The 2% tax on dividend income exceeding RM100,000 annually, introduced in Budget 2025 Malaysia on 18 October 2024, has come as a surprise to many investors. For years, dividends in Malaysia were completely exempt from personal tax, allowing shareholders to receive their full dividend payments without paying any additional tax.
However, starting from 1 January 2025, individuals with annual dividend income exceeding RM100,000 will have to pay 2% dividend tax in Malaysia, which applies to both residents and non-residents.
Some investors are concerned about what seems like double taxation—since corporate profits have already been taxed before being distributed as dividends. For high-income earners like T20 Malaysia, this additional tax can feel like an extra burden, reducing the amount they get to keep from their investments.
Exemptions on 2% Dividend Tax in Malaysia
While this tax will only affect a small portion of taxpayers, certain dividend incomes will be exempt from the new dividend tax Malaysia:
- Dividends from abroad
- Dividends from companies with pioneer status or reinvestment allowances
- Dividends from tax-exempt shipping companies
- Dividends from cooperatives
- Dividends from closed-end funds
- Dividends from Labuan entities
- Any dividends that already have specific exemptions for shareholders
Additionally, dividend tax will not apply to profit distributions from:
- KWSP (Employees Provident Fund)
- LTAT (Armed Forces Fund)
- ASNB (Amanah Saham Nasional Bumiputera)
- Any unit trusts
Changes in Dividend Tax Malaysia
Malaysia’s dividend taxation rules have evolved over time. Before 2008, under the Imputation System, dividends were taxed at the corporate level, but shareholders could receive tax credits to offset that. This system was replaced by the Single-Tier System, under which dividends were completely exempt from personal tax, since companies had already paid the taxes on their profits.
With Budget 2025 Malaysia, however, a 2% dividend tax on dividend income exceeding RM100,000 has been introduced, ending the era of fully Malaysia tax-free dividends for high-income individuals, especially T20. Now, investors and business owners must think about how this will affect their financial plans.
The Impacts of 2% Dividend Tax on SME Business Owners in Malaysia
For many family-owned SMEs, the new dividend tax could significantly affect personal income and business operations. SME owners, who often act as both shareholders and operators, may face the following challenges:
Reduced Personal Income
Dividends serve as a major source of personal income for SME owners. With the 2% tax on dividend income exceeding RM100,000, these owners will see a reduction in their net income.
Perception of Double Taxation
Corporate profits are already taxed, and the new tax on dividend income adds an extra layer of taxation for business owners, increasing the overall tax burden.
Reconsidering Dividend Distributions
SME owners may rethink profit distributions, opting to reinvest in the business rather than paying dividends to reduce the tax burden.
Cash Flow Management
Business owners will need to carefully manage cash flow and may need to explore alternative tax strategies to maximize their income without incurring higher taxes.
Complicating Succession Planning
For family-owned SMEs, the new tax complicates business succession plans, as future shareholders may face higher taxes on dividends, requiring careful planning for wealth transfer.
What the New 2% Dividend Tax Malaysia Means for Investors
Less Money from Dividends and the Need for Tax Planning
Investors who earn more than RM100,000 in dividend income annually will see a reduction in their net income, as they’ll now have to pay a 2% dividend tax on the amount over this threshold. This makes it crucial for high-income investors and business owners to revisit their tax strategies and consider ways to reduce their tax liability, such as exploring more tax-efficient investments.
Would Investors Prefer to Reinvest Rather than Issue Dividends?
With the new tax on dividend income, companies might rethink their dividend strategies. Instead of paying dividends, they could consider reinvesting profits back into the company to avoid the tax. Will this approach become more attractive for businesses and shareholders alike?
Would Investors Prefer to Avoid Dividend Stocks?
With the 2% dividend tax on higher dividend income, some wealthy individuals might begin to question whether dividend-paying stocks are still the best option for them. Would they instead shift towards investments that offer capital appreciation and avoid the new tax altogether?
Awaiting More Details on Dividend Income Reporting Requirements
Investors will need to wait for further clarity on how exactly dividend income should be reported from 1 January 2025. Details about new forms, potential penalties, and how the updated rules will be enforced are yet to be clarified.
Dividend Distribution Changes for Business Owners
Family-run businesses and companies that pay dividends may need to rethink how they distribute profits to minimize their tax obligations.
Managing Dividend Tax Malaysia
In other Southeast Asia countries like Indonesia, Thailand, and Vietnam, companies handle the tax through withholding tax, where they deduct it before paying out dividends. If Malaysia adopts this system, it could be complicated for big companies with many shareholders, as managing and calculating these taxes won’t be easy.
Foreign vs. Local Investments
Malaysians may be exempt from the 2% dividend tax on foreign-sourced dividends that were already taxed abroad, while they are required to pay 2% on dividends received from Malaysian companies. This might encourage some investors to focus on foreign investments, as they could end up paying less tax overall by investing abroad rather than locally.
Impact on Investors and Business Owners
Investors and business owners should closely review how this tax will affect their income and adjust their financial strategies accordingly.
Wrapping Up: Implications of the 2% Dividend Tax in Malaysia
The 2% dividend tax under Malaysia Madani Budget 2025 represents a significant shift in the tax landscape. High-income investors will need to rethink their financial strategies and explore new tax planning options to adapt to this change. That’s why it is crucial for investors to stay up to date with the latest information as more details are expected to come out soon. Staying informed will allow investors to make timely adjustments to their financial strategies and ensure they are fully prepared for the upcoming changes.
How YYC taxPOD Can Support You Through Budget 2025 Malaysia (Belanjawan 2025) and Economic Reforms
As the Malaysian government introduces a 2% dividend tax on previously exempt dividends in Budget 2025 Malaysia, investors will need to adapt to new policies and economic reforms, including those related to tax planning and compliance.
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For more information on how YYC taxPOD can assist you, visit our official website or book a demo session.
FAQs on the NEW 2% Dividend Tax in Malaysia
The 2% dividend tax is a new tax introduced under Budget 2025 Malaysia, which applies to dividend income exceeding RM100,000 annually for individual shareholders. The tax is part of the Malaysia Madani initiative to ensure a more equitable tax system by including investment income in the tax base.
The 2% dividend tax affects individual shareholders who receive dividend income exceeding RM100,000. This tax primarily impacts high-income earners, especially the T20 Malaysia income group, who tend to derive significant income from dividends.
Certain types of dividend income are exempt from the new dividend tax Malaysia. These exemptions include dividends from government-backed savings such as the Employees Provident Fund (EPF), Permodalan Nasional Berhad (PNB) unit trusts, and foreign dividends.
The dividend tax will take effect from the year of assessment 2025, meaning it applies to all dividend income received starting from January 1, 2025. The government introduced this measure under the Budget 2025 Malaysia initiative.
The 2% dividend tax is being introduced as part of Budget 2025 Malaysia to broaden the tax base and ensure wealthier individuals who earn substantial income from dividends contribute fairly. This is in line with the Malaysia Madani government's goal of reducing income inequality.
Yes, small business owners who rely on dividend income as a source of earnings may be affected by the dividend tax. Many SME owners reinvest their profits and later draw dividends, which means this tax could increase their tax obligations if their dividend income exceeds RM100,000.
No, the tax rate on dividend income is 2%, but it only applies to dividend income exceeding RM100,000. For example, if a person earns RM150,000 in dividends, only RM50,000 will be taxed at 2%.
Although there may be some short-term market volatility, experts believe the dividend tax Malaysia will not significantly affect long-term investor confidence. Malaysia's economy remains strong, and the T20 Malaysia group is expected to continue investing despite the new tax.
No, the 2% dividend tax applies to all dividend income exceeding RM100,000, even if the dividends are reinvested. However, income from government savings like the EPF and foreign dividends are still exempt.
To minimize the impact of the 2% dividend tax, individuals can invest in tax-exempt dividend sources such as EPF or foreign dividends. Consulting a tax professional to optimize investments and dividend withdrawals is advisable.
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