Did you know that in Malaysia, companies and LLPs are generally subject to a flat income tax rate of 24%?

That means for every RM100 of chargeable income, RM24 goes to the tax authority (LHDN).

However, not every business pays this flat rate.

If your company or Limited Liability Partnerships (LLPs) qualifies as a Small and Medium Enterprise (SME) under the tax rules, you may enjoy a preferential SME tax rate, which significantly reduces your tax burden.

In tax terminology, SME refers to Micro, Small and Medium Companies (MSMC).

What is the SME / Preferential Tax Rate?

For Year of Assessment (YA) 2023 onwards, eligible companies and LLPs can enjoy the following tiered tax rates:

• First RM150,000 chargeable income: 15%
• Next RM450,000 (RM150,001 – RM600,000): 17%
• Above RM600,000: 24%

👉 This structure is designed to support SMEs by reducing tax exposure in the early income tiers.

Below is a simplified reference of the SME corporate tax rate based on LHDN public rulings.

Is It Easy to Qualify?

For smaller companies, yes — usually quite achievable.

But here’s the catch:

As businesses grow, expand shareholding, or restructure group companies, it becomes increasingly easy to lose eligibility without realising it.

Once you lose SME eligibility, your entire tax computation and tax payable is affected.

SME Tax Rate Eligibility Checklist

Every company is required to comply with the requirements set by the tax authority (LHDN). LHDN will assess whether the company is eligible for the SME preferential tax rate.

To enjoy the SME preferential tax rate, ALL conditions below must be satisfied:

1️⃣ Tax Residency & Incorporation

✔ Company must be tax resident and incorporated in Malaysia

2️⃣ Paid-up Capital Threshold

✔ Paid-up ordinary share capital must not exceed RM2.5 million at the beginning of the basis period

(For LLP: capital contribution not exceeding RM2.5 million)

3️⃣ Revenue Limit

✔ Gross business income must not exceed RM50 million in the basis period

📌 Based on the audited financial year / basis period

4️⃣ Not Connected to a Related Company

✔ Company must NOT be “connected” to a related company

👉 A related company generally refers to a company with paid-up share capital exceeding RM2.5 million at the beginning of the basis period

Connection includes:

• 50% direct or indirect ownership between companies
• Cross ownership exceeding 50%

5️⃣ Foreign Shareholding Limit (Effective YA 2024 onwards)

✔ Foreign shareholding (direct or indirect) must not exceed 20%

This includes:

• Non-Malaysian individuals
• Foreign-incorporated companies
• Shall determine to the level of the ultimate holding company

What does “Not Connected” really mean?

A company or LLP is considered “Not Connected” if there is no more than 50% ownership or control relationship between the entities, directly or indirectly.

This means:

(i) No majority ownership by a related company
A related company must not own more than 50% of the company’s paid-up ordinary shares or LLP capital contribution (directly or indirectly).

(ii) No majority ownership in the related company
The company or LLP must also not own more than 50% of the related company’s paid-up ordinary shares (directly or indirectly).

(iii) No common controlling company
There must not be another company that owns more than 50% of both the company and the related company (directly or indirectly).

Real Case Study (YA 2025 Review)

(This article is prepared for illustrative purposes only. The facts have been generalised and anonymised to preserve confidentiality. All client information is treated as Private & Confidential (P&C) in accordance with professional standards.)

Let’s look at a real-life style scenario.

This company is:

• A corporate event planning business.
• Incorporated and tax resident in Malaysia
• Actively operating with strong annual revenue

Based on financial review:

📌 Result: NOT eligible for SME preferential tax rate in YA 2025

Even though most conditions are satisfied, failure in just ONE condition (revenue threshold) already disqualifies the company.

👉 This is why SME tax eligibility must be reviewed every single year, not once-off.

However, this company had incorrectly applied and submitted its tax return using the SME preferential tax rate.

Tax & Penalty Exposure (LHDN Audit)

Assuming chargeable income of RM1.5 million, the total tax and penalty exposure for this company is RM51,750.

Key Takeaway (Important for Business Owners)

Many companies assume:

“We qualified last year, so we should still qualify this year.”

❌ This is a common mistake.

SME preferential tax rate eligibility can change due to:

• Revenue growth
• Shareholding restructuring
• New investors
• Group company relationships
• Foreign ownership changes

Final Thought (Simple Version)

Think of SME tax relief like a yearly “membership pass”.

You don’t automatically renew it — You must re-check ALL conditions every year.

Missing just one condition = loss of tax benefit.

Want to Learn More About Malaysian Tax?

Tax rules and SME eligibility can change from year to year.

If you would like to improve your understanding of Malaysian taxation, feel free to WhatsApp us to learn more about our online tax learning platform, workshops, and practical tax update sessions.

👉 Stay updated and avoid costly tax mistakes before filing.