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In a notable shift, Malaysia’s Budget 2025 has introduced a 2% tax on dividend income exceeding RM100,000, effective 1 January 2025. This move marks a significant departure from the previously tax-exempt status of dividends, prompting reactions from investors and business owners alike. For years, shareholders enjoyed the privilege of receiving full dividend payments without additional tax burdens. With this change, high-income earners must reassess their financial strategies to adapt to the evolving fiscal landscape. This article explores the new dividend tax’s implications, its rationale, and strategies for navigating these changes.
Before 2008, Malaysia operated under the Imputation System. In this framework, companies paid corporate tax on their profits, and when these profits were distributed as dividends, shareholders could claim a tax credit equivalent to the corporate tax already paid. This system effectively avoided double taxation by imputing the tax burden to the shareholders, streamlining the process.
In 2008, Malaysia transitioned to the Single-Tier System. Under this system, companies continued to pay corporate tax on their profits, but dividends distributed to shareholders were exempt from further taxation. This eliminated the need for shareholders to claim tax credits, simplifying tax administration while ensuring that profits were taxed only once, at the corporate level.
A significant shift occurred with the announcement of Budget 2025, introducing a new 2% tax on dividend income derived by individual shareholders, whether resident or non-resident exceeding RM100,000, effective 1 January 2025. This policy was designed to broaden the tax base and create a fairer tax system, primarily targeting high-income earners. Importantly, many dividend sources, including those from Employees Provident Fund (EPF) savings, unit trusts, cooperatives, and foreign sources, remain exempt from this tax.
This evolution of dividend taxation reflects Malaysia’s ongoing efforts to balance simplicity in tax administration with the need for equitable contributions from higher-income individuals.
The following are the key features of dividend tax:
These changes signify a marked departure from the previously tax exempt status of dividends, compelling high-income earners to reassess their financial strategies and investment plans in light of the new fiscal landscape.
Dividends are payments made by a company to its shareholders, typically drawn from the company’s profits. These payments serve as a return on investment for shareholders and are usually distributed periodically. Dividends can originate from various sources, including publicly listed companies, private firms, and unit trusts. Many investors rely on dividends either as a steady income stream or for reinvestment to grow their portfolios.
Under S. 131 of the Companies Act 2016, a company may only distribute dividends to its shareholders out of its available profits, provided that the company is solvent. While the Companies Act 2016 does not explicitly define “profits,” the term generally refers to the net earnings or surplus generated by the company after accounting for all income, expenses, and taxes. This section ensures that companies can only declare dividends if they have sufficient financial resources and solvency to sustain such distributions.
The Companies Act 2016 governs the management, accounting, and distribution of profits, particularly concerning dividends and financial reporting. It is a crucial legislative framework to maintain corporate accountability and shareholder protection.
The legal framework surrounding dividends has been shaped by several important cases, both in Malaysia and abroad. These cases have established principles to ensure financial prudence and the protection of shareholder interests.
(Note: These are overseas case laws and thus, their applicability in Malaysia may be limited to merely being of a pursuasive nature.)
The cases above ensure companies follow financial prudence when declaring dividends, emphasising solvency and restricting capital use with established principles to protect shareholders and maintain companies’ long-term financial health, aligning expectations and preserving corporate integrity.
The Income Tax Act 1967 (ITA 1967) outlines several provisions regarding the taxation of dividends, focusing on their distribution, payment, and inclusion in gross income.
Dividend Paid: Refers to dividends delivered to shareholders in cash or its equivalent, such as vouchers, cheques, or other forms of payment.
Dividend Distributed: Encompasses broader methods of making dividends available to shareholders, including non-cash distributions (e.g., distribution in specie). The date of distribution may be considered the date on which the dividend is posted or delivered on behalf of the distributing entity.
For taxation purposes, the calendar year aligns with the basis year, which forms the foundation for the year of assessment.
For individuals (excluding companies, limited liabilities partnerships, trust bodies, or cooperative societies), the basis period coincides with the calendar year, meaning individual taxpayers are taxed on a calendar-year basis.
Gross income from a source consisting of dividends deemed to be derived from Malaysia under S. 14 is included in the taxpayer’s income for the relevant period. This applies whether the dividend is paid, credited, or distributed during that period.
Dividend Credited: Dividends are considered derived when credited to a shareholder’s account, even if not yet paid or distributed. This concept of constructive receipt means the income is taxable once it is made available to the shareholder.
Examples of Constructive Receipt:
Dividends are generally categorised into 2 types:
From a company law perspective, dividends represent a distribution of a company’s profits to its shareholders. These distributions may be in cash or other assets, such as shares or property. There are legal and regulatory frameworks to govern the distribution of dividends to ensure they are paid out of profits and the distribution of dividends do not endanger the company’s financial stability. For instance:
Dividends cannot be declared or paid under the following circumstances:
Thus, before declaring dividends, it is the directors’ duties to:
The ITA 1967 and company laws ensure dividends are distributed fairly and responsibly, protecting shareholders and maintaining companies’ financial integrity. Understanding these regulations is crucial for managing financial and compliance obligations.
Listed below are the global perspectives on dividend taxation for comparison:
United Kingdom:
United States:
Canada:
Germany and France:
Singapore:
Australia:
India:
New Zealand:
Malaysia’s New Dividend Tax
The introduction of the new 2% dividend tax in Malaysia, effective from 1 January 2025, carries several key implications for investors and the broader economy:
The tax primarily targets high-income earners, particularly those in the top 20% income bracket (T20) and some from the upper middle-income group (M40). These individuals are more likely to receive dividend incomes exceeding RM100,000 annually, making them the main group affected by the tax.
By taxing high dividend incomes, the government seeks to broaden its revenue base. This additional revenue will be used to fund public services and infrastructure projects, contributing to overall economic development.
This tax is part of a broader strategy to reduce income inequality. By imposing a small tax on significant dividend earnings, the government aims to redistribute wealth more equitably across society. This could enhance the spending power of a wider group, potentially stimulating economic growth.
The tax will have little impact on most everyday investors and middle-income earners, who typically do not receive dividends in excess of RM100,000. As a result, the financial burden is concentrated on those with substantial investment incomes.
While the current tax rate is set at 2%, there is concern that it may be increased in the future. Investors should stay informed about potential changes to tax policies and adjust their financial strategies accordingly.
In summary, the new dividend tax marks a significant shift in Malaysia’s tax policy. It aims to create a fairer, more balanced tax system, generate additional revenue for the government, and encourage wealth redistribution, while minimising the impact on everyday investors.
To address the new 2% dividend tax in Malaysia, effective from 1 January 2025, here are some key actions and considerations for investors and stakeholders:
High-income earners, particularly in the T20 and upper M40 groups, should reassess their investment portfolios. Consider diversifying into assets that are exempt from the dividend tax, such as unit trusts, cooperatives, and foreign sources (until 31 December 2036).
Engage with financial advisors or tax professionals to understand how the new tax will impact your financial situation. They can offer personalised advice on how to minimise tax liabilities and optimise investment returns.
Stay updated on any future changes to the dividend tax rate or threshold. Being aware of potential adjustments will allow you to proactively adjust your financial strategies.
Look into tax-advantaged investment options. For example, dividends from EPF savings and certain tax-exempt entities remain unaffected by the new tax. Investing in these areas can help mitigate the impact of the dividend tax.
Ensure that you set aside funds to cover the 2% tax on dividend income exceeding RM100,000. Proper planning will prevent surprises during tax season and help maintain financial stability.
Maintain accurate and up-to-date records of your investments and dividend income. Prepare a capital statement to track your wealth, as this will help you stay organised when filing taxes. Proper documentation ensures transparency and enables you to account for your wealth accurately, making it easier to manage the impact of the dividend tax.
Engage with policymakers and provide feedback on the impact of the new tax. Constructive dialogue can help shape future tax policies to be more equitable and effective.
Stay informed about the details of the new tax and its implications. Sharing this knowledge with peers and fellow investors will help everyone make more informed decisions and adapt to the new tax landscape.
By taking these steps, including proper documentation and wealth management, investors can better navigate the changes brought by the new dividend tax and optimise their financial strategies accordingly.
Malaysia’s new dividend tax signals a shift towards a more equitable fiscal system while maintaining simplicity for most investors. By understanding the tax’s implications and adopting informed strategies, high-income earners can mitigate its impact and align their financial plans with regulatory changes. As the tax landscape evolves, staying proactive and informed remains crucial for sustained financial growth and compliance.
This article was first published in the Tax Guardian Vol.18/No.1/2025/Q1 (January 2025), a publication by the Chartered Tax Institute of Malaysia.
