Tax Incentives for SMEs

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SMEs with a paid-up capital of RM2.5 million and below are eligible for a reduced corporate tax rate of 20% on the chargeable income of up to RM500,000. The tax rate on the remaining chargeable income is maintained at 28%. Dividends distributed will be given a tax credit of 20% in the hands of the shareholders. As per Budget 2007, to enhance the nation’s competitiveness, the company income tax rate of 28% will be reduced in stages by 2 percentage points. For the year of assessment 2007, the rate will be 27%, while for the year of assessment 2008, the rate will be 26%, including for SMEs. In the latest Budget 2008 announcement, the corporate tax rate will be further reduced to 25% in 2009.

Small-scale manufacturing companies incorporated in Malaysia with shareholders’ funds not exceeding RM500,000 and having at least 60% Malaysian equity are eligible for the following incentives:

  • Pioneer Status with an income tax exemption of 100% of the statutory income for a period of five years; or
  • Investment Tax Allowance of 60% on the qualifying capital expenditure incurred within five years. This allowance can be offset against 100% of the statutory income for each year of assessment.

A sole proprietorship or partnership is eligible to apply for this incentive provided a new private limited/limited company is formed to take over the existing production/activities.

To qualify for the incentive, a small-scale company has to comply with any one of the following criteria:

  1. The value added must be at least 15%; or
  2. The project contributes towards the socio-economic development of the rural population.

The company shall carry out the manufacturing of products or participate in activities listed as promoted products and activities for small-scale companies.

Applications should be submitted to MIDA.