Other BriefingsUnderstanding Malaysia’s Tax on High Dividend Income
Since January 1, 2025, Malaysia has applied a two percent tax on annual dividend income exceeding 100,000 ringgit (US$23,700). Introduced under Budget 2025, this measure marks a significant policy shift, moving away from the longstanding exemption under the country’s single-tier system.
The goal is clear: increase contributions from high-income earners to strengthen national revenue. Although the measure has been in place for several months, many investors and businesses are still adjusting their financial and tax strategies to accommodate the change.
How dividend income is treated under Malaysian tax law
Under the single-tier system, Malaysian companies pay corporate tax on profits, and dividends distributed to shareholders are typically exempt from further tax. This system has historically attracted both local and foreign investment by reducing double taxation. The introduction of a two percent tax on dividends above 100,000 ringgit (US$23,700), however, creates a new layer of liability specifically targeting individuals with high dividend income, while the core single-tier structure remains intact.
Who is affected by the threshold?
The 100,000 ringgit threshold applies per taxpayer, per year, including Malaysian residents, non-resident individuals, companies, trusts, and estates. Importantly, the limit applies to total dividend income, not per dividend source. For instance, if an individual earns 120,000 ringgit (US$28,442) from multiple companies, only the 20,000 ringgit (US$4,740) exceeding the threshold is taxed at the additional rate.
While Malaysian-sourced dividends are directly covered by this rule, foreign-sourced dividends may be treated differently, particularly where double tax agreements apply.
How the dividend tax is calculated
The Inland Revenue Board has provided a specific calculation formula to determine the chargeable dividend income when multiple income sources are involved.
For resident individuals, the formula is:
Chargeable Dividend Income = (Dividend Income A / Aggregate Income B) × Chargeable Income C
where:
- A = Statutory dividend income for the year
- B = Aggregate income for the year
- C = Chargeable income for the year
For non-resident individuals, the formula is framed as:
Chargeable Dividend Income = (Dividend Income A × Total Chargeable Income C) / Aggregate Income B
where:
- A = Statutory dividend income for the assessment year
- B = Aggregate income for the assessment year
- C = Chargeable income for the assessment year as specified under Malaysian tax law
Although presented differently, these formulas serve the same purpose: determining how much of the chargeable income relates to dividends and ensuring only the excess over 100,000 ringgit (US$23,700) is taxed at two percent. In cases where the only income is from dividends, the excess is taxed directly without needing the formula.
Applying the formula: Resident and non-resident scenarios
Let’s break this down with simple examples.
For a resident individual:
- Statutory dividend income (A) = 150,000 ringgit (US$35,554)
- Aggregate income (B), including salary and rent = 300,000 ringgit (US$71,113)
- Chargeable income (C) = 250,000 ringgit (US$59,261)
Formula: (150,000 / 300,000) × 250,000 = 125,000 ringgit (US$29,630) chargeable dividend income.
Amount exceeding 100,000 ringgit = 25,000 ringgit (US$5,295).
Tax due: 2% × 25,000 ringgit = 500 ringgit (US$118).
For a non-resident individual:
- Statutory dividend income (A) = 200,000 ringgit
- Aggregate income (B) = 300,000 ringgit
- Chargeable income (C) = 280,000 ringgit
Formula: (200,000 × 280,000) / 300,000 = 186,667 ringgit chargeable dividend income.
Amount exceeding 100,000 ringgit = 86,667 ringgit.
Tax due: 2% × 86,667 ringgit = 1,733 ringgit.
These examples help illustrate how the calculations work in practice, whether you are a local taxpayer or a foreign investor.
Exemptions, reliefs, and treaty considerations
Certain dividend streams, such as those from exempt entities or qualifying investment schemes, may fall outside the scope of the additional tax. Moreover, Malaysia’s network of double tax treaties offers foreign investors the potential to reduce or eliminate double taxation, depending on the country of residence and the specific treaty provisions.
Investors need to review these agreements carefully to determine eligibility for reduced rates or credits.
Compliance and reporting obligations
Taxpayers affected by the new rules must ensure proper reporting of dividend income on their annual tax filings, backed by accurate documentation like dividend vouchers and tax certificates.
The Inland Revenue Board has issued updated compliance guidelines, and following them is critical to avoid penalties or audits. Foreign investors should also ensure they understand whether withholding tax has been applied at the company level and how to claim treaty benefits where relevant.
Strategic planning and implications for investors
With the new dividend tax framework in place, investors — whether domestic or foreign — must take a comprehensive approach to reassessing their income structures and exposure. Strategies such as restructuring ownership across family members or entities, leveraging holding companies, or using trusts can help optimize dividend flows and potentially keep individuals below the 100,000 ringgit threshold.
For foreign investors, the stakes are even higher. Distributions to non-residents may face additional withholding taxes, making it crucial to understand how Malaysia’s network of tax treaties can reduce or eliminate this burden when applied effectively. These treaty provisions not only lower tax leakage but also offer pathways for more efficient cross-border investment structuring.
Importantly, this shift aligns with wider regional trends. For example, Singapore has progressively tightened its rules on tax residency and is actively working to combat base erosion and profit shifting, with stricter scrutiny of offshore arrangements. Indonesia has introduced a final income tax on dividends received by individuals, particularly focusing on domestic dividend flows and certain foreign-source income under its Tax Harmonization Law. Thailand recently amended its personal income tax rules to include foreign income brought into the country, requiring tax declarations on foreign dividends remitted to Thailand.
These examples show that Malaysia’s dividend tax is not an isolated development; it is part of a broader regional recalibration, where governments aim to strengthen fiscal sustainability by increasing contributions from high-net-worth individuals and cross-border income streams.
This article first appeared on ASEAN Briefing, our sister platform.
