Introduction

Malaysia is introducing a 2% tax on dividend income starting in Year of Assessment (YA) 2025. This tax will apply to individuals who earn more than RM100,000 annually in dividends, with only the amount above RM100,000 being taxed. Both Malaysian residents and non-residents are subject to this rule.

For example, if you received RM120,000 in dividends in a year, only RM20,000 will be taxed at 2%. Smaller investors earning below RM100,000 will remain unaffected. This measure aims to diversify tax sources, ensuring that wealthier individuals contribute more to Malaysia’s revenue without overburdening wage earners.

The Transition: From Tax-Free Dividends to the New System

Prior to 2008, dividends were taxed twice under the classical system—once at the corporate level and again when shareholders reported dividends as part of their income. This double taxation was eliminated with the introduction of the single-tier system in 2008, where companies paid tax on their profits, and individuals received dividends tax-free.

The new dividend tax in YA 2025 marks the first significant change in over a decade, introducing taxes on individuals who earn high dividend incomes while still allowing smaller investors to benefit from tax-exempt dividends.

The New Dividend Income Threshold

Under the new tax rules effective from YA 2025, a dividend income threshold will determine whether individuals need to pay taxes:

• Dividend income up to RM100,000 annually will remain tax-exempt.
• Dividend income exceeding RM100,000 will be subject to the 2% tax rate on the portion above RM100,000.

This threshold ensures that small investors continue to benefit from tax-free dividends, while higher-earning investors will face a modest tax on their excess dividend income.

Scope of the New Dividend Taxation

The taxation of dividend income in Malaysia is determined by both the type of dividends received and their source. Here’s a breakdown of the scope of taxation under the new rules:

• Malaysian Dividends: Dividends from Malaysian companies will be subject to the 2% tax for amounts exceeding RM100,000.
• Foreign Dividends: For now, dividends from foreign sources remain tax-exempt until 31 December 2026. After that, further changes may occur.
• Exemptions for Certain Entities: Dividends from specific entities will remain exempt, such as:
  • Companies with pioneer status or those benefiting from reinvestment allowances.
  • Shipping companies and closed-end funds.
  • Dividends from domestic companies paid from dividends of Labuan entities
  • Distributions from unit trusts, EPF, KWAP, LTAT, and ASNB.

This is the first time Malaysia is taxing individuals on substantial dividend income, and it primarily affects wealthier individuals with large dividend payouts from company shareholdings.

Calculation of Tax on Dividend Income

The tax on dividend income is calculated at a rate of 2% on the chargeable dividend income, using this formula:

Chargeable Dividend Income

= (Chargeable Income/ Aggregate Income) x Dividend Statutory Income

Tax-Efficiency Tips for High Dividend Investors

To minimize the impact, high-income investors may consider these strategies:

• Investment Vehicles: Explore structures like redeemable preference shares (RPS) to capitalize on capital gains instead of dividends.
• Tax-Exempt Investments: Focus on REITs, unit trusts, and other exempt sources
• Dividend Reinvestment Plans (DRIPs): Reinvest dividends to reduce taxable income.
• Foreign Diversification: Consider foreign dividends tax-free until 2026.

Conclusion

Preparing for the new dividend tax is essential. Managing dividend income, investing in tax-exempt sources, and diversifying can help you optimize your investment portfolio while minimizing tax exposure.

Schedule a meeting with us to discuss tailored tax planning strategies for YA 2025 and beyond.