SME Tax in Malaysia: Who Qualifies as an MSMC?
The 15% and 17% preferential tax rates are reserved for companies and LLPs that pass four strict tests — and many businesses fail them without realising. A clear walkthrough of the Inland Revenue Board’s Public Ruling 8/2025, the definitive guidance on the tax treatment of micro, small and medium companies.
Concept 01
MSME vs MSMC — Two Different Definitions
SME Corp. Malaysia decides whether you are an MSME. The Income Tax Act decides whether you get the tax benefits. They are not the same test.
The ITA Has No MSME Definition
SME Corp. Malaysia classifies businesses as micro, small or medium by annual sales turnover or full-time employees — for example, a services business is “small” from RM300,000 to below RM3 million in sales, or 5 to below 30 employees. That classification matters for grants and development programmes.
The Income Tax Act 1967 takes a completely different route. It never defines an “MSME” at all. Instead, it grants special tax treatment to MSMCs — companies and LLPs that are resident and incorporated (or registered) in Malaysia and that pass the ITA’s own tests on capital, gross income and shareholding.
Turnover or Headcount
Sector-based bands on annual sales (up to RM50m manufacturing / RM20m services) or employees (up to 200 / 75). Must be SSM-registered and not Bursa main-market listed or an MNC/GLC subsidiary.
Capital, Income & Shareholding
Paid-up ordinary share capital ≤ RM2.5m, gross business income ≤ RM50m, and no disqualifying shareholding links — measured at the beginning of the basis period for each year of assessment.
Being an SME Corp. MSME does not entitle you to the 15% rate
A business can be a certified MSME for grant purposes yet fail the ITA tests — and equally, a company can fail SME Corp.’s bands but still qualify as an MSMC. Always assess the tax tests separately, every year of assessment.
Watch the Video
Mr Low’s Flash Review of PR 8/2025
A quick walkthrough of the MSMC criteria, the shareholding traps in Examples 10, 12 and 15, and the special tax treatments.
Presented by Mr Low Chin Ann · Flash review covering PR 8/2025 MSMC criteria and special tax treatments
Concept 02
The Four Qualifying Conditions
All four must be satisfied — and they are tested afresh at the beginning of the basis period for every year of assessment.
Four Tests, Every Year
Resident & Incorporated in Malaysia
The company must be resident and incorporated in Malaysia; an LLP must be resident and registered under the Limited Liability Partnerships Act 2012.
Capital ≤ RM2.5 Million
Paid-up ordinary share capital (company) or capital contribution (LLP) must not exceed RM2.5 million at the beginning of the basis period. A capital contribution of RM3m fails outright (Example 2).
Gross Business Income ≤ RM50 Million
Gross income from a business source or sources must not exceed RM50 million in the basis period — measured before any deductions.
Shareholding Restriction
No disqualifying >50% link with a “related company” (one whose capital exceeds RM2.5m) — and from YA 2024, foreign ownership must not exceed 20%. Concepts 04 and 05 below.
Concept 03
Gross Business Income — The Traps
The RM50 million test only looks at income from a business source. That single phrase produces some counter-intuitive outcomes.
A Business Source Is Everything
A company with no business source at all cannot be an MSMC — passive income alone does not open the door. Yet a company whose business made a loss still qualifies. The PR walks through six scenarios:
| Scenario | Treatment under the RM50m test | MSMC Path |
|---|---|---|
| Rental with comprehensive maintenance & support services | A business source under paragraph 4(a) — the RM24m rental in Example 3 counts as gross business income. | ✓ Open |
| Passive rental + fixed-deposit interest only | Paragraph 4(d) and 4(c) income — no business source exists, so the company cannot qualify at all (Example 4). | ✗ Closed |
| Business made a loss, or operations temporarily ceased | Deemed zero gross business income — still within RM50m (Examples 5 & 6). | ✓ Open |
| Foreign business income remitted to Malaysia | Must be included when measuring the RM50m threshold. | ✓ Counted |
| Income fully exempted (e.g. pioneer status) | Gross business income is still counted despite the exemption — RM49m counted in Example 7. | ✓ Counted |
| Listed investment holding company (s.60FA) | Dividends & interest are deemed a business source while listed; on delisting, the deeming stops from the following YA (Examples 8 & 9). | ✓ While listed |
Property investment companies are the classic casualty
Whether rental income is a business source turns on whether you provide comprehensive and active maintenance and support services. A landlord who only provides security guards has no business source — and no MSMC status, no matter how small the company is.
Concept 04
The 50% Shareholding Chain
A “related company” is one whose paid-up ordinary share capital exceeds RM2.5 million. Cross the 50% ownership line with one — in either direction, or through a common parent — and MSMC status is lost.
Multiply Down the Chain
Indirect ownership is calculated by multiplying the percentages at each level, traced up to the ultimate holding company. Example 10 shows how one large parent poisons an entire chain:
Charlie Sdn Bhd’s own numbers look perfect — RM1.2 million capital, RM15 million income. It fails anyway, because Alpha Bhd’s effective indirect stake of 56% exceeds the 50% line.
Where the Chain Dilutes
The same multiplication cuts both ways. Each additional layer dilutes the parent’s effective stake — and once it drops to 50% or below, the restriction stops biting:
Never conclude at the first level of the group chart
In one group, a first-tier subsidiary fails while its own subsidiaries two levels down qualify. Trace every percentage to the ultimate holding company and multiply — that arithmetic, not the group’s overall size, decides each entity’s MSMC status.
Concept 05
The 20% Foreign-Ownership Cap
Effective from YA 2024, more than 20% foreign ownership — direct or indirect — disqualifies a company or LLP from the special treatments.
Form Over Ultimate Ownership
The cap is triggered where more than 20% of the paid-up ordinary share capital or capital contribution is owned, directly or indirectly, by a foreign company incorporated outside Malaysia or an individual who is not a Malaysian citizen. Example 15 shows just how literal the test is:
FSB’s ultimate owners are both Malaysian citizens — but the rule looks at the immediate shareholder’s place of incorporation, and MHZ Pte Ltd is a Singapore company. At 100% it fails; scale the holding back to exactly 20% (Example 16) and FSB qualifies, since MPL’s own capital also stays within RM2.5m at BNM’s exchange rate.
Malaysians investing through offshore vehicles forfeit the benefit
Holding your Malaysian Sdn Bhd through a Singapore or Labuan-incorporated entity now costs you the SME rates — regardless of your citizenship. Groups restructured for regional reasons should re-examine their Malaysian subsidiaries’ eligibility from YA 2024 onwards.
Concept 06
The Prize — Rates & Special Treatments
Why qualifying matters: from YA 2023, an MSMC’s first RM600,000 of chargeable income is taxed well below the standard 24%.
Preferential Rates from YA 2023
Worked contrast (Example 18): a qualifying company with RM420,000 chargeable income pays RM22,500 + RM45,900 = RM68,400 — against RM100,800 at a flat 24%. A saving of RM32,400 in a single year, before the Section 6D rebate of up to RM20,000 per YA for qualifying new companies and LLPs (first three YAs; operations commenced 1 July 2020 – 31 December 2022; unabsorbed rebate is forfeited).
Beyond the rates, MSMC-linked criteria unlock four further treatments:
Unlimited Small Value Assets
100% special allowance on assets costing RM2,000 or less each, with no annual cap for qualifying companies (others are limited to RM20,000 per YA). LLPs, business trusts and securitisation SPVs are excluded from the unlimited claim. From YA 2020.
Increased Exports Allowance
Statutory income exemption of up to 70% for companies (not LLPs) achieving increased exports of agricultural produce or manufactured goods — YA 2016 to YA 2020.
CP204 Exemption for New Companies
Newly commenced resident companies within the capital limits need not submit estimated tax payable for the first two YAs. Companies only — LLPs, business trusts and SPVs are excluded (Examples 19 & 20).
ESG Expenditure Deduction
Up to RM50,000 per YA for YA 2024–2027, covering consultation fees for customised e-Invoice software and external e-Invoice implementation providers. Planning-stage costs and MyInvois portal fees are excluded.
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Disclaimer
This page is a summary of key concepts in IRB Public Ruling No. 8/2025 (Tax Treatment for Micro, Small and Medium Companies) prepared for educational purposes only. It does not constitute tax, legal, or accounting advice. MSMC eligibility is fact-specific and assessed each year of assessment — readers should refer to the full official PR document and consult a qualified tax professional such as CA Low & Co before making decisions based on this content. The examples used are simplified illustrations of the PR’s examples, which are themselves not exhaustive.
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