For decades, dividends received by Malaysian shareholders from Sdn Bhd companies were largely tax-free in the hands of the recipient under the single tier system. That changed. The Finance Act introduced Part XXII to Schedule 1 of the Income Tax Act 1967, and individual shareholders receiving large dividends from Malaysian companies now face a direct personal tax charge they may not have planned for.

Under Part XXII of Schedule 1, where a dividend paid, credited or distributed by a company is deemed derived from Malaysia under Section 14, and the total dividend received by an individual exceeds RM100,000 in a year of assessment, the excess above RM100,000 is subject to income tax at 2 percent. The first RM100,000 remains exempt for eligible individuals.

One point that often gets overlooked: this 2 percent tax applies only to individuals. The law specifically uses the word "individual" throughout Part XXII and in the amended Section 6(1)(r) of the ITA. If the shareholder receiving the dividend is a company rather than a person, the dividend remains fully exempt under the existing single tier system, as it has been since 2008. This distinction matters for business owners who hold shares personally compared to those who hold through a corporate holding structure.

In practical terms, if you are an individual shareholder of your own Sdn Bhd and the company declares a dividend of RM500,000 to you in a year, the first RM100,000 is exempt and the remaining RM400,000 is taxed at 2 percent, resulting in RM8,000 of additional personal tax. This may seem modest, but for business owners who have built up retained earnings over many years and plan to declare a large distribution in one go, the exposure accumulates quickly.

Planning the timing, amount, structure, and recipient of dividend declarations now carries direct tax consequences. For business owners considering a large payout from years of accumulated profits, the difference between declaring the dividend personally versus through a holding company is not a minor detail. It is a decision with real tax implications.

If you wish to focus on running and growing your business, our CFO advisory team can take care of your accounting, payroll, tax planning and compliance matters for you. Feel free to WhatsApp us at 010-246 2151.