Many business owners in Malaysia treat the company account as a personal float. Need cash? Take a director's loan. It feels harmless because the money stays within the family. But under Malaysian tax law, this quietly creates a real tax bill for your company every single month, even if no interest was ever charged or paid.

Under Section 140B of the Income Tax Act 1967, the moment a company advances money from its internal funds to a director who holds a management or directorship role in the company and controls at least 20% of its ordinary share capital, the company is treated as having earned interest income on that loan. Internal funds include capital injections, retained earnings, and company reserves. LHDN does not wait for real income to exist. It calculates a deemed interest amount and taxes the company on it regardless.

The calculation is straightforward. Every month, LHDN takes the outstanding loan balance, multiplies it by Bank Negara's Average Lending Rate, and divides by 12. This runs every single month for as long as the loan remains outstanding. The deemed interest income is then assessed under paragraph 4(c) of the ITA as interest income of the company.

The only way to stop this from applying is to charge the director interest at a rate equal to or above Bank Negara's Average Lending Rate for that month. If the rate charged falls below that benchmark, the law disregards the interest charged entirely and the full deemed amount still applies. Where no interest is charged at all, the entire deemed interest computed under the formula is brought to tax.

There is also a less obvious trap for dormant companies. Under the Public Ruling, if a dormant company makes a loan or advance to a director, it is treated as having commenced operations. Section 140B still applies, and the deemed interest income is assessed in the same way as for an active company.

Beyond income tax, the Companies Act 2016 adds a separate layer of risk. Section 224 prohibits most companies from making loans to their own directors unless specific prior approvals are in place. Exempt private companies are excluded from this restriction, but for companies that do not qualify, any director who authorises such a loan without the required approvals commits a criminal offence carrying up to five years imprisonment or a fine of up to RM3 million.

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.

Our Services: CFO Advisory | Financial Operations Support | Taxation | Payroll | Corporate Secretarial | e-stamping | e-invoice Training