Malaysia: New tax to affect Malaysian dividend income of UHNWI’s

Among the number of changes announced in the latest Budget 2025 by the Malaysian Government on October 2024, one key item that will affect individuals deriving dividend income from a Malaysian-registered company (ME) is the imposition of a 2% dividend tax on dividend income in excess of RM100,000 (or about USD22,500) (Threshold) received by them from Malaysian-registered companies (Dividend Tax). This will apply from 1 January 2025.

What is interesting to note is that the Dividend Tax only applies to dividends paid out by Malaysian-registered companies to its individual shareholders (whether resident or non-resident) of Malaysia) (“Malaysian Dividend”) in respect of dividend income above RM100,000 (the Threshold).  Conversely, dividend income paid to MEs by non-Malaysian companies will not be subject to the Dividend Tax nor should it be counted in the calculation of the aggregate dividend income for purposes of determining the Threshold, and dividend income below the Threshold will not be subject to the Dividend Tax.

Therefore, if you are:

1. an ME (whether or non-resident in Malaysia); and
2. the aggregate Malaysian Dividend received by you as dividend income is more than RM100,000,

you will be subject to the Dividend Tax.

We expect the immediate impact to be:

(A) For MEs who derive a substantial proportion of their income from Malaysian Dividend, an effort to restructure their holdings in Malaysian company shares to minimise the impact of the Dividend Tax on their income and there is likely to be interest in:

1. The establishment of tax-efficient structures such as foreign-registered holding companies to hold their Malaysian shares (in this sense, the family office regimes offered by Hong Kong SAR and Singapore as they would offer additional benefits on top of simply enabling the payment of foreign-sourced dividends).
2. Alternatives to dividends as a means of obtaining a return on investment from the Malaysian companies - instead of deriving income purely through dividend payments, distributions could occur through share redemption, warrants, put options or other similar derivative rights in respect of the underlying shares. This would require careful consideration of the ME’s role in the Malaysian company (if any) and whether or not the ME’s control of the Malaysian company may be affected as a result of switching to such alternatives.
3. Similarly, a shift in investment strategy from pure dividends to alternatives such as venture capital and co-investments where returns can be obtained through capital gains rather than dividends.
4. Investment in other forms of securities such as interest-paying bonds or notes.
5. A rebalancing of portfolios to focus on foreign-sourced company dividends.
6. The additional burden of compliance and tax-filing, which raises several questions:
   1. How to file tax returns
   2. How aggregate dividend will be calculated for the purposes of determining whether or not the Threshold has been met.
   3. Whose responsibility is it to determine the Dividend Tax payable – the dividend-paying company or the government after the ME has filed his returns?
   4. Are there any exemptions or deductions?
   5. For example, expenses incurred in the production of such dividend income? What about the possibility of double-counting?

(B) Conversely, for Malaysian companies:

1. An increase in administrative and compliance burden, which raises questions such as, who is responsible for the supervision and tracking of dividend payments to determine whether or not the Threshold has been met – the company or the individual shareholder, and if the company, how? Will Malaysian companies be expected to conduct any sort of withholding in respect of dividend payments and then refund thereafter if the Threshold eventually is deemed not met? Are the costs of such supervision and administration tax-deductible?
2. Depending on the nett effect on the company’s bottomline and the costs associated with redomiciling, there may be an incentive to move offshore.
3. As Malaysia has among the highest corporate income tax rates in Southeast Asia, the attractiveness of investment in a Malaysian company may be lessened in line with item (A)5 above for individuals.
4. Increasing difficulty in fundraising, obtaining and onboarding investors (particularly cornerstone or key substantial investors) who may insist on complex investment structures in line with item (A)(1) above or require the entire capital structure of the Malaysian company to be amended which requires careful consideration as to the consequential effects on existing financing and contracting arrangements (such as loan covenants and other contractual arrangements with contractors) of the Malaysian company.
5. Increased involvement of investees in fund-raising exercises which may lead to extensive costs and time in line with items A(2), (3) and (4).
6. A need for the strategy of business owners to change – instead of focusing purely on the business, they will need to consider, assess and balance various new issues such as investees’ needs, the ability of their tax and administrative staff to deal with compliance, structures that will likely cost more in the short-term but may have long-term benefits and how to extract value from the Malaysian company in a tax-efficient manner.

Since this is the first time dividend tax is being introduced in Malaysia, there will certainly be teething problems and many questions have arisen as to how to actually track such dividend payments for purposes of the dividend tax. However, aside from those, Malaysian companies and UHNWIs should carefully and immediately consider the effect on them and, even if as a short-term placeholder, how to deal with this in the interim, since the tax will come into effect on 1 January 2025, less than a month away. Once the dust has settled, they should then plan their long-term objectives, bearing in mind Budget 2026 may be a different animal altogether. No matter what, professional advice, particularly on tax and legal compliance, should be obtained.