The New 2% Dividend Tax: Strategic Insights And Impact On High-Value Shareholders

Table of contents

• Introduction

• The slight comeback to dividend imputation system

• Components of the new dividend tax

• Areas of consideration

• Why this change now

• The outlook moving forward

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Introduction

On 4th December 2024, the long fully exempted dividend income from taxation is finally to be taxed at 2% on chargeable dividend income for annual dividend income exceeding RM100,000 beginning from year of assessment 2025 (meaning from 1st January 2025), with the Finance Bill 2024 passed at the Parliament of Malaysia. Further guidelines and/or public ruling have not been published by the Inland Revenue Board of Malaysia (IRBM) for deeper details on the application and/or technicalities of this unique tax, and also income tax exemption orders are expected from the Federal Government for further details on the exemptions available, however based present available information, a few striking observations could be made on the dividend tax model.

The slight comeback to dividend imputation system

Prior to year of assessment 2008, dividends were taxed at both the company and shareholders level under the full imputation system, however allowing for tax credits, where the tax imposed on the shareholders would be adjusted to reflect the amount satisfied by the company. Meaning that the shareholders would only be taxed for the difference between their marginal tax rate and the corporate tax rate. Effective 2008, to enhance the efficiency and administration of this system, it was replaced with the single-tier system, where taxes on company profits are considered final and dividends are tax exempted in the hands of shareholders. There was no further need to deduct taxes for dividend payouts and it could be freely distributed without having to keep track of a dividend franking account.

Following the recent announcement, after 17 years of tax exemption, a Dividend Tax has been introduced and legislated in Malaysia, sparking the main concern that dividends will now once again be taxed on shareholders. An unexpected and startling move after all these years.

Components of the new dividend tax

This new Dividend Tax is imposed on dividends paid, credited or distributed, whether in monetary form or otherwise, by a company to any of its shareholders which is an individual, either through direct shareholding or a nominee, and the dividend is deemed by virtue of Section 14 of the Income Tax Act 1967 (ITA 1967) to be derived from Malaysia, in excess of RM100,000 annually at the rate of 2% on the chargeable income in respect of such dividend beginning from 1st January 2025. Amendments to the ITA 1967 were made in respect of Section 6 of the ITA 1967 and inclusion of Part XXII of Schedule 1 of the ITA 1967 to incorporate these new changes. Paragraph 12B of Schedule 6 of the ITA 1967 has expanded to state that individual shareholders earning below RM100,000 annually will not be affected by this Dividend Tax.

The primary focus on the above amendments is that the liability of this new tax falls on high-value individual shareholders which consists of residents, non-residents and individuals who hold shares through nominees. It is to be noted that corporate shareholders are not affected by this new mechanism. This is further confirmed by the amendment to Paragraph 12B of Schedule 6 of the ITA 1967.

Furthermore, there are exemptions and/or exclusions from this Dividend Tax, which are summarized as follows:

Dividend income from sources outside Malaysia	Dividends distributed from profits of companies that received pioneer status and reinvestment allowances	Dividends distributed from profits of shipping companies that are exempted from tax	Dividends distributed by co-operative societies
Dividends declared by closed-end funds	Dividends received by residents from Labuan entities	Profit distributions by Employees Provident Fund (EPF), Armed Forces Fund Board, Amanah Saham Nasional Bumiputera (ASNB), or any unit trusts	Any exemption granted on dividend income in the hands of individual shareholders as determined by the Finance Minister

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Introduction

On 4th December 2024, the long fully exempted dividend income from taxation is finally to be taxed at 2% on chargeable dividend income for annual dividend income exceeding RM100,000 beginning from year of assessment 2025 (meaning from 1st January 2025), with the Finance Bill 2024 passed at the Parliament of Malaysia. Further guidelines and/or public ruling have not been published by the Inland Revenue Board of Malaysia (IRBM) for deeper details on the application and/or technicalities of this unique tax, and also income tax exemption orders are expected from the Federal Government for further details on the exemptions available, however based present available information, a few striking observations could be made on the dividend tax model.

The slight comeback to dividend imputation system

Prior to year of assessment 2008, dividends were taxed at both the company and shareholders level under the full imputation system, however allowing for tax credits, where the tax imposed on the shareholders would be adjusted to reflect the amount satisfied by the company. Meaning that the shareholders would only be taxed for the difference between their marginal tax rate and the corporate tax rate. Effective 2008, to enhance the efficiency and administration of this system, it was replaced with the single-tier system, where taxes on company profits are considered final and dividends are tax exempted in the hands of shareholders. There was no further need to deduct taxes for dividend payouts and it could be freely distributed without having to keep track of a dividend franking account.

Following the recent announcement, after 17 years of tax exemption, a Dividend Tax has been introduced and legislated in Malaysia, sparking the main concern that dividends will now once again be taxed on shareholders. An unexpected and startling move after all these years.

Components of the new dividend tax

This new Dividend Tax is imposed on dividends paid, credited or distributed, whether in monetary form or otherwise, by a company to any of its shareholders which is an individual, either through direct shareholding or a nominee, and the dividend is deemed by virtue of Section 14 of the Income Tax Act 1967 (ITA 1967) to be derived from Malaysia, in excess of RM100,000 annually at the rate of 2% on the chargeable income in respect of such dividend beginning from 1st January 2025. Amendments to the ITA 1967 were made in respect of Section 6 of the ITA 1967 and inclusion of Part XXII of Schedule 1 of the ITA 1967 to incorporate these new changes. Paragraph 12B of Schedule 6 of the ITA 1967 has expanded to state that individual shareholders earning below RM100,000 annually will not be affected by this Dividend Tax.

The primary focus on the above amendments is that the liability of this new tax falls on high-value individual shareholders which consists of residents, non-residents and individuals who hold shares through nominees. It is to be noted that corporate shareholders are not affected by this new mechanism. This is further confirmed by the amendment to Paragraph 12B of Schedule 6 of the ITA 1967.

Furthermore, there are exemptions and/or exclusions from this Dividend Tax, which are summarized as follows:

Dividend income from sources outside Malaysia	Dividends distributed from profits of companies that received pioneer status and reinvestment allowances	Dividends distributed from profits of shipping companies that are exempted from tax	Dividends distributed by co-operative societies
Dividends declared by closed-end funds	Dividends received by residents from Labuan entities	Profit distributions by Employees Provident Fund (EPF), Armed Forces Fund Board, Amanah Saham Nasional Bumiputera (ASNB), or any unit trusts	Any exemption granted on dividend income in the hands of individual shareholders as determined by the Finance Minister

Separately, the formula to determine the chargeable dividend income is shown below:

A/B x C = D

A: Dividend statutory income

B: Aggregate income

C: Chargeable income

D: Chargeable dividend income

An illustration on the application of the above formula and derivation of chargeable dividend income till the final tax impact and/or exposure on an individual shareholder is as shown below for readers’ easy understanding:

Total income received by Mr A in year of assessment 2025	RM	Threshold	Chargeable dividend income
Employment income	50,000	N/A	N/A
Rental income	7,200	N/A	N/A
Investments in local companies
Dividends from EPF for year 2024 (received on 3rd March 2025)	5,000	No	No
Dividends declared on 1st November 2024 (received on 1st January 2025)	55,000	Yes	Yes
Dividends received on 1st June 2025	138,000	Yes	Yes
Dividends declared on 1st November 2025 (received on 1st February 2026)	10,000	No	No

Calculation of statutory dividend income for year of assessment 2025	RM
Dividend income:
Investments in local companies
Dividends declared on 1st November 2024 (received on 1st January 2025)	55,000
Dividends received on 1st June 2025	138,000
Total	193,000
Amount in excess of RM100,000	93,000

Mr A’s tax computation for year of assessment 2025		RM
Statutory employment income		50,000
Statutory rental income		7,200
Statutory dividend income [RM193,000 – RM100,000]	[A]	93,000
Aggregate income	[B]	150,200
Less: Personal relief - self		(9,000)
Chargeable income	[C]	141,200
Chargeable dividend income [taxed at 2%]	[D] = A/B x C	87,427
Net chargeable income at scale rate [taxed at scale rate]		53,773
Dividend tax [RM87,427 x 2%]		1,748.54
Tax [RM1,500 + (RM3,773 x 11%)]		1,915.03
Total tax payable		3,663.57

Areas of consideration

The offered allowances and deductions

Additionally, it has been announced that allowances and deductions will be allowed to be taken into account for computation of chargeable dividend income purposes, however further details on this are yet to be announced. For the time being, it could be considered that such allowances and deductions would be intended for deductibility of expenditure incurred in relation to generating and/or obtaining the said dividend income.

Determination of annual dividend income threshold

Another area of confirmation that would be required is if the exempted and/or excluded dividends would be included for annual dividend income threshold (RM100,000) computation purposes to determine taxability for Dividend Tax. It is essential to precisely identify this condition as it could lead to different derivations of annual dividend income, thus shareholders failing to properly identify liability for Dividend Tax.

Inaccurate reporting

The Dividend Tax model adopts a self-assessment system where individuals are required to self-assess their taxability and liability for Dividend Tax, and to perform self-declaration in their tax return to ensure compliance. With the various requirements and especially the complex and intricate computation formula for chargeable dividend income, proper compliance and reporting in tax return is vital. Besides, shareholders also have to accurately declare their dividend income in line with the amounts stated in the dividend certificates and/or vouchers issued by the dividend-paying companies, as under-declaration and/or inaccurate reporting could lead to tax audits and imposition of penalties.

Reporting and/or data collection mechanism

The IRBM could establish a reporting and/or data collection mechanism for this new tax. The IRBM may not solely rely on individuals’ declaration in their tax return and may create and/or establish a database for them to collect and/or obtain information for reconciliation purposes with individual taxpayers’ records. Reporting mechanisms such as declaration by dividend-paying companies may be required.

Payment mechanism of Dividend Tax

It has been clearly indicated that the Dividend Tax will not be withheld and paid to the IRBM by the dividend-paying companies on behalf of the individual shareholders as no amendments were made to Section 108 of the ITA 1967 (where it states that companies are not entitled to deduct tax from dividends paid), but rather it was maintained with inclusion of additional requirements for issuance of dividend certificate. Thus, payment of Dividend Tax will be made together with final taxes post-tax return submission by individual shareholders. However, it is essential to determine if the same mechanism would be viable for instances with non-resident individuals.

Compulsory and enhanced dividend certificate

According to Section 108 of the ITA 1967, from year of assessment 2025, dividend-paying companies upon distributing dividends are required to furnish individual shareholders with a certificate stating the following information:

i. The gross amount of dividend; and

ii. The amount of dividend paid, or where the dividend includes property other than money, also stating the market value of that property at the time of dividend distribution.

Companies will now need to compulsorily issue dividend certificates and/or vouchers for all shareholders receiving dividends as it is now a requirement under the ITA 1967. For companies that have not been adhering to this, immediate action is required as it is more vital than now for companies to issue complete and detailed dividend vouchers for their shareholders. Furthermore, for companies who have been issuing dividend vouchers, they should ensure that it is enhanced to include the required information. This dividend certificate can be seen as a way to ease shareholders for their self-declaration purposes especially for those who receives dividends from multiple sources or receives multiple-payout dividends from a company in a year. Over time, the IRBM could release a prescribed format for companies to adhere to accordingly in order to streamline the information requirements.

On a separate note, it must be clarified if companies should begin adhering to this requirement beginning from their respective year of assessment 2025 (due to companies’ differential commencement of financial year) or to begin from 1st January 2025 as the year of assessment 2025 for an individual commences from 1st January 2025. This is a very important component to be determined and further details on this are yet to be announced.

Why this change now

During the Budget 2025 announcement, the Government has declared that this move of theirs were intended to make Malaysia’s individual income tax structure more progressive and to further broaden the tax base. This is due to the fact that as compared with our neighboring countries in the Southeast Asia region, Malaysia’s tax base presents to be narrower, and presently attempts are being taken by the Government to widen it. The table below depicts the taxation on dividends across the Southeast Asia region:

Country	10 Sept 2019
	Resident	Non-Resident
Cambodia	N/A	14
Indonesia	0 - 15	20
Myanmar	0	0
Philippines	0	15 / 25
Singapore	N/A	0
Thailand	0 - 15	10

Under the operation of a tax treaty and/or double taxation agreement, lower rates may be applicable. It is to be noted that in the Southeast Asia region, corporations are being taxed on dividend income received and withholding tax mechanism is applicable primarily for non-residents and also on residents for several countries. These features and/or components varies distinctly with Malaysia’s upcoming dividend taxation system.

Thus, Malaysia’s Dividend Tax system is unique in nature with a set of its own mechanisms especially in terms of the comprehensive list of exemptions and/or exclusions provided, and with a comparatively lower taxation percentage of 2% as compared to countries nearby. Furthermore, the Dividend Tax is focusing predominantly on high-value individual shareholders as in order to receive dividends of RM100,000, investments of approximately RM1 million to RM3 million would be required.

The maximum impact of this new tax can be seen on two parties. Firstly, an individual who earns dividends as their primary source of income, and secondly, on medium to large sized family-owned businesses as present practices in which the owners (shareholders) are also employed in the business, most individuals refrain from receiving high salary payouts (which are liable for higher taxes), and instead receives higher dividend payouts as it is exempted from tax. A visible huge gap presents here and the repercussions from it are tax leakages. Therefore, the Government have initiated this measure to create a more progressive individual income tax base. The graph below indicates the income tax revenue from individuals (personal tax) from year 2014 till estimation for year 2025:

This new Dividend Tax can also be seen in a way to assist the IRBM in identifying the presence of more high-net-worth individuals or even ultra-high-net-worth individuals in Malaysia. This is further strengthened and/or substantiated with the fact that this new Dividend Tax is only applicable on individual shareholders. Delving in detail into the scope of taxation, one particular and intriguing scope would be on individuals who hold shares through nominees. This expanded personal tax base seems to be aimed at bringing more non-compliant individuals under the net, to further curb tax leakages and ensuring compliance.

The outlook moving forward

The 2% Dividend Tax is presently just a kickstart of this new mechanism after 17 years of tax exemption. Initial propositions by our Prime Minister and Finance Minister were to levy 5% of taxes on annual dividend income, however upon discussions and/or engagements with stakeholders, it has been decided with a reduction to 2%. As the 2% taxes may not generate substantial amount of additional revenue for the Government, hence possibilities and/or chances for an increase in tax rate is highly probable in the near run.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Also published on Wolters Kluwer: read article here