From Fully Exempt Dividends to a 2% Tax: What Malaysia’s MADANI Budget 2025 Means for Investors and Business Owners

The Malaysia MADANI Budget 2025, announced on 18 October 2024, has introduced a notable 2% tax on annual dividend income exceeding RM100,000, marking a pivotal shift for investors in Malaysia. For years, Malaysia allowed shareholders to receive dividends tax-free, providing an appealing income stream for investors and business owners alike. However, starting 1 January 2025, both residents and non-residents will be subject to a 2% tax on dividends that exceed this threshold, altering the tax landscape and impacting financial planning across the board.

This adjustment has raised concerns about double taxation, as corporate profits are already taxed before being distributed as dividends. For high-income investors and owners of family-owned businesses , this added tax layer could significantly reduce net income, compelling them to reassess their financial strategies and investments. Therefore, top accounting firms in Malaysia like YYC Advisors, can offer valuable guidance to help investors and business owners navigate this change effectively.

Evolving Landscape of Dividend Taxation in Malaysia

Malaysia’s taxation on dividends has seen substantial shifts over the years. Before 2008, dividends were taxed under an Imputation System. Under this system, tax was imposed at company and shareholder level. However, the tax imposed on shareholders would be adjusted through tax credits. Since the year of assessment 2008, income tax has been imposed at a single level (single-tier) on dividends distributed by companies. Under this single-tier tax system, the tax on company profits is final, and dividends distributed are exempted from tax at the shareholder level. This change encouraged more individuals to invest in dividend-paying stocks, helping to stimulate growth in the stock market.

However, with the latest MADANI Budget 2025 reform, high-income earners with annual dividends exceeding RM100,000 will be required to pay a 2% tax on dividend income above this threshold. Although this move primarily affects a small percentage of taxpayers, it represents a key shift in tax policy, prompting business owners and investors to reevaluate their investment planning and strategies.  

Are there any applicable exemptions? Yes! Below are the details of the exemptions applicable, including:

• Dividends from foreign entities
• Dividends from companies with pioneer status or reinvestment allowances
• Dividends from shipping companies exempted from tax
• Dividends from cooperatives and closed-end funds
• Profits distributed by KWSP (Employees Provident Fund), LTAT (Armed Forces Fund), ASNB (Amanah Saham Nasional Bumiputera), and other unit trusts

Implications of the New 2% Dividend Tax for Family-owned Business Owners

For family-owned business owners, who often serve as both shareholders and managers of their companies, the new dividend tax could have far-reaching implications. Many shareholders rely on dividends as a primary source of personal income. The reduction in net income due to the 2% tax will compel shareholders to consider several adjustments:

1. Reduced Personal Income

With the new tax, business owners whose dividend income exceeds RM100,000 will see a reduction in personal earnings. This change may prompt them to reconsider how they distribute profits and possibly explore alternatives like reinvesting in the business instead of issuing dividends.

2. Double Taxation Perception

Business owners may perceive the 2% tax on dividends as a form of double taxation, given that corporate profits have already been taxed. This sentiment is likely to be especially strong among business owners who see this additional tax as a financial burden on top of existing corporate taxes.

3. Cash Flow Management

The added tax could prompt business owners to re-evaluate cash flow management strategies, possibly impacting reinvestment plans. Companies might need to explore tax-efficient ways to allocate profits and minimize the tax impact on shareholders.

4. Impact on Succession Planning

For family-owned businesses, the dividend tax could complicate succession planning, as future shareholders may face higher taxes on dividends. To ensure a smooth transfer of ownership, business owners may need to incorporate strategic tax planning into their wealth transfer processes.

What This Means for High-Income Investors

With the 2% dividend tax being introduced, investors will need to adopt more sophisticated tax strategies, such as exploring tax-efficient investments to mitigate the impact on their portfolios. Top accounting firms in Malaysia with tax filing and advisory services can support investors with up-to-date insights and guidance.

1. Reduced Dividend Income and Tax Planning

For high-income investors, the tax will directly affect net earnings, reducing income from dividend stocks. This makes it essential to work with professional advisors and explore comprehensive tax planning strategies to minimize their tax burdens. Investors may find a tax planning course valuable for learning effective tax strategies that can help them retain more of their income.

2. Reconsidering Dividend Stocks vs. Growth Stocks

Investors may now question whether dividend stocks remain as attractive. Some might shift toward growth-oriented stocks that do not regularly issue dividends but offer capital appreciation, helping them avoid the dividend tax altogether.

3. Considering Reinvestment Strategies

The new tax policy could also encourage companies to retain more of their earnings for reinvestment rather than distributing them as dividends. As a result, investors and business owners may prefer strategies that focus on capital reinvestment, potentially increasing the company’s value over time.

Managing Dividend Tax: Insights from Southeast Asia

In other Southeast Asian countries, companies handle dividend taxes through withholding tax, deducting taxes before distribution. Should Malaysia implement a similar system, it would require substantial administrative changes, especially for larger companies with many shareholders. This change could increase demand for tax filing services in Malaysia , as businesses and individuals may require additional support to comply with updated tax regulations.

Foreign Investments: An Attractive Alternative?

Since the 2% tax applies to Malaysian dividend income while foreign-sourced dividends that are already taxed abroad are exempted from tax, some investors might consider shifting their portfolios to include more foreign dividend-paying stocks. This could potentially reduce their overall tax burden, making foreign investments an attractive alternative.

How YYC taxPOD Can Support You in Navigating Budget 2025 Changes

The YYC taxPOD, developed by YYC Advisors, is an innovative online platform that provides businesses with the resources needed to stay compliant and informed amid these regulatory changes. With access to expert-led classes, webinars, and timely updates, YYC taxPOD offers indispensable support for investors and business owners in Malaysia, helping them stay ahead of changes and adapt their financial strategies to maximize tax savings. Whether you are a high-income investor or a business owner, YYC taxPOD can guide you through every phase of compliance and planning to optimize your tax outcomes.

Book a session today to see how YYC taxPOD can support your tax planning efforts, or visit our website to learn more about YYC’s services, including tax filing and advisory services, that are geared toward empowering Malaysian businesses and investors alike.

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