Public Ruling 8/2025: LHDN's Comprehensive Guide to SME Tax Treatment in Malaysia
The Inland Revenue Board of Malaysia (LHDN) has released Public Ruling No. 8/2025, titled "Tax Treatment for Micro, Small and Medium Companies." This comprehensive ruling consolidates all existing tax treatments for Malaysian MSMCs into one definitive reference document, making it easier for business owners and tax practitioners to understand and apply the rules. What is Public Ruling 8/2025?
Public Ruling 8/2025 is a consolidation document that brings together all existing tax treatments for companies and Limited Liability Partnerships (LLPs) that qualify as Micro, Small and Medium Companies (MSMCs) under the Income Tax Act 1967. It is important to note that most of the tax treatments covered in this ruling have been in effect for several years. The preferential tax rates, paid-up capital requirements, and gross income thresholds were already established through previous practice notes (including Practice Note 4/2020) and legislative amendments. PR 8/2025 now provides a single, comprehensive reference that includes detailed examples and scenarios. The one key new element introduced is the 20% foreign ownership restriction, which took effect from Year of Assessment 2024.
Who Qualifies as an MSMC Under the Income Tax Act?
To qualify for MSMC tax benefits, a company or LLP must meet the following criteria:
| Criteria | Requirement |
| Residency | Resident and incorporated/registered in Malaysia |
| Paid-up Capital | Not exceeding RM2.5 million at the beginning of the basis period |
| Gross Business Income | Not exceeding RM50 million in the basis period |
| Shareholding Structure | Not controlled by larger entities (>50% by related company with capital >RM2.5m) |
| Foreign Ownership (from YA 2024) | Not more than 20% owned by foreign entities or non-Malaysian citizens |
Key Highlight: 20% Foreign Ownership Cap (Effective YA 2024)
The most notable new element in PR 8/2025 is the 20% cap on foreign ownership, which took effect from Year of Assessment 2024. A company will not qualify as an MSMC if more than 20% of its paid-up capital is owned by:
•Foreign companies incorporated outside Malaysia; or
•Individuals who are not Malaysian citizens.
Impact: Malaysian SMEs with foreign investors exceeding this threshold will lose access to preferential tax rates and other MSMC benefits. This could result in a higher tax liability.
Action Required: If your company has foreign shareholders, review your shareholding structure to determine if you are still eligible for MSMC status.
Preferential Tax Rates for MSMCs (Existing Rates Confirmed)
PR 8/2025 confirms the preferential tax rates that have been in effect since YA 2023:
Chargeable Income | Tax Rate |
First RM150,000 | 15% |
RM150,001 – RM600,000 | 17% |
Above RM600,000 | 24% |
Compared to the standard corporate tax rate of 24%, this tiered structure provides substantial tax savings for smaller businesses.
Tax Deduction for E-Invoicing Implementation
•Maximum Deduction: RM50,000 per year of assessment
•Period: YA 2024 to YA 2027
•Consultation fees for developing customized e-invoicing software
•Fees for external service providers related to e-invoicing implementation
Note: This deduction does not cover planning stage costs or consultation fees for using the MyInvois Portal. Detailed Scenarios for Gross Income Determination
One of the valuable aspects of PR 8/2025 is the inclusion of detailed scenarios (previously covered in Practice Note 4/2020) with comprehensive examples:
Scenario | Treatment |
Business rental income (with comprehensive services) | Counted as gross business income |
Passive rental income (without comprehensive services) | NOT counted as gross business income |
Business losses | Deemed as NIL gross business income (still qualifies) |
Temporary business closure | Deemed as NIL gross business income (still qualifies) |
Foreign business income | Included in RM50 million threshold |
Income with tax incentives (e.g., pioneer status) | Full gross income counted, regardless of exemptions |
Tips for Malaysian SMEs
1. Use PR 8/2025 as Your Reference Document
This Public Ruling is now the definitive guide for MSMC tax treatment. Keep a copy for reference when preparing your tax returns or discussing tax matters with your accountant.
2. Review Your Foreign Shareholding
If your company has foreign shareholders, calculate the total foreign ownership percentage. If it exceeds 20%, consider restructuring options to maintain MSMC eligibility.
3. Plan Your E-Invoicing Implementation
Take advantage of the RM50,000 tax deduction by implementing e-invoicing before the deadline. Ensure your expenses are properly documented and eligible for the deduction.
4. Understand the Gross Income Rules
The distinction between business income and non-business income (e.g., passive rental income) is critical for MSMC qualification. Ensure your income is correctly classified.
How KS Chia & Associates Can Help
Navigating the complexities of Malaysian tax law requires professional expertise. At KS Chia & Associates, we specialize in helping SMEs understand and comply with the latest tax regulations.
•E-invoicing implementation guidance
•Shareholding structure review
Contact us today for a consultation:
KS Chia & Associates (AF001828) WhatsApp: +6011 2366 5233
Conclusion
Public Ruling 8/2025 serves as a comprehensive consolidation of all existing tax treatments for Malaysian MSMCs. While most of the rules have been in place for several years, having them compiled in one document with detailed examples provides valuable clarity for business owners and tax practitioners. The key new element to note is the 20% foreign ownership cap effective from YA 2024, which may affect companies with significant foreign investment.
Source : https://www.hasil.gov.my/media/fo1ptejq/pr-8-2025-tax-treatment-for-micro-small-and-medium-companies.pdf
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