New 2% Dividend Tax for YA 2025

The Danger Zone: Why You Can't Ignore the New 2% Dividend Tax for YA 2025

For years, Malaysian taxpayers have enjoyed a straightforward rule: under the single-tier system, dividends received from Malaysian companies are tax-free. Because of this, many business owners and investors have developed a habit of simply copying last year's tax figures when filing their Form B. Starting in Year of Assessment (YA) 2025, that habit enters a dangerous new territory.

The Inland Revenue Board (LHDN) has introduced a new 2% Dividend Tax effective YA 2025. Because this is the first year taxpayers have to deal with it, it represents a massive "danger zone" for compliance. Failing to declare this income correctly can lead to severe penalties under Section 112(3) or Section 113(1) of the Income Tax Act 1967 for submitting incorrect returns.

What Changed with Dividend Tax in Malaysia?

To broaden the tax base, the government now imposes a 2% tax on dividend income distributed by a company to individual taxpayers that exceeds RM100,000 per annum. This applies whether the dividend is received in cash or in-specie.

The key facts you must know:

• The tax applies to dividends received from both listed and unlisted shares in Malaysia.
• It affects resident individuals, non-resident individuals, and individuals holding shares through nominees.
• Only the portion of dividend income exceeding the RM100,000 threshold is subject to the 2% tax.

How the Tax is Computed (It's Not Simple)

You cannot just lump your dividend income together with your business or employment income anymore. Under the new rules gazetted on 7 May 2025, dividend tax requires a separate computation.

The portion of your chargeable income attributable to dividends is determined using a specific statutory formula (A/B x C) under Part XXII of Schedule 1. This means your Form B now has a split structure to handle this dual tax computation:

• Part BA (Item B8): You must report your statutory dividend income here, separate from other income sources.
• Part BB (Item B26): The chargeable income subject to the dividend tax is calculated here using the formula.
• Part BB (Item B27): The 2% tax is applied to the calculated dividend amount.
• Part BB (Item B28): Your remaining chargeable income is taxed at normal scale rates.

Getting the mapping wrong between these sections will misstate your tax liability and could trigger an LHDN audit.

The Good News: Exemptions Apply

Not all dividends are caught in this new tax net. The following dividend sources remain exempt and are out-of-scope for the 2% tax:

• Profit distributions from the Employees Provident Fund (EPF / KWSP)
• Distributions from Amanah Saham Nasional Bumiputra (ASNB)
• Distributions from Lembaga Tabung Angkatan Tentera (LTAT) or any unit trusts
• Overseas (foreign source) dividend income
• Dividends from companies enjoying pioneer status or reinvestment allowances
• Dividends distributed by co-operatives

Who Needs to Be Careful?

The taxpayers most at risk of falling into this danger zone are:

Business owners and directors: Those who regularly extract profits from their private companies (Sdn Bhd) via dividends instead of salaries.

High-net-worth investors: Individuals holding significant portfolios of listed shares on Bursa Malaysia.

Joint assessment filers: Spouses filing together must now separately disclose the dividend-earning spouse's statutory dividend income.

Need Help Navigating YA 2025?

Do not assume your dividends are still tax-free. The first year of a new tax law is when the most costly mistakes happen. Let our team review your dividend income position and handle the complex new Form B computations for you.

Contact KS Chia & Associates (AF001828) for professional tax advisory and compliance services. WhatsApp us at 011 2366 5233.