Short answer. To use LHDN’s preferential SME rates (15% on the first RM150,000, 17% to RM600,000, 24% above), a resident company needs paid-up ordinary share capital of not more than RM2.5 million at the beginning of the basis period and gross business income of not more than RM50 million. It must also pass PR 8/2025’s related-company tests and, from YA 2024, have no more than 20% held by foreign companies or non-citizens.
Axecta provides company incorporation for companies across Malaysia. Talk to our team.
In this article
- What the SME tax rate is and why share capital sits at the centre
- The conditions in detail
- How to check eligibility: step by step
- A worked example (illustrative)
- Why share issues are the main risk
- Other treatments tied to the same tests
- Common mistakes
- What this means for different owners
- How Axecta helps
- Next steps
- Frequently asked questions
What the SME tax rate is and why share capital sits at the centre
Malaysian resident companies pay income tax at 24% in general. A company that qualifies as a micro, small or medium company (referred to in the ruling as an MSMC) pays lower rates on the first slice of its chargeable income. LHDN’s company tax rate page (last updated 25 June 2026 when we read it) shows, for YA 2023 to 2024:
| Company category | Rate structure |
|---|---|
| Paid-up capital up to RM2.5 million and gross business income up to RM50 million | 15% on the first RM150,000; 17% on RM150,001 to RM600,000; 24% on the rest |
| Other companies | 24% |
LHDN’s public ruling PR 8/2025, “Tax Treatment for Micro, Small and Medium Companies”, was published on 22 December 2025. Its rate table lists the same structure starting from YA 2023 (the earlier table was 17% on the first RM600,000 for YA 2020 to 2022). Check it for your year.
Share capital is central, and under the Companies Act 2016.pdf) it is simply what the company has received for its shares (see SSM’s no-par FAQ), because it is one of the three tests, and it is the one a company controls directly. The other two, income and ownership, are affected by who invests and how much.
The conditions in detail
Paragraph 6.2.1 of PR 8/2025 sets the conditions; each must be met.
| # | Condition | Detail from PR 8/2025 |
|---|---|---|
| 1 | Resident and incorporated in Malaysia | Residence for the basis year follows section 8 of the Income Tax Act |
| 2 | Paid-up ordinary share capital not more than RM2.5 million | Measured at the beginning of the basis period for the YA (paragraph 5.3.1) |
| 3 | Gross income from business sources not more than RM50 million | Measured in the basis period (paragraph 5.3.2), before deductions |
| 4 | Shareholding restrictions | Related-company tests (paragraph 5.3.3(a)) and, from YA 2024, a foreign-ownership test (paragraph 5.3.3(b)) |
| 5 | Not an excluded entity | The special rates do not apply to a business trust or to an asset-backed securities special-purpose company (paragraph 6.2.3) |
Condition 2: paid-up ordinary share capital
- The ruling refers to paid-up ordinary share capital, so ask your adviser how any preference shares are treated.
- The test date is the start of the basis period, not the year-end. Shares issued part-way through a year affect the next year’s test, not the current one, on the ruling’s wording.
- For an LLP the equivalent figure is capital contribution.
- The ruling’s Example 1 shows a resident company with RM2 million at the beginning of the basis period qualifying on this limb.
Condition 3: gross business income
Gross income here means business-source income before deductions, and the ruling gives scenarios worth knowing:
- Rental income counts as business income only where the company provides comprehensive and active maintenance and support services (Example 3, with RM24 million of rent). Passive rental and bank interest are not business income and do not count towards the RM50 million (Example 4).
- Losses and suspended operations. In Examples 5 and 6 a business that made a loss (or paused trading) is deemed to have zero gross income from the business source for this test.
- Foreign business income brought into Malaysia and tax-incentive income (even if exempt, Example 7) are included.
- The RM50 million test does not involve related companies. Paragraph 5.3.3 (note B) says the gross income test is applied to the company itself.
Condition 4: shareholding
There are two layers.
Related-company tests (all years). The company does not qualify if more than 50% of its paid-up ordinary share capital is owned directly or indirectly by a related company; or if the company owns more than 50% of the paid-up ordinary share capital of a related company; or if another company owns more than 50% of both. In each case the “related company” is one with paid-up ordinary share capital exceeding RM2.5 million at the beginning of the basis period. Ownership is traced through the chain to the ultimate holding company (note C). Example 10 multiplies percentages (70% x 80% = 56%) to show the indirect holding.
Foreign-ownership test (from YA 2024). The company must also have not more than 20% of its paid-up ordinary share capital owned, directly or indirectly, by at least a foreign company incorporated outside Malaysia or an individual who is not a Malaysian citizen. The ruling’s examples are instructive:
| Scenario | Outcome | Why |
|---|---|---|
| Example 14: a non-citizen holds 30% directly and a further 28% indirectly (40% x 70%) | Not an MSMC | 58% foreign-held exceeds 20% |
| Example 15: 100% held by a Singapore company whose ultimate owners are Malaysian citizens | Not an MSMC | The holder is a foreign company, so the 20% limit is breached despite the Malaysian owners |
| Example 16: the same Singapore company holds 20% and its own paid-up capital does not exceed RM2.5 million | MSMC | 20% does not exceed 20%, and the related-company tests are passed |
Before YA 2024, note D of the ruling says there was no restriction on whether the company was locally or foreign owned, as long as the other conditions were met.
How to check eligibility: step by step
Need this done for you? Axecta’s company incorporation team can handle this for your company. See the company incorporation service.
- Confirm residence and incorporation for the year of assessment.
- Identify the basis period and write down the paid-up ordinary share capital on its first day.
- List every shareholder in the chain up to the ultimate holder, with percentages.
- Test related companies: is any related company, with paid-up ordinary share capital above RM2.5 million, holding more than 50% of you, held more than 50% by you, or sharing a >50% parent with you?
- Test foreign ownership (YA 2024 onward): add direct and indirect holdings of foreign companies and non-citizens. Is it above 20%?
- Estimate gross business income for the basis period against RM50 million, treating passive income as outside the test.
- Compute tax at the tiered rates, then compare with the 24% alternative to see what is at stake.
- Diarise the next basis period’s opening paid-up capital before agreeing any share issue.
A worked example (illustrative)
The income figure is invented. The rates are from LHDN’s rate page and PR 8/2025.
A qualifying company has chargeable income of RM800,000 for YA 2027, assuming the YA 2023 structure still applies for that year (check the current rate table).
| Band | Amount | Rate | Tax |
|---|---|---|---|
| First RM150,000 | 150,000 | 15% | 22,500 |
| RM150,001 to RM600,000 | 450,000 | 17% | 76,500 |
| Remaining | 200,000 | 24% | 48,000 |
| Total | 800,000 | 147,000 |
At a flat 24% the tax would have been RM192,000, so qualifying is worth RM45,000 in this example. If a share issue taken before the start of the following basis period pushes paid-up ordinary share capital above RM2.5 million, that saving would be lost for the later year. Model any large equity round with your tax adviser first.
Why share issues are the main risk
A share issue changes both capital and ownership at once. Before agreeing:
- Amount. Will total paid-up ordinary share capital at the start of the next basis period exceed RM2.5 million?
- Investor identity. Is the new investor a foreign company or a non-citizen? Even a minority stake can breach 20% when added to existing foreign holdings.
- Group links. Does the investor or its parent already control another company with more than RM2.5 million of ordinary shares?
- Timing. The tests look at the start of the basis period, so a share issue on 2 January has a very different effect from one on 31 December.
Mechanics of the issue itself are in how to increase paid-up capital.
Other treatments tied to the same tests
PR 8/2025 attaches the MSMC conditions to more than the tax rate.
- Small value assets. Companies can claim a special allowance for assets of RM2,000 each, normally limited to RM20,000 per year of assessment. An MSMC meeting the conditions (including the foreign-ownership test from YA 2024) can claim without that annual limit (paragraph 6.3).
- CP204 flexibility. A newly operating resident company can be exempt from submitting estimates if it is not related to a company with more than RM2.5 million of paid-up ordinary share capital and keeps its own at or below RM2.5 million at the start of its basis period and the following two years. The foreign-ownership limit applies from YA 2024 (paragraph 6.6.2). Normal CP204 rules are covered in CP204 estimated tax.
- ESG and e-invoice deduction. MSMCs can claim a deduction of up to RM50,000 per YA for YA 2024 to 2027 for specified expenditure, which includes consultation fees for customised e-invoice software and external service providers (paragraph 6.7), with exclusions listed in the ruling. See the e-invoice guide for the timeline.
Common mistakes
- Testing at year-end. The ruling tests at the beginning of the basis period.
- Forgetting foreign holding companies. A foreign company in the chain triggers the foreign-ownership limit regardless of who owns it ultimately (Example 15).
- Ignoring group companies. The 50% related-company tests can disqualify a small company in a group with a larger affiliate.
- Not matching shares to the register. If the SSM record, register and accounts disagree, evidence for the test is weak. See no-par value shares](/guides/registered-capital-requirements/no-par-value-shares-companies-act-2016/), [SSM’s updating services and PD 11/2026.
What this means for different owners
- Local-owned Sdn Bhd. The key limits are RM2.5 million of ordinary capital and RM50 million of business income. Plan equity in stages if you are near the line.
- Foreign-owned or part foreign-owned company. From YA 2024, more than 20% direct or indirect foreign ownership removes access to the preferential rates, so the 24% rate is the planning assumption.
- Sole proprietor planning to incorporate. A sole proprietorship is taxed on the owner’s personal return. Compare structures in tax obligations by business type and sole proprietorship vs Sdn Bhd.
How Axecta helps
Axecta’s tax team and incorporation service can map your shareholding chain, test PR 8/2025 before a share issue, prepare the CP204 and Form C filings, and keep your SSM and accounting records consistent. See Malaysia’s corporate tax rates and when corporate tax is payable for the broader picture.
Next steps
- Record paid-up ordinary share capital at the start of each basis period.
- Draw the shareholding chart to the ultimate owners and mark foreign companies and non-citizens.
- Check the rate page for the year you are filing.
- Run the numbers before any share issue, including investor identity.
- Read the ruling’s examples that match your structure.
Frequently asked questions
What is the paid-up capital limit for the SME tax rate in Malaysia?
Not more than RM2.5 million of paid-up ordinary share capital at the beginning of the basis period for the year of assessment, per LHDN’s PR 8/2025. The company must also have gross business income of not more than RM50 million and meet the shareholding tests.
What are the SME company tax rates?
LHDN’s rate page lists 15% on the first RM150,000 of chargeable income, 17% on RM150,001 to RM600,000 and 24% on the rest for YA 2023 to 2024, with 24% for other companies. PR 8/2025 shows the same structure from YA 2023. Check the page for the year you are filing.
Does foreign ownership affect the SME rate?
Yes, from YA 2024. If more than 20% of paid-up ordinary share capital is held directly or indirectly by foreign companies incorporated outside Malaysia or by non-citizen individuals, the company does not qualify for the preferential rates under PR 8/2025.
Does a foreign holding company owned by Malaysians count as foreign?
Under Example 15 of PR 8/2025, a Singapore holding company owning 100% of a Malaysian company counted as foreign even though its ultimate owners were Malaysian citizens, so the 20% limit was breached. The same example with a 20% holding by that company passes.
When is paid-up capital tested?
At the beginning of the basis period for the year of assessment, not at the year-end. Shares issued during the year therefore generally affect the following year’s test, not the current one. Confirm your own basis period dates and the share issue timing with your tax adviser before signing.
Are loans from directors included in the RM2.5 million?
The test refers to paid-up ordinary share capital, so a genuine, repayable director loan is not share capital. However, converting a loan to shares increases paid-up capital, so test the effect first and keep the documents that show whether each amount is a loan or an equity subscription.
Does a related company affect my eligibility?
It can. Under PR 8/2025, a company does not qualify if more than 50% of its ordinary share capital is owned by a related company, if it owns more than 50% of a related company, or both are owned more than 50% by another company, where the related company has more than RM2.5 million of paid-up ordinary share capital.
Can an LLP get the SME rate?
Yes, if it qualifies. PR 8/2025 deals with companies and LLPs together, applying the RM2.5 million limit to an LLP’s capital contribution at the beginning of the basis period, along with the gross income and ownership tests. A resident LLP registered in Malaysia is the starting point.
Planning a share issue that could affect your tax rate?
Axecta Management Services is a full-suite accounting, company secretarial and consulting firm in Kuala Lumpur, serving companies from SMEs to MNCs.
Ask Axecta to check your eligibility
Keep reading
- Malaysia Corporate Tax Rate for Sdn Bhd
- How Much Capital Does a Sdn Bhd Need? Minimum Paid-Up Capital in Malaysia
- How to Increase Paid-Up Capital of a Sdn Bhd: Steps, Approvals and SSM Filing
- CP204 Estimated Tax: How It Works
- Paid-Up Capital vs Authorised Capital in Malaysia: What Changed Under the Companies Act 2016
- No-Par Value Shares Under the Companies Act 2016: What Section 74 Means for Your Sdn Bhd
- Registered Capital Requirements: the full guide
Official sources to check
- LHDN public ruling PR 8/2025 (published 22 December 2025)
- LHDN company tax rate page (updated 25 June 2026)
- Companies Act 2016
This article is general information and not legal, tax or accounting advice for your company. Rates, thresholds, deadlines and procedures change, so confirm current requirements with the sources above or with Axecta.