New Tax Rate if you use Sdn Bhd to buy property/share

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When you look at the new tax rate, do you get overwhelmed with a strong sense of anger?

Increase income tax by 7% in 2020 is NO JOKE!

Overview

On 18 May 2020, LHDN has release Practice Note.3/2020 to clarify:

a)    On determine the gross income from business sources of not more than RM50million of company or Limited Liability Partnership (LLP); and

b)    Changes in tax rate from 17% to 24%.

By clarifying the changes in determining the gross income, effective from year assessment 2020 onwards, certain companies (see below) will NOT be entitled to enjoy the SME (17%) tax rate.

Key takeaways

You will understand when a Company/LLP entitles to enjoy the SME (17%) tax rate. For those didn’t fulfil the SME criteria, the tax rate will be 24%. 

Summary of learning

To enjoy the SME (17%) tax rate, the Company need to fulfil the following conditions:

a)    Share capital / Total capital contribution ≤ RM2.5 million; and

b)    *Must have gross income from source or sources consisting of a business not exceed RM50 million. It consist

I.        Business income;

II.        Any foreign business source; and

III.        Any exempted income (who enjoy Pioneer Status or Investment Tax Allowance which has being approved by MIDA).

* Additional criteria for resident company/LLP to determine the gross income.

Therefore, the following companies are NOT entitled to enjoy the SME (17%) tax rate:

a)    Company without business source of in

I.        Investment Holding Company (IHC) (not listed on Bursa Malaysia

An investment holding company refers to a company that owns investments such as properties and shares for long term investment and derives investment income ("non-trade income") such as dividend, interest or rental income. The company's principal activity is that of investment holding.

II.        Company ceased business operation but has other income such as rental income or interest gain.

b)    Gross income more than RM50 Million.

IMMEDIATE tax IMPACT

CP204 tax estimation - Tax rate increases from 17% to 24% if not fulfil the SME criteria, a 10 % underestimate penalty may be imposed if more than 30% differences with final tax payable.

CONCLUSION

Consult with your tax agent now and revise tax estimation to pay more tax and save the penalty eventually.

Supporting information:

1.     Practice Note No.3/2020

2.     Finance Act 2019

3.     Income Tax 1967

Para 2A and 2D, Part 1 of Schedule 1 - Rates of tax (amendment)

Section 22 - Gross income

Section 24 - Gross income from business is related

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