(TAX UPDATE) E-Invoice Malaysia: LHDN Finally Defines “Related Company”

For months, SME business owners like us have been guessing.

Every time we submit an e-invoice, the system asks:

“Is this a related company?”

But the problem was — nobody could give a straight answer.

No proper guideline.
No official definition.
No standard reference.

Even consultants had only one reply:

“It depends.”

That uncertainty is now over.

On 9 July 2025, LHDN released a major update to its General FAQ. And finally, they pointed us to the correct legal reference.

“Related company” will follow the definition under Section 2 of the Promotion of Investments Act 1986.

It’s official. Clear. And most importantly — we now know what to do.

What is a “related company”?

Under Section 2 of the Promotion of Investments Act 1986, a company is considered related to another in two situations:

One company controls the operations of the other
Both companies are controlled by the same person or entity

This covers direct or indirect control. It’s not just about ownership. It’s about who has the power to make decisions in the company.

And here’s the key rule for most SMEs:

If a company holds 20% or more of another company’s shares, they are automatically considered “related”.

This is known as the 20% rule.

If Company A owns 20% of Company B, they are related.

If Company B owns 20% of Company A, also related.

If both companies own 20% of each other, they are still related.

No need to prove control. The 20% rule is enough.

Not every business is a “company”

This part is important for SME owners.

The term “company” here refers only to companies registered under the Companies Act 2016 — meaning:

Sdn Bhd and Berhad — Yes, included
Sole proprietorships — Not included
Partnerships — Not included

So if your supplier is a traditional kedai runcit, a sole prop, or a partnership, even if owned by your friend or relative — they are not considered a “related company” for e-invoice purposes.

This update brings relief to many small businesses. It keeps the focus on incorporated companies, not informal or unregistered businesses.

How does this affect you?

Let’s go through a few common SME examples.

1. You own another company under your group

If your Sdn Bhd owns another Sdn Bhd, or your directors control multiple companies. Yes, they are related. Declare accordingly in your e-invoice.

2. You hold a 25% stake in a supplier

Even if you don’t have control or board presence under the 20% rule, that company is related. You must tick “Yes” in the related company field.

3. A supplier owns 21% of your company

Same story. If they hold 20% or more, the relationship is considered related.

4. You buy from your brother’s sole prop

Even if he shares your office or uses your warehouse — if he runs a sole prop or partnership, he’s not a “company” under the Act. So you do not need to declare it as related.

What should SME business owners do next?

Here’s a simple action plan to protect your business and stay compliant:

Step 1: Create a Related Party List
List down all your key suppliers and customers. Note their company numbers, ownership structure, and whether they fall under Companies Act 2016. This helps you decide what to tick in the system.

Step 2: Set a 20% Watchlist
Ask your company secretary to highlight any company where you or your group holds 20% or more — or vice versa. Update this list regularly.

Step 3: Train your finance and procurement team
Your team must know how to identify a related company — using the control test and 20% rule. No more guesswork.

Step 4: Update your SOPs
Revise your internal standard operating procedures to reflect this update. Mention the official reference:
Section 2 of the Promotion of Investments Act 1986 and LHDN FAQ dated 9 July 2025.

This gives you a clear basis if LHDN ever audits your e-invoice records.

Why this matters

Inaccurate declarations in e-invoicing can raise red flags. If you wrongly declare a company as related — or fail to declare when it actually is — you may face unnecessary queries or penalties later.

This latest FAQ update from LHDN helps to:

Clear the confusion
Standardise the approach
Reduce your business risk

Now that the official reference is confirmed, every SME can apply the same rules — fairly and consistently.

Summary for SME owners

From now on, when LHDN asks whether a company is “related” in your e-invoice, just follow two steps:

Check whether there is control or common control
Check whether there is 20% or more ownership, directly or indirectly

For sole proprietors and partnerships, they’re outside the scope.

This update brings much-needed clarity and will help you manage your e-invoicing process with confidence.

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