(TAX UPDATE) Splitting Into Five Sole Proprietorships to Escape e-Invoice? You Are Still One Taxpayer

Latest LHDN E-Invoice FAQ

Introduction

The same business owner came back. Last time his clever plan was two companies to stay under the SST threshold. This time he had a new one.

Close the Sdn Bhd. Open five sole proprietorships instead. Spread the turnover so each enterprise sits comfortably below RM1 million. No e-Invoice phase to worry about, no MyInvois, no 55 data fields, no validation. Five small businesses, each quietly exempt.

It sounds neat until you understand one thing LHDN settled a long time ago. A sole proprietor is not a separate taxpayer. Five enterprises owned by one person are still one person, with one tax file, and one combined turnover.

If you have been weighing the same idea, read on before you visit SSM.

The RM1 Million Line and What Actually Decides Your Phase

E-Invoice in Malaysia is phased by annual turnover, not by profit and not by the number of business names you hold. Phase 1 captured turnover above RM100 million from August 2024. The phases worked downward, and from 1 January 2026 the mandate reaches businesses with turnover between RM1 million and RM5 million.

On 7 December 2025 the exemption floor was raised from RM500,000 to RM1 million, effective 2026. So today, if your turnover is below RM1 million, you sit outside the mandate. That is the line everyone is now trying to stay under.

Note the wording carefully. The threshold attaches to the taxpayer's turnover, and LHDN decides who crosses it using tax filing data and business registration records. Hold that thought.

A Sole Proprietor Is Not a Separate Taxpayer

This is the part that quietly defeats the whole plan. A sole proprietorship is not a separate legal person and, more importantly, not a separate tax person. The business and the individual are the same.

When you run five sole proprietorships, you do not have five taxpayers. You have one individual, reporting all five business activities under one Form B, against one tax file and one TIN. The turnover does not split into five neat figures in LHDN's eyes. It adds up under you.

So if those five enterprises together turn over RM3 million, that is RM3 million of business turnover sitting against a single individual taxpayer. You have not landed below the RM1 million line. You have parked RM3 million squarely inside Phase 4.

The split that worked in your spreadsheet never happened on LHDN's system, because LHDN was never looking at the enterprises. It was looking at you.

What LHDN Already Sees

There is no hidden trick to uncover here. SSM records show every business registration tied to your name. Your Form B consolidates the income from all of them. Your TIN ties it together.

LHDN already uses business registration data and tax filings to determine which taxpayers fall into each phase. One individual holding five enterprise registrations, all reporting under the same tax file, is not a clever structure. It is a single line of turnover wearing five different signboards.

And the income tax cost arrives before the e-Invoice question is even reached. All five businesses are assessed on you personally, at individual progressive rates that climb to 30%, with unlimited personal liability on every one of them. You have taken on more exposure, not less.

Section 140 and the Price of the Plan

Even if someone restructured this into separate individuals, family members or nominees, the anti-avoidance net is wider than e-Invoice itself.

Section 140 of the Income Tax Act 1967 gives the Director General power to disregard or vary any transaction whose purpose or effect is to avoid or reduce tax liability. A split designed for no commercial reason other than dodging a compliance threshold is precisely the kind of arrangement that provision exists to unwind. Substance over form is the principle, and an artificial split has no substance to defend.

On the e-Invoice side, failure to comply is an offence under Section 120 of the Act, carrying a fine of up to RM20,000 or imprisonment of up to six months, or both, for each offence.

What You Give Up, for Nothing

Set aside the legal risk for a moment and look at the trade. To chase an exemption you may not even keep, you would dissolve a limited liability company, expose your personal assets, push your business income onto higher personal rates, and multiply your bookkeeping across five sets of accounts.

And you still would not escape the ecosystem. Even an exempt business has to receive validated e-Invoices from suppliers in the mandate, and your larger customers will increasingly demand a validated e-Invoice before they can claim their deduction. Sit outside the system and you may simply lose those customers.

The exemption floor is also widely expected to be reviewed downward over time. Building your whole structure around a line that is likely to move is not planning. It is hoping.

KTP's View

We keep returning to the same message with clients. Compliance thresholds are not loopholes waiting to be gamed. They are lines LHDN draws and LHDN polices.

If the only reason you are converting one company into five sole proprietorships is to slip under the RM1 million e-Invoice line, assume LHDN will read it exactly as it is, one taxpayer with one combined turnover, and price the cost back to you. You will have surrendered limited liability and a clean corporate structure in exchange for a saving that probably does not survive your own Form B.

Before you register that first enterprise, ask the question we asked the boss across our table. Would this structure exist if e-Invoice did not. If the honest answer is no, you are not planning around the rule. You are building a problem for your future self to explain.

Visit Us

Wisma KTP, 53 Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
Wisma THK, 41, Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru

KTP (Audit, Tax, Advisory)

An approved audit firm and licensed tax firm operating under the KTP group based in Johor Bahru providing audit, tax planning, advisory and compliance services to clients

THK (Secretarial, Bookkeeping, Payroll, Advisory)

A licensed secretarial firm in Johor Bahru providing fast reliable incorporation, secretarial services, corporate compliance services, outsourcing bookkeeping, and payroll services to clients