(TAX UPDATE) Group Relief 2025: How SME Bosses Can Save Tax by Sharing Losses in the Group

(TAX UPDATE) Group Relief 2025: How SME Bosses Can Save Tax by Sharing Losses in the Group

Running a business is like riding a roller coaster – some years, you’re climbing to record profits, and other years, the numbers dip into red.

If your company or group has a mix of profitable and loss-making companies, the Inland Revenue Board of Malaysia (LHDN) gives you a lifeline … Group Relief.

This is a legally approved way to use current year business losses from one company to reduce the tax bill of another related company. Think of it as keeping cash inside your group, instead of sending it all to LHDN.

Public Ruling No. 2/2025, issued on 31 July 2025, explains everything SME bosses need to know. Here’s the breakdown in plain English.

1. What is Group Relief?

Group relief allows a loss-making company (“surrendering company”) to transfer up to 70% of its current year adjusted business losses to a profitable company (“claimant company”) in the same group.

The profit-making company can deduct this loss against its taxable income and pay less tax.

  • Example:

    • Company A has a loss of RM1 million this year.

    • Company B (same group) has a profit of RM1.5 million.

    • Company A can surrender RM700,000 (70%) to Company B.

    • Company B pays tax only on RM800,000 instead of RM1.5 million.

This is cash flow gold for SMEs … why let your group pay full tax when another company is bleeding losses?

2. Who Qualifies for Group Relief?

Not every company can enjoy this tax break. LHDN is strict.

To qualify, both the surrendering and claimant companies must:

  • Be incorporated and resident in Malaysia.

  • Have the same 12-month accounting year (ending on the same day).

  • Maintain at least 70% ordinary shareholding for the whole basis period and the 12 months before.

  • Have paid-up ordinary share capital > RM2.5 million at the start of the basis period.

  • Make an irrevocable election in the income tax return (Form C).

  • Be subject to the standard corporate tax rate.

The claimant company must also have defined aggregate income (i.e., taxable profits after certain deductions like donations and pre-operational expenses).

3. The 70% Rule and the Two Tests

LHDN introduced a two-level test to avoid abuse:

First Level Test – 70% Ordinary Shareholding

  • One company must own (directly or indirectly) at least 70% of ordinary shares of the other.

  • Foreign or non-resident shareholding does not count.

Second Level Test – Residual Profits & Assets

  • Even with 70% shares, you must show you’re beneficially entitled to at least 70% of:

    1. Residual profits – profits left after paying fixed dividends and commercial loan returns.

    2. Residual assets – net assets available to equity holders if the company is wound up.

If a company has no residual profit or asset, LHDN uses a notional RM100 rule to perform the test.

4. Time Limit for Loss Surrender

SMEs often miss this critical timing rule:

  • A new company can only surrender losses for 3 consecutive years of assessment (YA) after it commences operations.

  • After that, losses can still be carried forward but cannot be surrendered for group relief.

  • Critical deadline alert for established companies. If you started a subsidiary in 2017, you could only use group relief until 2021 - that window has CLOSED. Companies started in 2015 lost group relief after 2019. If your subsidiary started before 2015, it NEVER qualified for group relief surrender. Check your incorporation dates now

Example:

  • Company X starts business in 2022.

  • It can surrender current year losses for YA 2023, 2024, 2025 only.

  • From YA 2026 onwards, its losses are yours to carry forward, but not for group relief.

5. Ordinary Shareholding Must Be Maintained

SME bosses love to reshuffle shares for investment or exit purposes. Be careful that any drop below 70% in the relevant periods will break the chain, and group relief is gone.

Example:

  • Company A owns 70% of Company B for YA 2023.

  • On 2 January 2024, shareholding drops to 69%.

  • No group relief allowed for YA 2024.

6. Common Pitfalls for SMEs

  • Assuming any loss can be surrendered.

    • Only current year adjusted business losses qualify.

    • Brought forward losses cannot be used for group relief.

  • Forgetting the second level test.

    • Even with 70% shares, you fail group relief if non-commercial loans or special shares reduce your entitlement below 70%.

    • Watch out for loan structures. If your group has inter-company loans without proper remedial clauses or with profit-sharing features, these become 'non-commercial loans.' The loan creditors are treated as equity holders, which can dilute your beneficial entitlement below 70% and kill your group relief eligibility.

  • Different year-ends.

    • LHDN requires the same 12-month accounting year end.

    • A mismatch means no group relief.

  • Not filing the election properly.

    • Election for group relief is irrevocable and must be made in the income tax return (Form C).

    • Forget to tick the box? Say goodbye to tax savings.

7. Why Group Relief is a Lifeline for SME Groups

In a volatile economy, cash flow is king. Group relief:

  • Reduces overall tax payable for your group.

  • Keeps more cash for operations or expansion.

  • Helps start-ups or new subsidiaries survive early losses.

Final Thoughts

SME bosses often overlook group relief because the rules look complicated. But the reward is real:

  • Losses become tax savings.

  • The group’s cash flow stays healthy.

Before filing your next Form C, check your group structure, shareholding, and loss position. A smart election can save you hundreds of thousands in tax.

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