(TAX UPDATE) 2% income tax applies to LLP profit distributions exceeding RM100,000

(TAX UPDATE) 2% income tax applies to LLP profit distributions exceeding RM100,000

Introduction

You run your business through an LLP. For years, that profit distribution sitting in your bank account felt like clean money. No tax, no drama, just cash.

That changed on 31 July 2026.

Gazetted as P.U.(A) 278/2026, the Income Tax (Determination of Chargeable Income of an Individual in respect of Limited Liability Partnership's Profit) Rules 2026 landed quietly, but it carries real weight for every individual partner drawing profit from an LLP.

It does not introduce a new tax. What it does is far more practical. It tells LHDN, and you, exactly how to calculate the portion of your income that falls into the new LLP profit tax bracket.

If you have been wondering how the RM100,000 threshold actually translates into a number on your Form B, this is the rule that answers it.

Who this catches

The rule applies to you if you are an individual partner, resident or non-resident, of an LLP that pays, credits, or distributes profit to you, in cash or in kind, and your share in a basis period exceeds RM100,000.

Cross the threshold, and your LLP profit distribution is no longer sitting outside the tax net. It falls under Part XXIII of Schedule 1 to the Income Tax Act 1967, taxed separately at the rate that Part prescribes, currently reported at 2 percent on the chargeable portion after allowable reliefs and deductions.

Stay under RM100,000, and the rule does not touch you.

The formula, in plain terms

Once you are caught, the rule sets out exactly how much of your chargeable income gets pulled into this separate LLP tax treatment. The formula is:

Chargeable income from LLP profit = (A divided by B) multiplied by C

Where:

A is your statutory income from the LLP profit for that basis period, computed under section 54C of the Act.

B is your aggregate income for that same basis period, meaning everything you earned, not just the LLP slice.

C is your total chargeable income for that basis period that falls under paragraph 1 of Part I, or paragraph 1A of Part I for non-residents, together with Part XXIII of Schedule 1.

In plain language, the rule takes your total chargeable income, works out what proportion of your total earnings came from the LLP, and applies that proportion to arrive at the amount taxed under the LLP specific treatment.

Everything left over is taxed the normal way, at the scale rates under paragraph 1 or 1A of Part I, exactly as your other income always has been.

If you are jointly assessed

Married and filing under a combined assessment pursuant to subsection 45(2)? Your aggregate income figure, the B in the formula, includes your spouse's income too. This matters, because a larger B changes the proportion attributed to the LLP profit, and can shift the final number either up or down depending on how the household income is structured.

Why this matters beyond the formula

This rule confirms something firms like ours have been telling LLP partners since the profit tax was first proposed. The RM100,000 threshold is not a flat line where everything above it gets taxed at 2 percent.

It is an apportionment exercise. Your other income, your spouse's income if jointly assessed, and how your statutory income from the LLP compares to your total aggregate income, all feed into what actually gets caught.

Two partners drawing the same LLP profit distribution can end up with different chargeable amounts under this formula, simply because their other income sources differ.

If you are a partner structuring drawings from an LLP this year, this is not a rule to skim past. Run the numbers before you decide how and when to take your distributions.

These Rules take effect for year of assessment 2026 and subsequent years of assessment, so this is live for the current filing cycle.

KTP's View

A formula buried in a gazette rarely makes headlines, but this one decides how much of your LLP profit actually gets taxed. If you are a partner in an LLP and your distributions are creeping past RM100,000, do not wait for filing season to work out the number. Talk to us before you draw, not after.

Compliance Note : This piece states a statutory formula and a tax rate reference (2 percent under Part XXIII of Schedule 1). The 2 percent rate is not stated in P.U.(A) 278/2026 itself, it originates from the Finance Act provisions establishing Part XXIII of Schedule 1. Verify the rate and section references against the Finance Act and LHDN guidance before this goes out.

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