We are writing to inform that the IRB has issued a Practice Note on 18 May 2020 to clarify on the gross income from business sources of not more than RM50 million for determination of Small and Medium Enterprises (SME) status for a Company or Limited Liability Partnership (LLP).
W.e.f. Y/A 2020, the first RM600,000 (instead of RM500,000) of the chargeable income of SMEs is to be taxed at the preferential tax rate of 17% subject to the following conditions:
- Paid up capital of up to RM2.5 million / total contribution of capital of up to RM2.5 million
- Having annual gross income from business sources of not more than RM50 million
However, a SME shall not include a Company or LLP where more than:-
- 50% of the paid up capital in respect of ordinary shares of the company is directly or indirectly owned by a related company;
- 50% of the paid up capital in respect of ordinary shares of the related company is directly or indirectly owned by the first mentioned company; or
- 50% of the paid up capital in respect of ordinary shares of the first mentioned company and the related company is directly or indirectly owned by another company.
‘Related company’ is defined as a company which has a paid up capital exceeding RM2.5 million in respect of ordinary share.
Practice Note issued by the IRB on 18 May 2020
We to highlight below some salient points for your attention:
|Type of Company / LLP||Tax issues|
An investment holding company (under Section 60F of ITA 1967) which is not listed on Bursa Malaysia and deemed to have no gross income from a business source
Not qualified to be SME w.e.f. Y/A 2020 even though total income is less than RM50 million.
Ø Cannot enjoy preferential 17% tax rate on the first RM600,000 chargeable income; and
Ø Special capital allowance of 100% for small value assets (≤ RM2,000) is limited to a total value of RM20,000.
A company/LLP which does not have gross income from business sources but have other incomes such as rent and interest (including temporarily closed business operations)
Company/LLP which has gross income from foreign business sources
Gross income from foreign business sources shall be taken into account in determining gross business income not exceeding RM50 million.
In view that a Company/LLP which is not deriving income from business is no longer considered as SME effective from Y/A 2020, the whole chargeable income of the Company/LLP will be subject to tax at the rate of 24% which may result in a higher tax payable position for Y/A 2020 and subsequent years of assessment.
In this regard, kindly reassess your company’s tax estimation for Year of Assessment 2020 and 2021 and file the revision of tax estimation in the 6th or 9th month of the basis period.