Do You Qualify for the SME Tax Rate? The Tests, and the YA 2027 Rates
A Malaysian company or LLP pays the lower SME income tax rates only if it passes four tests: resident in Malaysia, paid-up capital of RM2.5 million or less, business gross income of RM50 million or less, and ownership limits on related and foreign shareholders. Budget 2027 proposes cutting the two lower bands to 14% and 16% from YA 2027.
Malaysian companies and LLPs that qualify as micro, small and medium companies (MSMCs) pay tax at lower rates on their first RM600,000 of chargeable income. Qualifying is not automatic. LHDN's Public Ruling No. 8/2025 sets four tests, and failing any one of them means your company pays the standard corporate rate on all of its chargeable income. Budget 2027, tabled on 9 October 2026, proposes lowering the two MSME bands by one percentage point each from the year of assessment (YA) 2027. This guide walks through the tests, then the rates.
The four tests
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Test |
What LHDN requires |
When it is measured |
|---|---|---|
1. Residence |
The company is resident and incorporated in Malaysia (an LLP must be registered in Malaysia) |
For the basis year |
2. Paid-up capital |
Paid-up ordinary share capital (or LLP capital contribution) of RM2.5 million or less |
At the beginning of the basis period |
3. Business income |
Gross income from business sources of RM50 million or less |
Over the basis period |
4. Ownership |
Limits on ownership by related companies and, from YA 2024, by foreign shareholders |
At the beginning of the basis period |
Test 2: paid-up capital, at the start of the year
The RM2.5 million limit is checked at the beginning of the basis period. If you increase your paid-up capital above RM2.5 million partway through a financial year, that year is still assessed on the opening figure, but the following year is not. If you are planning a capital injection, talk to your tax agent about timing before you do it.
Test 3: gross income from business sources, not profit
The RM50 million test looks at gross income from business sources, which is broadly your revenue from trading or services, not profit. Non-business income such as some rental, interest or dividends is treated differently. The ruling includes worked examples for companies with mixed income, so ask your tax agent to check how your income is classified.
Test 4: ownership
A company or LLP does not qualify if more than 50% of its capital is owned, directly or indirectly, by a related company, if it owns more than 50% of a related company, or if another company owns more than 50% of both. A related company here means a company with paid-up capital above RM2.5 million at the start of the basis period. Ownership is traced up to the ultimate holding company.
From YA 2024, there is an extra condition: no more than 20% of the capital may be owned, directly or indirectly, by foreign companies incorporated outside Malaysia or by individuals who are not Malaysian citizens. A small company with a 25% foreign shareholder, for example, fails this test even if every other number is small.
The rates: current and proposed
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Chargeable income |
YA 2026 MSME rate |
Proposed MSME rate from YA 2027 |
|---|---|---|
First RM150,000 |
15% |
14% |
RM150,001 to RM600,000 |
17% |
16% |
Above RM600,000 |
24% |
24% |
The YA 2027 rates are proposed in Budget 2027 and take effect once legislated. A company that fails any test pays the standard rate on all chargeable income. The standard corporate rate is 24%, the same as the top MSME band.
Two worked examples (using the proposed YA 2027 rates)
Example A: qualifies. A Sdn Bhd owned by two Malaysian founders, paid-up capital RM100,000, revenue RM4 million, chargeable income RM250,000.
- First RM150,000 at 14% = RM21,000
- Next RM100,000 at 16% = RM16,000
- Total tax = RM37,000
Example B: fails the foreign ownership test. Same numbers, but a Singapore company holds 30% of the shares. Because more than 20% is foreign-owned, the MSME rates do not apply.
- RM250,000 at 24% = RM60,000
The RM23,000 difference comes entirely from the shareholding, which is why the ownership test is worth checking before you bring in an investor.
Before you rely on the MSME rate
- Check your paid-up capital on your SSM records as at the first day of your financial year.
- List every shareholder with more than a small stake and note whether it is a company (and its paid-up capital) or an individual (and their citizenship).
- Ask your tax agent to confirm how your income is split between business and non-business sources.
- Recheck all of this before issuing new shares or bringing in a corporate or foreign investor.
Frequently asked questions
Is this the same as the SME definition used by SME Corp?
No. SME Corp's definition uses sales turnover and employee numbers and is used for government programmes. The tax tests above come from the Income Tax Act and LHDN's ruling. A business can meet one definition and not the other.
Do sole proprietors get the MSME rate?
No. Sole proprietors and partners are taxed at personal income tax rates on their business income.
We are a small LLP. Does the same apply?
Yes, LLPs are covered by the same ruling, using capital contribution instead of paid-up share capital.
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Sources: Inland Revenue Board of Malaysia, Public Ruling No. 8/2025, Tax Treatment for Micro, Small and Medium Companies, 22 December 2025 (paragraph 5.3: residence, paid-up capital, gross business income and ownership tests; 20% foreign ownership condition from YA 2024); Ministry of Finance, Budget 2027 tax measures, Appendix 11 (current and proposed MSME rates, from YA 2027). Worked examples are illustrations only. This guide is general information, not tax advice; confirm your position with LHDN or a licensed tax agent.
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