Budget 2025: Introduction of 2% Dividend Tax

The introduction of a 2% dividend tax, as announced in the 2025 Budget proposal, breaks the long-standing tradition of dividends being tax-exempt for individual shareholders. Starting from 1 January 2025, individual shareholders with annual dividend income exceeding RM100,000 will be subject to this new tax, catching many off guard. For high-income earners, this not only signals a reduction in net personal income but also raises concerns about double taxation, as corporate profits are already taxed before dividends are distributed.
While this new tax will only affect high-income investors, it is also important to note that the following types of dividends will be exempted:

Which types of dividends will be exempted?

• Foreign dividends
• Dividend income distributed from the profits of companies that received pioneer status and reinvestment allowances
• Dividend income paid, credited or distributed from the profits of shipping companies that is exempted from tax
• Dividend income distributed by cooperatives
• Dividend income declared by closed-end funds
• Dividend income received by residents from Labuan entities
• Any exemption given on dividend income at shareholder level

Additionally, it is also not applicable to profit distributions made to contributors and depositors by:

• Employees Provident Fund (KWSP)
• The Armed Forces Fund Board (LTAT)
• Amanah Saham Nasional Bumiputera (ASNB)
• Any unit trust funds

Prior to the year of assessment 2008, income tax on distributed dividends by companies was based on the full imputation system. Under this system, tax on dividends was imposed at both the company and shareholder levels. However, the tax imposed on shareholders would be adjusted to reflect the amount already paid by the company through tax credits.

Since the year of assessment 2008, income tax has been imposed at a single level (single-tier) on dividends distributed by companies. Under this single-tier tax system, the tax on company profits is final, and dividends distributed are exempted from tax at the shareholder level.

With the introduction of the Budget 2025 proposal, the 2% tax on dividends exceeding RM100,000 annually marks the end of this tax-free era for investors. Investors and entrepreneurs must now reconsider the impact this will have on their financial planning.

For many family-owned SMEs, the new dividend tax could significantly affect personal income and business operations. SME owners, who are often both shareholders and business operators, may face the following challenges:

1. Reduction in Personal Income

Dividends are an important source of personal income for SME owners. The 2% tax on dividends exceeding RM100,000 will directly reduce their net income.

2. Double Taxation

Since corporate profits are already taxed, the additional dividend tax increases the tax burden on entrepreneurs.

3. Reviewing Dividend Distribution

SME owners may reassess profit distributions, opting to reinvest profits into the business to minimise tax liabilities

4. Increased Complexity in Tax Filing

With the introduction of the new dividend tax, investors who previously didn’t need to calculate taxes on dividends will now face more complex tax filing requirements. They will need to understand how to calculate dividend taxes and accurately report dividend income, which adds to their administrative burden.

Family-owned businesses and companies distributing dividends may need to reconsider how they should allocate profits to minimise their tax burden.

1. Managing Dividend Taxes

In other Southeast Asian countries, such as Indonesia, Thailand, and Vietnam, companies withhold tax before distributing dividends. If Malaysia adopts this system, managing and calculating these taxes will become more complex for large companies with numerous shareholders.

2. Foreign Investment vs Local Investments

Dividends from foreign sources are exempted from the 2% dividend tax (provided the dividends have already been taxed overseas), while dividends from Malaysian companies are subject to the 2% tax. This difference may prompt investors to reconsider their investment strategies, focusing more on foreign investments, which could result in a lower overall tax burden, thus making local investments appear less attractive.

Conclusion

The 2% dividend tax in Malaysia’s Budget 2025 marks a significant shift in tax policy. High-income investors must reassess their financial strategies and explore new tax planning options to adapt to this change. Therefore, investors must stay informed about the latest updates and adjust their financial strategies to ensure they are fully
prepared for the upcoming changes.

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