SME Tax Rate Malaysia: The 15%, 17% and 24% Bands and the 4 Conditions

What is the SME tax rate in Malaysia?

As of October 2026, a qualifying SME pays 15% on the first RM150,000 of chargeable income, 17% on RM150,001 to RM600,000 and 24% on the balance. These bands have applied since the 2023 year of assessment. A company that does not qualify pays the standard rate of 24% on every ringgit.

Chargeable income band	Qualifying SME	Other companies
First RM150,000	15%	24%
RM150,001 – RM600,000	17%	24%
Above RM600,000	24%	24%

The banding means the benefit is capped: an SME saves only on its first RM600,000 of chargeable income, and everything above that is taxed at 24% like any other company.

Two words in the table matter. Chargeable income is not your revenue, and it is not exactly the profit in your accounts; it is the figure your tax agent arrives at after tax adjustments, explained below. Qualifying means meeting all four SME conditions for that year. The rates and conditions are set by law and can change in a Budget, so check the position each year with LHDN or a licensed tax agent.

If you are still deciding whether to run your business as a sole proprietorship or a company, our comparison of sole proprietor vs Sdn Bhd tax puts these rates next to personal tax rates.

Which companies qualify for the SME tax rate?

A company qualifies only if it meets all four conditions below. Fail any one and the company is taxed at 24% from the first ringgit; there is no partial benefit.

Condition	The limit	Where to check
Paid-up capital	Paid-up ordinary share capital of RM2.5 million or less at the start of the basis period	SSM company information and share capital records
Gross income	Gross income from business sources of RM50 million or less	Sales ledger and management accounts
Foreign ownership (from YA2024)	Not more than 20% of paid-up capital owned, directly or indirectly, by foreign companies or non-Malaysian citizens	Register of members, and the owners of any corporate shareholder
Related company	No related company (a shareholding relationship of more than 50%) with paid-up capital above RM2.5 million	Group chart of holding companies and subsidiaries

A few points owners often miss:

• The basis period is your financial year. Paid-up capital is tested at its start, so an increase made late in the year usually shows up in the following year's test. Timing matters.
• Indirect ownership counts. If a Malaysian-registered company holds part of your shares but is itself foreign-owned, that holding can count towards the 20%.
• Group structures are tested too. The related-company condition looks beyond your own company to holding companies and subsidiaries linked by more than 50% shareholding. Ask your tax agent to map the group if there is any doubt.

How much tax does an SME pay on RM500,000 of chargeable income?

A qualifying SME with chargeable income of RM500,000 pays RM82,000 in tax, compared with RM120,000 at a flat 24%. Here is the worked example for a Penang hardware trader that meets all four conditions:

Band	Chargeable income	Rate	Tax
First RM150,000	RM150,000	15%	RM22,500
RM150,001 – RM600,000	RM350,000	17%	RM59,500
Total	RM500,000	—	RM82,000

At the standard rate, the same RM500,000 would be taxed RM120,000 (RM500,000 × 24%). Qualifying as an SME is worth RM38,000 in a single year, money that stays in the business for stock, equipment or a cash buffer.

The same comparison at other income levels:

Chargeable income	Tax as qualifying SME	Tax at 24%	Difference
RM100,000	RM15,000	RM24,000	RM9,000
RM300,000	RM48,000	RM72,000	RM24,000
RM600,000	RM99,000	RM144,000	RM45,000
RM1,000,000	RM195,000	RM240,000	RM45,000

Notice that the saving stops growing at RM600,000: above that, both columns rise at 24%. Your monthly CP204 tax instalments should be based on the rate you will actually pay. If you assume SME rates and then lose the status, the estimate can turn out far too low.

How is chargeable income different from accounting profit?

Chargeable income is your accounting profit after the tax adjustments your tax agent makes: adding back expenses the law does not allow and deducting the allowances it does. The SME rates apply to that adjusted figure, so applying 15% or 17% straight to the profit in your accounts usually gives the wrong answer.

The main adjustments follow a few principles:

• Expenses wholly and exclusively incurred in producing business income are deductible (section 33 of the Income Tax Act 1967).
• Capital spending, such as machinery or vehicles, is not deducted as an expense. Depreciation is added back and capital allowances are claimed instead.
• Private and domestic expenses are not deductible.
• Most business entertainment is only 50% deductible, with some listed exceptions.
• Fines and penalties are not deductible.

A simplified illustration for a company with RM470,000 of accounting profit:

Item	RM
Accounting profit per P&L	470,000
Add back: depreciation	30,000
Add back: non-deductible expenses (half of entertainment, a traffic fine, private items)	20,000
Less: capital allowances on machinery and vehicles	(20,000)
Chargeable income	500,000

Clean books make this quicker and more accurate. When entertainment, fines, private spending and asset purchases sit in their own accounts, your tax agent can see them at once instead of combing through a mixed "general expenses" line. Our guide to tax-deductible business expenses covers the common items.

What makes a company lose SME status?

Most companies lose SME status through a change in shareholding or structure that nobody connected to tax, rather than through sheer size. Watch for these triggers:

1. A capital injection. A bank, supplier or tender asks for higher paid-up capital and the directors take it above RM2.5 million. From the first basis period that starts with capital above the limit, the SME rates no longer apply.
2. A group change. Your company becomes a subsidiary of, or takes a stake of more than 50% in, a company with paid-up capital above RM2.5 million.
3. A foreign investor. An overseas partner or a foreign-owned company takes more than 20% of the shares, directly or through another company.
4. Fast growth. Gross income from business sources passes RM50 million.

The cost of losing status is not just a higher rate on new profit; it is 24% from the first ringgit. Example: a JB contractor with chargeable income of RM200,000 pays RM31,000 as a qualifying SME (RM22,500 + RM8,500). If a foreign shareholder holds 25% of its paid-up capital, the same income is taxed RM48,000, which is RM17,000 more.

Because the paid-up capital test looks at the start of the basis period, the timing of a share issue or restructuring matters. Talk to your tax agent before the change, not after Form C has been filed.

What should you check before your financial year ends?

Run a short SME-status check each year, a few months before your financial year end, so there is still time to act.

• Confirm paid-up ordinary share capital from your SSM company information and share records.
• List every company in your group, holding companies and subsidiaries, with its paid-up capital.
• Review the register of members for foreign individuals or foreign-owned companies, including indirect holdings.
• Project gross business income for the year from up-to-date management accounts.
• Estimate chargeable income, not just accounting profit, and compare the tax with your CP204 estimate; revise with CP204A if the gap is large.
• Flag non-deductible items such as fines, private expenses and entertainment as they happen.
• Book your tax agent early, well ahead of the Form C deadline.

Rates and conditions can change in a Budget. Re-check them each year with LHDN or a licensed tax agent before relying on them for planning.

How WeCount helps

WeCount keeps your monthly books, bank reconciliations and management reports up to date, with entertainment, fines, private spending and fixed assets recorded in their own accounts. That gives you a reliable view of profit during the year and gives your tax agent organised records for the tax computation. WeCount is not a tax agent: regulated tax-agent and professional accountancy services are delivered through appropriately authorised partners where required. See our monthly bookkeeping service or packages.