What tax incentives can a Malaysian SME realistically use?
Most major incentives, such as pioneer status, investment tax allowance and reinvestment allowance, target manufacturing and approved activities and need approval. Pioneer status exempts 70% of statutory income for five years; reinvestment allowance gives 60% of qualifying spending for established manufacturers.
Headline incentives under the Income Tax Act and the Promotion of Investments Act 1986:
- Pioneer status: exempts 70% of statutory income for five years, with the other 30% taxed at the normal rate (LHDN Public Ruling 10/2023).
- Investment tax allowance: 60% of qualifying capital expenditure, or another rate up to 100% approved by the Minister, within a five-year period, set against 70% of statutory income (LHDN Public Ruling 4/2023).
- Reinvestment allowance (Schedule 7A): for a resident company operating at least 36 months that incurs capital expenditure on a qualifying manufacturing or approved agricultural project. The allowance is 60% of the expenditure, given over up to 15 consecutive years of assessment, and is set against 70% of statutory income.
- Budget 2026 measures: an extra 50% deduction for SMEs on recognised AI and cybersecurity training, and a 100% allowance on own-use green assets for companies using locally made technology carrying the MyHIJAU Mark.
Reality check: most incentives need prior application and a qualifying activity, and a pure trading or services SME may not qualify. Some start only after approval, so do not start spending before checking.
LHDN's incentive pages and MIDA are the sources to check for current applications and conditions.
Legal basis
- Promotion of Investments Act 1986
- Income Tax Act 1967, Schedule 7A (reinvestment allowance)
Sources
Applies to YA 2026 · Last reviewed 29 October 2026
General information for business owners, not legal, tax or professional advice. Rules change, so check the sources or ask a licensed professional before you act.
Related questions
- What personal income tax rates apply to business owners in Malaysia?Resident individuals pay progressive tax from 0% on the first RM5,000 up to 30% on income above RM2 million. Non-residents pay a flat 30%. The rates apply to total chargeable income after reliefs.
- Who must register for sales tax in Malaysia and what are the rates?Sales tax is charged on taxable goods made in Malaysia by registered manufacturers and on taxable imports. Rates are 5%, 10% or a specific rate; since 1 July 2025, goods not listed in the 5% or specific-rate orders are taxed at 10%. A manufacturer must register once taxable sales exceed RM500,000 in 12 months.
- When does my business have to register for service tax in Malaysia, and at what rate?Service tax is charged on listed taxable services at 8%, except 6% for food and beverage, logistics, telecommunications, parking, construction, private healthcare and private education. Registration depends on the service: RM500,000 in 12 months for rental or leasing and financial services, RM1.5 million for food and beverage, construction and private healthcare, and private schools charging over RM60,000 per student a year.
- What changed in service tax from 1 July 2025?From 1 July 2025 Customs extended service tax to rental or leasing (8%), financial services (8%), beauty treatment (8%), construction (6%), private healthcare (6%) and private education (6%), subject to thresholds and exclusions. Sales tax rates changed on the same date, with unlisted goods taxed at 10%.
- How does real property gains tax (RPGT) work in Malaysia?RPGT is charged on gains from disposing of land, buildings and shares in real property companies. Rates fall with the holding period. For Malaysian citizens and PRs it is 30%, 30%, 20%, 15% in years 1 to 5, and nil from the 6th year. Companies pay 10% from year 6.