Domestic Top-up Tax (DTT) in Malaysia
On 3 February 2026, the Inland Revenue Board of Malaysia (IRBM / LHDN) published an official guideline detailing the mechanics, scope, and administrative requirements of the newly implemented Domestic Top-up Tax (DTT). This tax forms a crucial part of Malaysia’s compliance with the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Global Minimum Tax (GMT) initiative.
Effective for financial years beginning on or after 1 January 2025, the GMT is enacted via a dual mechanism: the Multinational Top-up Tax (MTT) and the Domestic Top-up Tax (DTT). The primary goal of the DTT is to ensure a minimum effective tax rate (ETR) of 15% on profits earned by in-scope entities operating within Malaysia, allowing the nation to retain primary taxing rights over low-taxed domestic profits under the Qualified Domestic Minimum Top-up Tax (QDMTT) framework.
-
Scope and Thresholds
The DTT applies specifically to Constituent Entities of an MNE Group located in Malaysia. For an MNE group to fall within the scope of this legislation, it must meet a specific revenue criteria:
-
The Revenue Threshold: The group’s consolidated annual revenue must be at least EUR 750 million in at least two of the four preceding financial years.
-
Excluded Entities: Certain institutional entities are completely excluded from the scope of DTT, including government entities, international organizations, non-profit organizations, pension funds, and investment funds or real estate investment vehicles acting as the Ultimate Parent Entity (UPE).
|
-
Charging Provisions & Allocation Formula
Unlike other international components of the GMT, the DTT liability is calculated based on the full amount of Jurisdictional Top-up Tax, regardless of the exact percentage of ownership interest held by a foreign parent company.
The total tax liability is allocated exclusively to the profitable Malaysian Constituent Entities based on their proportion of positive GloBE income:
A × B / C
Where:
-
A：is the jurisdictional Top-up Tax for the jurisdiction for the Financial Year;
-
B：is the GloBE Income of the Constituent Entity for the Financial Year if the Entity has positive GloBE Income; and
-
C：is the aggregate GloBE Income of all Constituent Entities that have GloBE Income for the Financial Year.
|
The Top-up Tax Formula
The standard mathematical framework utilized under Subsection 177(2) of the Income Tax Act 1967 (ITA 1967) is:
DTT = (Top-up Tax Percentage × Excess Profits) + Additional Current Top-up Tax
Where:
-
Top-up Tax Percentage: 15% - Jurisdictional Effective Tax Rate.
-
Jurisdictional Effective Tax Rate: The sum of Adjusted Covered Taxes divided by the Net GloBE Income of each domestic constituent entity.
-
Excess Profits: Net GloBE Income minus the Substance-Based Income Exclusion (SBIE).
-
What is the Substance-Based Income Exclusion (SBIE)?
The Companies can reduce their top-up tax vulnerability by utilizing payroll and tangible asset carve-outs. An eight-year transitional relief period provides higher carve-out rates, starting in 2025 at 9.6% for payroll and 7.6% for tangible assets, before gradually tapering down.
|
-
Financial Accounting and Currency Standards
To simplify domestic compliance, the DTT utilizes local financial reporting frameworks:
-
Local Standards Rule: Computations should ideally utilize financial statements prepared under Malaysian Financial Reporting Standards (MFRS) or Malaysian Private Entities Reporting Standards (MPERS). This is permitted provided that all domestic constituent entities share the same financial year as the UPE, and their statements are legally mandated or audited. If these terms are not met, calculations default to the accounting standards used in the UPE's consolidated financials.
-
Functional Currency: Tax returns must be finalized and filed in Malaysian Ringgit (MYR). If the initial calculations are done in a foreign parental currency, the final liability must be converted to MYR using the average Bank Negara Malaysia monthly exchange rate for that financial year.
|
-
Cross-Border Tax Adjustments
When establishing the final ETR for DTT purposes, specific cross-border taxes are excluded to isolate local profits. These include taxes allocated from a main entity to a Malaysian Permanent Establishment (PE), Controlled Foreign Company (CFC) tax regimes, and taxes on hybrid entities. Furthermore, any taxes arising from a Qualified Income Inclusion Rule (QIIR) or a Qualified Undertaxed Payment Rule (QUTPR) cannot be counted as covered taxes under the DTT.
-
Relief Mechanisms and Safe Harbours
To mitigate compliance burdens, the guideline outlines key carve-outs and transition rules:
-
Filing and Compliance Obligations
Every single in-scope constituent entity located in Malaysia bears a statutory duty to furnish a DTT Top-up Tax Return via an electronic medium to LHDN.
Deadlines: The standard filing window is no later than 15 months after the close of the financial year. However, recognizing the complexities of the initial rollout, a transitional window permits filing up to 18 months after the last day of the reporting financial year for the very first filing period.
-
Conclusion
The publication of the "domestic-topup-tax-guidelines (DTT)" marks a definitive shift in Malaysia's corporate tax landscape, transitioning from traditional tax incentive structures to a strict global compliance model.
By implementing the Domestic Top-up Tax (DTT) effective 1 January 2025, Malaysia effectively secures its taxing rights, ensuring that low-taxed profits generated by multi-billion euro multinational enterprises (MNEs) are topped up domestically to the 15% minimum rate rather than being surrendered to foreign jurisdictions.
For further information, please visit the official website of the Inland Revenue Board of Malaysia at
https://www.hasil.gov.my/en
KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.
KNOWLEDGE
