Business expenses in Malaysia: what you can deduct and the structure that fits

Last reviewed: November 2026 · Reviewed by Stéphane Gombauld, tax expert, technologist and digital nomad

You run a consultancy, an agency or a SaaS from Malaysia and want every legitimate ringgit of cost to reduce your tax. Which costs count depends on the rules and on the structure you use. After reading, you will know what is deductible in 2026, which structure fits what you do, and the traps that cost foreign founders most.

Malaysia business expenses in 2026: the key figures

Is this guide for you?

Read on if you…

• run a business or freelance practice from Malaysia, alone or through a company;
• pay foreign contractors or software providers and want to stay compliant;
• are choosing between a Sdn Bhd, an LLP and a Labuan company.

Probably not your case if you…

• are a salaried employee with no business income (see personal tax deductions and benefits of Malaysia);
• run a business in a sector with special rules, such as petroleum, insurance or banking.

Which structure fits what you do?

The structure decides who pays tax on your profit, at what rate, and whether you can run it from abroad. Here is the comparison for 2026.

Two practical notes. Foreign-owned companies that want work passes for their owners usually need much more paid-up capital, often RM500,000. And the SME rates exclude companies with significant foreign ownership.

The full entity comparison is in legal forms of business in Malaysia. If you want your own setup checked, see Heavnn business setup.

The management and control warning

Here's the catch for nomad founders. A company is resident in Malaysia if its management and control, meaning where the key decisions are made, is exercised in Malaysia. Run your Estonian or UK company from a Kuala Lumpur flat, and LHDN can treat it as Malaysian-resident.

Even without residence, a fixed place of business in Malaysia can create a permanent establishment (PE). That is a taxable presence for the foreign company. Profits linked to it are then taxed in Malaysia at 24%, and only expenses that meet Malaysian rules count.

What can you deduct in Malaysia?

The core rule is section 33 of the Income Tax Act 1967. An expense is deductible if it is wholly and exclusively incurred in producing your gross income. In plain words: you spent it to earn the money, and not for yourself.

Usually fully deductible

• Office rent, utilities, internet and coworking memberships.
• Salaries, bonuses and directors' fees, plus EPF contributions up to 19% of pay.
• Software subscriptions, hosting, domains and SaaS tools.
• Marketing, advertising and website costs.
• Professional fees: accounting, tax filing, legal advice on day-to-day operations.
• Business travel, including flights and hotels for client work.
• Interest on loans used for the business.
• Bad debts that are genuinely irrecoverable.

Partly deductible or capped

• Entertainment: 50%. Staff events and promotional samples are 100%.
• Passenger cars: capital allowances capped at RM100,000 or RM50,000, as in the table. Lease rentals follow similar caps.
• Home office (self-employed): a reasonable share of rent and utilities, apportioned and documented.
• Donations: to approved institutions, up to 10% of aggregate income.

Never deductible

• Private and domestic spending, including your own living costs.
• Capital expenditure, except through capital allowances.
• Income tax, fines and penalties.
• Payments to non-residents where required withholding tax was not paid.

How do capital allowances work?

You cannot deduct a laptop or a car in one go. Instead, you claim capital allowances: yearly deductions spread over the asset's life.

1. Initial allowance in the first year, typically 20% of cost for plant and machinery.
2. Annual allowance each year after that: 10% for office furniture, 14% for general plant, 20% for vehicles and heavy machinery.
3. Accelerated rates apply to some assets, notably computers and ICT equipment.
4. Small value assets up to RM2,000 each get 100% in year one. Non-SMEs are capped at RM20,000 a year in total.

Unused capital allowances carry forward as long as the business continues. Unused losses carry forward for ten years.

Which withholding and e-invoicing rules affect your deductions?

Paying foreign providers

When you pay a non-resident for services performed in Malaysia, you generally withhold 10% and pay it to LHDN within one month. Royalties are 10% and interest 15%. Treaties can lower the rate. Services performed entirely abroad are usually outside withholding.

Foreign digital services, such as cloud software, carry 8% service tax charged by the provider. That tax is a cost, and it is deductible with the subscription.

E-invoicing

Malaysia has phased in mandatory e-invoicing since 2024. Businesses with annual turnover from RM1 million to RM5 million joined on 1 January 2026, and smaller businesses below RM1 million are exempt. For deductibility, keep an e-invoice or a self-billed e-invoice for foreign suppliers.

How do you keep claims safe in an audit?

1. Keep every invoice, receipt and contract for seven years.
2. Separate business and personal bank accounts.
3. Write a one-line business purpose on entertainment and travel receipts.
4. Document cross-border payments and any withholding tax paid.
5. Apportion mixed costs with a written method you apply every year.

Overclaimed expenses are the most common audit finding. The penalties are set out in tax fraud regulations of Malaysia.

Common mistakes (and what they cost)

• Claiming 100% of client entertainment → half is added back, plus a penalty of up to 100% of the extra tax.
• Not withholding on a foreign contractor working in Malaysia → part of the cost becomes non-deductible, plus a 10% increase on the unpaid withholding.
• Expecting SME rates in a foreign-owned Sdn Bhd → 24% from the first ringgit; on RM300,000 of profit that is RM24,000 more than budgeted.
• Running a foreign company from Malaysia → the company can be Malaysian-resident and taxed at 24% here.
• Mixing personal and business accounts → harder audits and disallowed costs you cannot prove.

Frequently asked questions

What business expenses are tax deductible in Malaysia?

Expenses wholly and exclusively incurred in producing your business income are deductible under section 33 of the Income Tax Act 1967. Typical examples are rent, salaries, EPF contributions, software, marketing, professional fees and business travel. Capital spending is not deducted directly but through capital allowances. Private and domestic costs, fines and income tax itself are never deductible.

Is client entertainment deductible in Malaysia?

Usually only 50%. Section 39 restricts entertainment to half its cost. Some categories are fully deductible, such as entertainment for employees, promotional samples of your own products and costs that are part of your business, like hospitality for a conference you sell. Keep notes on who attended and the business purpose to support the claim.

Can I deduct my home office in Malaysia?

If you are self-employed, a reasonable share of rent, electricity and internet can be deducted when part of your home is used for the business. Apportion by floor area or usage and keep records. For a company, the cleaner route is a rental agreement between you and the company at market rent, which you then declare as rental income.

Do I have to withhold tax when paying foreign freelancers?

Only in some cases. Withholding tax applies to payments to non-residents for services performed in Malaysia, technical advice, royalties, interest and certain rentals. The usual rates are 10% for services and royalties and 15% for interest, possibly reduced by treaty. Services performed entirely abroad are generally outside withholding. Missing a required withholding makes part of the expense non-deductible.

How long can business losses be carried forward in Malaysia?

Unabsorbed business losses can be carried forward for ten consecutive years of assessment, then they lapse. Unused capital allowances can be carried forward without a time limit as long as the same business continues. For companies, a substantial change in shareholders can restrict the use of losses in some cases.

Can a foreigner register a sole proprietorship in Malaysia?

No. Only Malaysian citizens and permanent residents can register a sole proprietorship or conventional partnership with the Companies Commission. Foreigners usually set up a Sendirian Berhad, a private limited company, or a limited liability partnership with a locally resident compliance officer. A Labuan company is another option for international activity with real substance in Labuan.

Related guides

• Legal forms of business in Malaysia
• Malaysia tax landscape overview
• Specific taxes in Malaysia: SST and stamp duty
• Tax fraud regulations of Malaysia
• Personal tax deductions and benefits of Malaysia
• Business expenses in Singapore, for comparison
• All country tax guides

Sources

• Inland Revenue Board of Malaysia (LHDN) – business income and withholding tax
• Laws of Malaysia online – Income Tax Act 1967
• Companies Commission of Malaysia (SSM) – registration
• Labuan Financial Services Authority
• Royal Malaysian Customs Department – MySST portal
• PwC Worldwide Tax Summaries – Malaysia, deductions (secondary cross-check)

This guide is general information, not personalised tax advice. See how we research and review.