KUALA LUMPUR (Oct 18): The government will introduce a 2% tax in the year of assessment 2025 on dividend income exceeding RM100,000 received by individual shareholders.

This comes as a negative surprise as Malaysia currently adopts the single-tier tax system whereby companies are not required to deduct tax for dividends paid to shareholders. Taxes are only required at the company level.

Countries that adopt double taxation on dividend income are typically developed countries like the US, UK, France, Canada, South Korea and Japan.

Based on the payout in 2023, investors who held more than 37,313 shares in Nestlé (Malaysia) Bhd (KL:NESTLE) would have received total dividends of RM100,000. The block of shares was worth roughly RM3.88 million. Likewise, an individual who owned 138,889 shares in Petronas Gas Bhd (KL:PETGAS) would have received dividends of RM100,000. [see table]

CIMB Investment Bank’s head of research Ivy Ng Lee Fang said the dividend tax could be perceived as an extension of the capital gains tax on unlisted shares introduced last year.

“This negative development will affect local investors with assets above RM2 million, assuming dividend yield of 5%. It is not clear if this will apply to dividend income from all asset classes.”

It remains unclear whether foreign investors will be subject to this tax, although it seems likely, said Ng, “This could make Malaysian equities less attractive in terms of dividend yield against other countries,” she added.

UOB Kay Hian's director of strategy, Vincent Khoo, however, anticipates little impact. “Small impact, no issue. I doubt the 2% would create any tectonic shift in the wealthy’s investment strategies.”

Fund managers contacted by The Edge commented that the new tax could dampen market sentiment and trigger some knee-jerk reaction in the local bourse on Monday.

“It is not sure if the 2% dividend tax is only imposed on dividends paid by public-listed companies only or if it also applies to unlisted companies, and investment products that pay dividends,” one fund manager said.

The investing fraternity hopes that the government can provide clarifications as soon as possible to reduce overhang risks to the local capital market.

A high networth investor views the new tax rule as unfair and commented that he may move his funds to capital markets that are friendlier towards long-term dividend investing.

He cited administrative tasks like providing proof to authorities on a timely basis may be tedious.   

Another high net worth investor said he is more than happy to pay the dividend tax because the tax amount paid is not significant, citing that a 2% tax on a gross dividend yield of 6%, one will still make 5.88% net yield, which is considered decent.

For him, the cost of mobilising funds to less familiar and prospective capital markets is more costly.

Click here for all you need to know about Malaysia's Budget 2025.