In Malaysia’s corporate tax landscape, group relief stands out as a powerful incentive for corporate group structures. Group relief allows a loss-making entity (the surrender company) to transfer its current year business losses to one or more profitable related companies (the claimant companies).
By sharing losses, a corporate group can effectively offset taxable income, save tax, and significantly improve the cash flow of the entire holding company structure.
How a Company Qualifies for Group Relief Eligibility
Determining group relief eligibility requires a rigorous two-level test to ensure Malaysian entities are truly related companies.
1. The Two-Level Ownership Test
- First Level (Ordinary Share Capital): At least 70% of the paid-up share capital in respect of ordinary shares must be owned, directly or indirectly, by the other company, or by both the other company and a third Malaysian resident corporation.
- Second Level (Beneficial Entitlement): The holding company must be beneficially entitled to at least 70% of the residual profit and 70% of the residual assets available for distribution to equity holders.
2. General Compliance and Criteria
For a company to qualify, several relevant conditions must be met during the Year of Assessment (YA):
- Residency: Both the surrender and claimant company must be resident and incorporated in Malaysia. Foreign companies are generally excluded from this mechanism.
- Capital Requirement: Both must have a paid-up ordinary share capital exceeding RM2,500,000 at the start of the basis period.
- Aligned Basis Period: Both entities must have a 12-month accounting period ending on the same date.
- Continuous Relationship: The ownership must be substantial and continuous throughout the current period and the preceding 12 months.
The 70 % Transfer Limit and Three-Year Time Limit for Malaysian and Foreign Corporations
While group relief is a robust tax planning tool, it is not unlimited. Malaysian tax laws impose a strict time limit and limit on the quantum of the transfer:
- Transfer up to 70%: A surrendering company can only transfer up to 70% of its adjusted current year business losses. The remaining loss must be carried forward by the loss-making company for future adjustment against its own revenue.
- Three-Year Time Limit: Effective YA 2019, surrendering company which has just commenced operations can only surrender current year adjusted business losses for the purpose of group relief to the claimant company limited to three (3) consecutive YAs.
- Irrevocable Election: The election to surrender losses is made via the Income Tax Return Form (ITRF) and cannot be changed once filed with the Inland Revenue Board.
Non-Eligible Companies and Special Exemption
Not every candidate within a corporate group qualifies for group relief. A company may be disqualified if it:
- Enjoys Pioneer Status or Investment Tax Allowance.
- Claims Reinvestment Allowance (RA) or other specialised tax attributes like shipping profit exemption.
- Has unutilized pioneer business losses or allowance from a previous tax incentive period.
Compliance, Tax, Transfer Pricing and Loss Planning
Proper tax compliance is essential. The Inland Revenue Board scrutinises group relief claims during audits. Issues such as improper transfer pricing between associated companies or incorrect definition of aggregate income can lead to disallowed losses and heavy penalties.
Loss planning should be a core part of your accounting strategy. By understanding how to offset tax through group relief, a corporate group ensures that its group pay (total tax liability) is optimised.
Note: Determining indirect share holdings or navigating investment allowance overlaps is complex. If you are unsure whether your entity qualifies for group relief, it is highly recommended that you consult a licensed tax professional.
Need help? Determining if your group structure meets both the “Ordinary Shareholding” and “Beneficial Entitlement” tests can be complex, especially with indirect holdings or non-commercial loans. If you need assistance navigating these rules, please reach out to our support team or consult with a tax professional.
Source: Public Ruling No. 2/2025 – Group Relief for Companies
