Last Updated on November 29, 2024 by Chin Yi Xuan
As a dividend investor, the introduction of 2% dividend tax is certainly a key highlight of Budget 2025 for me.
In this post, I’d like to dive into more details of this new dividend tax, and share my 2 cents about how it might affect dividend investors like ourselves.
Meanwhile, check out my go-to broker that I use to build my Freedom Fund:
Table of Contents
Context: What is this new 2% dividend tax all about?
Essentially, the new dividend tax is a 2% tax that will apply to people with annual dividend income exceeding RM100,000 starting 2025.
Based on my research, this tax will only apply to the amount above the RM100,000 threshold:
Example:
If your dividend income is RM120,000, the 2% dividend tax will be charged for RM20,000 – translating to a dividend tax of RM400 (RM20,000*2%).
Exemptions:
There are some exemptions to this new dividend tax, namely:
- Dividends from EPF.
- Dividends from unit trusts under Permodalan Nasional Berhad (PNB), such as Amanah Saham funds.
- Foreign-sourced dividend income
Dividend withholding tax (WHT) vs Malaysia 2% Dividend Tax: What are the differences?
A part where I think many dividend investors might be confused with are the differences between dividend withholding tax (WHT) and the newly introduced 2% dividend tax in Malaysia.
Essentially, the main difference between them is at which stage the dividend is being taxed.
| Dividend withholding tax (WHT) | 2% Dividend Tax | |
| When is the dividend is taxed? | Withheld and deducted at the company/fund level | Deducted at personal level. |
| Action required from investors | No | Yes. Declare & pay while filing personal income tax. |
| Tax % for Malaysians | 0% for Malaysian companies (10% for REIT) | 2% |
(i) Dividend Withholding Tax (WHT)
Dividend withholding tax (WHT) is withheld and deducted at the company/fund level. As such, when you receive your dividend from an investment charged with dividend WHT, the tax has already been deducted BEFORE it reaches you.
Simply put, there is no action required from the investor’s side as dividend WHT is already settled by the company or fund that you invest in.
- Example: I invest in SCHD, a US-domiciled dividend ETF. As a foreigner, my dividend from SCHD is always deducted by 30% before reaching my brokerage account due to a 30% dividend WHT.
- Note: At the moment, the dividend WHT charged to Malaysians is 0% for dividends received from Malaysian companies (10% for REITs).
- Example: Let’s say you invest in Maybank and Maybank declares RM0.30/share in dividends, you will get 100% of the RM0.30/share of dividends.
(ii) 2% Dividend Tax for Malaysians
On the other hand, the new 2% dividend tax is deducted at personal level. This means that Malaysians will need to track their dividend income from local companies, and pay for the 2% dividend tax should they exceed the RM100,000/year mark while filing for their income tax.
The pros & cons of implementing the 2% dividend tax instead of dividend withholding tax (WHT) in Malaysia:
- Pro: This 2% dividend tax is targeted only at Malaysians with an annual dividend of over RM100,000. Meanwhile, a dividend WHT would (generally) cover everyone regardless of the dividend amount.
- Cons: Malaysians will need to track their dividends and declare them for the 2% dividend tax while filing their personal income tax, which is additional work. Meanwhile, dividend WHT is deducted at company/fund level which requires no additional action from investors’ side.
My thoughts on the 2% dividend tax
Initial thought: This 2% dividend tax is not going to affect most investors since it takes a sizable amount of capital to hit RM100,000 in annual dividend income.
Allow me to expand further:
- The capital you need to hit RM100,000 in annual dividend income depends on the dividend yield of your portfolio.
- Below, I share the capital required to hit RM100,000 in annual dividend income based on different dividend yield (%) of a portfolio:
| Portfolio annual dividend yield | Capital required |
| 4% | RM2,500,000 |
| 5% | RM2,000,000 |
| 6% | RM1,666,667 |
| 7% | RM1,428,571 |
Simply put, the capital required to achieve RM100,000 in annual dividend income will take time for most people to achieve.
Even at a 7% dividend yield (which is a pretty high yield for an investment portfolio), it takes more than RM1.4m to achieve it.
As such, in my opinion, the 2% dividend tax is not going to affect most people.
However, it’d be too irresponsible for me to end our discussion here.
What if there are serious dividend investors who are looking to live off dividends someday? For these investors, with time, hitting RM100,000 in dividend income is certainly possible.
2 ways to navigate around the 2% dividend tax for Malaysian dividend investors
If you are a serious dividend investor in Malaysia, here are 4 ways I can think of – which could help navigate through this 2% dividend tax:
#1 Consider adding foreign-listed stocks and ETFs to your dividend portfolio
For serious dividend investors, diversifying into foreign-listed stocks or ETFs is one of the most direct ways to navigate around this 2% dividend tax.
Since this 2% dividend tax applies only to dividends received from local private and public listed companies, foreign-listed stocks and ETFs can be a good addition to our dividend portfolio.
Since tax exemption for Foreign-Sourced Income (FSI) is proposed to be extended until 2036 under Budget 2025, it is one way to prevent our dividend income derived from locally-listed stocks from going beyond RM100,000 annually.
Investing in foreign-listed stocks and ETFs: Be mindful of dividend withholding tax (WHT)
Despite that, please note that investing in certain overseas markets may come with dividend withholding tax (WHT).
For instance, there’s a 30% dividend WHT on US-listed stocks and ETFs. However, some markets offer attractive dividend WHT, such as 0% for Singapore and Hong Kong-listed stocks.
Click HERE to check out my article on dividend WHT.
#2 Consider transitioning partially or completely to EPF or Amanah Saham funds
Another way Malaysian dividend investors can work around the 2% dividend tax is to diversify, or transition their dividend portfolio – be it partially or fully, to EPF (self-contribution) or Amanah Saham funds once the RM100,000 annual dividend is achieved on their dividend portfolio.
Both dividends from EPF and Amanah Saham funds are excluded from the 2% dividend tax.
- EPF has been paying decent dividends between 5.20% – 6.90% (2016 – 2023).
- Meanwhile, Amanah Saham fixed-price funds such as the Amanah Saham Malaysia (ASM) have been delivering returns between 4.00% – 6.30% (2016 – 2023).
2 minor downsides:
2 downsides I could foresee from this approach are:
- By investing your money for dividends on EPF or Amanah Saham funds, you’ll have to give up potential capital gains from stocks, which could be an opportunity cost that would matter to some investors.
- EPF self-contribution has a limit of RM100,00 per year, while Amanah Saham fixed-price funds have limited units – so both EPF and ASNB funds have their respective limitations.
Arguments around the 2% dividend tax in Malaysia
From my research, I found 2 key arguments for the 2% dividend tax which is related to dividend investors:
#1 The argument for double taxation
Right now, Malaysian companies are paying 24% of corporate tax on their net profits before distributing dividends, while dividends are tax-free for shareholders.
However, under Budget 2025, an additional 2% dividend tax is charged on the shareholders’ side. Hence, this is debated as an extra layer of tax on top of the 24% corporate tax paid on the companies’ side.
#2 Tracking dividends can be complicated for investors with a diversified source of dividend income
For investors/shareholders that generate dividend income from various sources, such as dividends from private companies and those with investments with multiple stock brokers, tracking dividends accurately could be more difficult.
At the moment, there is no easy way for these groups of people to track their dividends except for doing it manually
Verdict: “Should I continue to invest for dividends?”
Despite the introduction of 2% dividend tax for Malaysians, I think it should not deter us from building our passive income from the stock market.
Personally, hitting a level of passive income in life where I have the freedom to:
- Prioritize my family over work when the time comes (eg. having kids, aging parents);
- Say ‘No’ to projects or work opportunities that do not resonate with me;
- Travel or take time off without having to stress about money or income.
Achieving this level of freedom in life is so important to me that this 2% dividend tax will not bother me too much.
I hope this makes sense! Feel free to leave your questions in the comment section below if you have any!
Disclaimers:
Any of the information above is produced with my own best effort and research.
This post is produced for general information purposes only. It is not intended to constitute professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances.
The inclusion of Interactive Brokers’ (IBKR) name, logo or weblinks is present pursuant to an advertising arrangement only. IBKR is not a contributor, reviewer, provider or sponsor of content published on this site, and is not responsible for the accuracy of any products or services discussed.
