Paragraph 39(1)(l) of the Income Tax Act 1967 disallows fifty per cent of expenditure on the provision of entertainment. Eight provisos take specified categories out of that disallowance entirely, so the expenditure is fully deductible if it also passes the section 33(1) test. The provisos cover entertainment for employees, entertainment provided for payment in the ordinary course of business, promotional gifts at overseas trade fairs, promotional samples, public cultural or sporting events, logo gifts within Malaysia, entertainment related wholly to sales, and a yearly leave passage within Malaysia.
- There are eight provisos to paragraph 39(1)(l), numbered (i) to (viii) — not six
- Three questions in order: is it entertainment under s.18, is it wholly and exclusively incurred under s.33(1), and does a proviso apply
- An entertainment expense that fails s.33(1) gets nothing at all — the 50 per cent floor does not exist
- Promotion with an entertainment element follows the same rules; promotion without one is fully deductible under s.33(1)
- Cash is not entertainment — the Court of Appeal held that hospitality of any kind must be read alongside food, drink and recreation
Who this applies to: Malaysian businesses classifying client entertainment, staff functions, promotional gifts and sales incentives in the tax computation.
On this page
Almost every Malaysian tax computation halves the entertainment line and moves on. That is wrong in both directions. Some of what is halved should be disallowed in full, and a good deal of it should not be halved at all.
Paragraph 39(1)(l) of the Income Tax Act 1967 disallows a sum equal to fifty percent of expenses incurred in the provision of entertainment. Attached to it are eight provisos, numbered (i) to (viii) — not six, as commonly stated. Public Ruling No. 4/2015 refers to them throughout as provisos (i) to (viii).
The three questions, in order
1. Is it entertainment? Section 18 defines entertainment as the provision of food, drink, recreation or hospitality of any kind, or of accommodation or travel in connection with facilitating such entertainment, by a person or an employee in connection with the business. From the year of assessment 2014 the definition also catches entertainment provided for the purpose of promotion. If the expense is not entertainment, paragraph 39(1)(l) never engages — promotion without an entertainment element is fully deductible under s.33(1).
In NV Alliance Sdn Bhd v KPHDN the Court of Appeal held that cash incentives paid to sales agents are not entertainment. Reading hospitality of any kind alongside food, drink, recreation, the court applied the noscitur a sociis and ejusdem generis rules and confined the general words to the same genus as the specific ones. Cash does not belong to it.
2. Is it wholly and exclusively incurred under s.33(1)? If not, nothing is deductible. Public Ruling No. 4/2015 gives two examples that catch people out: a microwave oven given to a customer as a wedding gift, and a lunch bought for a potential customer — both refused entirely, not halved.
3. Does a proviso apply? If yes, 100 per cent. If no, 50 per cent.
The decision table
| Proviso | Category | Watch for |
|---|---|---|
| (i) | Entertainment for employees | Fails if the provision is incidental to entertaining others — but suppliers attending a staff annual dinner are themselves incidental, and the whole cost stands |
| (ii) | Entertainment provided for payment in the ordinary course of a business that provides entertainment for payment | Hotel cultural shows, in-flight meals |
| (iii) | Promotional gifts at trade or industrial exhibitions held outside Malaysia to promote exports | Overseas only |
| (iv) | Promotional samples of the products of the business | Must be the business’s own products |
| (v) | Entertainment for cultural or sporting events open to the public, wholly to promote the business | Members-only events fail; the ruling states a National Day parade is not a cultural event |
| (vi) | Promotional gifts within Malaysia carrying a conspicuous advertisement or logo of the business | Need not be the business’s own product, but must go to the public non-discriminatorily — expensive gifts to selected persons fail |
| (vii) | Entertainment related wholly to sales arising from the business | Product launches, redemption vouchers, lucky draw prizes, dealer incentive trips, refreshments while a customer waits |
| (viii) | Leave passage for a yearly event within Malaysia involving the employer, employee and immediate family | Travel cost falls here; food and accommodation on the same trip fall under proviso (i) |
Anything outside the table is halved: a dinner for suppliers, a festive hamper to maintain a relationship, flowers for a customer’s new branch.
Common mistakes
Halving something that should be disallowed entirely. Entertaining a prospect who is not yet a customer fails s.33(1) before paragraph 39(1)(l) is reached.
Treating the sales-related proviso as unlimited. Proviso (vii) requires the entertainment to relate wholly to sales arising from the business. Vouchers and points-based gifts are entertainment only when the customer redeems them.
Confusing the two gift provisos. Overseas trade fairs sit in proviso (iii); logo gifts inside Malaysia sit in proviso (vi). A non-logo gift given in Malaysia falls in neither and is halved.
Adding back cash incentives. NV Alliance removed those from paragraph 39(1)(l) altogether, and Public Ruling No. 4/2015 separately notes that cash does not fall within the section 18 definition.
Splitting a family day incorrectly. The ruling divides one trip between proviso (viii) for the travel and proviso (i) for the food, drink and accommodation — both fully deductible, but for different reasons.
What’s next
Reclassify the entertainment ledger by proviso before halving it, and keep the evidence that fixes the category — the guest list for a staff dinner, the artwork showing the logo on a promotional gift, the public advertising for a sponsored event. Then check the rest of section 39, because entertainment is one line of a much longer prohibition list.
Is client entertainment 50 per cent deductible in Malaysia?
Only if it first passes section 33(1). Paragraph 39(1)(l) disallows fifty per cent of entertainment expenditure, but that halving applies to expenditure already established as wholly and exclusively incurred in the production of gross income. Public Ruling No. 4/2015 gives the example of a lunch with a potential customer, which is refused in full rather than halved.
Is a staff annual dinner fully deductible?
Yes, under proviso (i) to paragraph 39(1)(l), which covers the provision of entertainment to employees except where it is incidental to entertaining others. Public Ruling No. 4/2015 accepts a full deduction where suppliers also attend an annual dinner held for employees, on the basis that the entertainment of the suppliers is only incidental.
Are hampers and gifts to customers deductible?
A festive hamper given to maintain a business relationship falls outside all eight provisos, so only fifty per cent is deductible. A promotional gift within Malaysia carrying a conspicuous advertisement or logo of the business is fully deductible under proviso (vi), provided it is given to the public on a non-discriminatory basis rather than to selected persons.
Are cash incentives to sales agents entertainment?
No. In NV Alliance Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri the Court of Appeal held that cash incentives paid to sales agents are not hospitality within section 18, applying the noscitur a sociis and ejusdem generis rules so that hospitality of any kind takes its meaning from food, drink and recreation. The payments therefore fell outside paragraph 39(1)(l) altogether and were fully deductible.
The following are deliberately unstated or described only qualitatively until confirmed by a subject-matter expert:
- Whether Public Ruling No. 4/2015 has been reissued — it remains listed as current on the LHDN Public Rulings index but was published in 2015
- Whether the Finance Act 2025 (Act 874) or any later amending Act changed paragraph 39(1)(l) after the Income Tax Act 1967 reprint dated 21 May 2024 used here
Sources
- Income Tax Act 1967 (Act 53), reprint as at 21 May 2024 — LHDN
- Public Ruling No. 4/2015 — Entertainment Expense — LHDN
- NV Alliance Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri — Court of Appeal judgment — LHDN
Change history
| Version | Date | Change | By |
|---|---|---|---|
| 01.00 | 20 Jul 2026 | Approved and published. | — |