Global Minimum Tax in Malaysia: DTT and MTT

Almost everything written about Pillar Two is written for the ultimate parent entity. If you run finance for a Malaysian subsidiary of a foreign group, that is the wrong audience — the parent decides the group’s position, but you are the one LHDN expects a return from.

Malaysia’s rules are in Part XI of the Income Tax Act 1967, sections 157 to 239, effective for financial years beginning on or after 1 January 2025. They come in two parts: the Domestic Top-up Tax (DTT), Malaysia’s qualified domestic minimum top-up tax, and the Multinational Top-up Tax (MTT), its income inclusion rule. This page is about what the Malaysian entity does.

Are we in scope?

The test is at group level. A Malaysian constituent entity is subject to DTT if the multinational group’s consolidated annual revenue reached EUR 750 million in at least two of the four preceding financial years.

Two clarifications from LHDN’s FAQ version 7.0 matter here:

• The group must be multinational in the tested year only. For the two-of-four revenue test, it may have been a purely domestic group in those earlier years. A group that internationalised recently does not get a grace period.
• The effective date runs off the ultimate parent entity’s consolidated financial statement accounting period, not the Malaysian entity’s.

Practical consequence: the size of your Malaysian operation is irrelevant. A RM30 million subsidiary of a EUR 2 billion group is in scope; a RM900 million Malaysian group with no foreign presence is not.

Some entities are excluded from DTT scope entirely — government entities, international organisations, non-profit organisations, pension funds, and investment funds or real estate investment vehicles that are ultimate parent entities — along with certain 95%-owned or 85%-owned holding and ancillary entities beneath them.

Who files what

This is where subsidiary teams most often get it wrong, because two different returns get called the Pillar Two filing.

	GloBE Information Return (GIR)	Top-up Tax Return (TTR)
Who files	The ultimate parent entity or a designated filing entity, once for the group	Each constituent entity located in Malaysia
Contents	The full top-up tax computation, for exchange with other jurisdictions	The tax liability of that entity — a simplified return
Filed with	LHDN, which exchanges it onward	LHDN
Deadline	15 months after the reporting financial year end; 18 months for the first transition year	The same

Paragraph 10.1 of the Domestic Top-up Tax guidelines is unambiguous: every constituent entity of an MNE group located in Malaysia furnishes its own DTT Top-up Tax Return, electronically, in the prescribed form. Paragraph 10.3 adds that the return reflects either a declaration of no tax liability or the amount payable — a nil position still requires a return.

One trap on group structuring: an MNE group cannot appoint more than one Designated Local Entity to file the GIR for different groups of constituent entities. There is one GIR filer.

The deadline runs off the parent’s year end

LHDN’s FAQ answers this directly: the 15-month, or 18-month transitional, due date is based on the financial year end of the ultimate parent entity, not the respective constituent entity. The same applies to a joint venture with a different year end from its parent.

For a group with a 31 December year end, the first financial year in scope ends 31 December 2025, and the first GIR and TTR are due 30 June 2027.

And the point that keeps getting lost in group planning calls: the Form C deadline is unchanged. LHDN states it explicitly — 31 July with a one-month grace period for a December year end. Top-up tax filing is an addition to the ordinary corporate compliance calendar, not a substitute for any part of it.

Returns must be submitted in Malaysian ringgit. Where the computation was done in the parent’s presentation currency, convert using the average Bank Negara Malaysia monthly exchange rate for the financial year.

What breaks the safe harbours

Most in-scope Malaysian entities will spend the first few years trying to land inside the Transitional CbCR Safe Harbour rather than running a full GloBE computation. Two conditions are doing the work, and both are failable by a subsidiary’s own administration.

The Country-by-Country Report must be filed. LHDN’s FAQ is categorical: for the transitional safe harbour, submission of a CbC Report is a prerequisite, and groups subject to CbC reporting that fail to file are not eligible. A missed CbCR filing does not cost a penalty alone — it costs the safe harbour, and with it the exemption from full GloBE calculations.

The report must rest on Qualified Financial Statements. The financial information must not be adjusted to align with the GloBE rules, except for purchase price allocation adjustments needed to meet the consistent reporting condition, and goodwill impairment adjustments. Qualified Financial Statements means the accounts used to prepare the parent’s consolidated financial statements, or separate constituent entity financial statements prepared under an acceptable or authorised accounting standard and reliably maintained. All entities in the tested jurisdiction must draw on the same type of qualified financial statement.

The transitional safe harbour is time-limited. For DTT purposes it applies only for financial years beginning on or before 31 December 2027, and not to any financial year ending after 30 June 2029.

Separately, where Malaysian constituent entities qualify for the QDMTT Safe Harbour, the group is exempted from performing additional GloBE calculations for them — which is the practical point of Malaysia having a qualified domestic regime at all.

Local accounts, and when you may use them

A useful Malaysian-specific concession sits at subsection 164(2) of the ITA 1967. The DTT may be computed from financial statements prepared under local accounting standards — MFRS or MPERS — instead of the group’s standard, provided that:

• all Malaysian constituent entities have the same financial year as the ultimate parent; and
• each prepares its own financial statements, which are either required to be kept or used under Malaysian written law, or audited by an approved company auditor.

LHDN’s FAQ confirms that unaudited local accounts may be used, so long as those same accounts are used for SSM submission or corporate income tax filing and the other s.164(2) conditions are met. It also confirms that MFRS and MPERS may coexist across entities in the same group.

Miss either condition and the computation reverts to the parent’s consolidated accounting standard and presentation currency — which usually means the Malaysian team loses control of the numbers.

How Malaysian incentives interact with the 15% rate

The mechanism is worth stating plainly because the conclusion is counter-intuitive.

A Malaysian incentive that reduces tax payable — pioneer status, investment tax allowance, reinvestment allowance, a reduced rate under a gazette order — reduces adjusted covered taxes. The effective tax rate for the jurisdiction is covered taxes over GloBE income. Push covered taxes down far enough and the jurisdictional ETR falls below 15%, and the DTT collects the shortfall. Malaysia keeps the revenue instead of another country’s income inclusion rule taking it, which is the design intent of a qualified domestic regime — but the incentive’s benefit to the group is gone either way.

What survives is the substance-based income exclusion: a carve-out of a return on eligible payroll costs and the carrying value of eligible tangible assets, which is deducted before top-up tax applies. Section 197 of the ITA 1967 gives a more generous SBIE percentage across an eight-year transition period, and this transitional relief applies to the DTT computation.

LHDN’s FAQ adds three usable details on the SBIE. Tangible assets shown under property, plant and equipment but not yet in use during the year still count. Work in progress capitalised and reported as PPE in the consolidated statements counts. And reimbursements to employees for housing or transportation are eligible payroll costs.

The strategic reading: incentives attached to real Malaysian headcount and real Malaysian fixed assets keep more of their value under Pillar Two than incentives attached to income. Two further points from the FAQ round out the covered-tax picture — real property gains tax is a covered tax, while zakat on business is not, because it is a religious duty rather than a compulsory payment to general government.

Common mistakes

• Assuming the parent handles everything. The GIR is a group filing; the Top-up Tax Return is per Malaysian entity, including a nil one.
• Working to the local year end. Both deadlines run off the ultimate parent’s financial year end.
• Treating a missed CbCR filing as a minor lapse. It removes eligibility for the Transitional CbCR Safe Harbour outright.
• Adjusting CbCR figures to look more GloBE-compliant. Qualified Financial Statements must be unadjusted apart from purchase price allocation and goodwill impairment.
• Letting one Malaysian entity drift onto a different year end from the parent. It disqualifies the whole Malaysian group from using local accounts under s.164(2).
• Assuming an existing incentive is unaffected. It reduces covered taxes, and the domestic top-up tax reclaims the difference.
• Reading OECD guidance as optional. LHDN states that agreed administrative guidance issued by the OECD is automatically incorporated into Malaysian GMT rules, and prevails over LHDN’s own guidelines where they conflict.
• Relying on transitional penalty relief as a filing exemption. It applies to accuracy where reasonable measures were taken, during the transition window, and only to groups that actually file.

What’s next

The concrete work for a Malaysian subsidiary in the current year is unglamorous. Confirm with the parent that the group crosses the two-of-four revenue test and which entity will be the designated filing entity. Confirm the group’s CbC Report has been filed for every relevant year, because that filing is now load-bearing. Check whether every Malaysian constituent entity shares the parent’s financial year end, and fix it if not.

Then model the jurisdictional effective tax rate against the substance-based income exclusion, so that when the group asks whether Malaysia will produce a top-up tax liability, the answer comes from your numbers rather than the parent’s estimate.