Losses, Group Relief and Unabsorbed Capital Allowances

Two companies in the same group, both making losses, both with directors who assume the losses will be there when profits come. One will still have them in 2035. The other will not, and nothing about its trading explains the difference.

Loss relief in Malaysia is governed by three separate mechanisms that most guides run together: a ten-year expiry, a shareholder-continuity test, and a group surrender regime that excludes almost every SME. They interact badly.

How long do carried-forward losses last?

Section 44(5F) limits the deduction of an unabsorbed adjusted business loss to ten consecutive years of assessment, and the period commences immediately following the relevant year of assessment. Any balance at the end is disregarded for the purposes of the Act.

So a loss arising in YA2020 is deductible from YA2021 through YA2030, and is gone from YA2031. Public Ruling No. 1/2022 works exactly that example.

The history matters because a lot of ranking content is stuck at the wrong number. The Finance Act 2018 introduced a seven-year limit with effect from YA2019. The Finance Act 2021 amended it to ten years, also with effect from YA2019. Paragraph 4.3 of the ruling records the change. Anything still quoting seven years is citing repealed law.

There is also a transitional rule most people never reach. Amounts ascertained under s.44(4) or (5) for YA2017 and earlier that had not been deducted by YA2018, and any YA2018 amount, may be utilised against statutory business income under s.43(2) for YA2019 to YA2028. The oldest stock of losses in Malaysian companies has a fixed expiry of YA2028, independent of when it arose.

Unabsorbed capital allowances are not capped

This is the single most common error in Malaysian loss content, and it points the wrong way — it makes companies write off relief they still have.

Paragraph 75 of Schedule 3 says that where an allowance cannot be given in full because of insufficient or absent adjusted income, the unused amount is deemed to be an allowance for the first subsequent year of assessment in which there is adjusted income from that business, and so on for subsequent years of assessment until the whole amount has been made. No period is stated. There is no ten-year cap on unabsorbed capital allowances.

What capital allowances do share with losses is the shareholder test.

What a change of shareholders does

Section 44(5A) disregards a carried-forward loss unless the Director General is satisfied that the shareholders on the last day of the basis period in which the loss was ascertained were substantially the same as those on the first day of the basis period in which it would otherwise be deducted — and the amount disregarded is not allowed in any later year either. Paragraph 75A of Schedule 3 imposes the identical test on unabsorbed capital allowances.

Section 44(5B) defines “substantially the same” with two limbs that must both be satisfied on both dates:

• more than 50% of the paid-up capital in respect of ordinary shares is held by or on behalf of the same persons; and
• more than 50% of the value of the allotted ordinary shares is held by or on behalf of the same persons.

Shares held by another company are deemed held by that company’s own shareholders, so a change two levels up in a group can still break continuity.

The dormancy carve-out that decides most real cases

On its face s.44(5A) would kill the losses of every acquired company. It does not, because s.44(5D) lets the Minister exempt a company in special circumstances, and paragraph 8.3 of Public Ruling No. 1/2022 records that from YA2006 the Minister has allowed a company with a substantial change in shareholding to carry forward its accumulated losses — unless the substantial change occurs in a dormant company.

That reverses the practical position entirely. A trading company can change hands and keep its losses. A dormant company cannot.

The ruling defines dormant tightly: no significant accounting transaction in one financial year prior to the substantial change in equity shareholding, meaning no entry in the accounts other than the minimum expenditure needed to meet statutory requirements. It lists that minimum exhaustively:

• filing of the company’s annual return with SSM
• secretarial fee for filing the annual return
• tax filing fee
• audit fee
• accounting fee

Which is to say: buying a clean shell for its accumulated losses does not work, and it is the shell, not the size of the loss, that triggers the disallowance. A company that kept even modest genuine trading activity in the year before the sale is outside the definition — but note the test bites on the financial year before the change, so a buyer who restarts trading after signing has already missed the window.

Group relief: the regime that excludes SMEs

Section 44A lets a surrendering company give up not more than 70% of its adjusted loss for a basis period to one or more claimant companies in the same group. Both sides must be resident in that basis year and incorporated in Malaysia.

The qualifying criteria in s.44A(2), restated at paragraph 6 of Public Ruling No. 2/2025, are cumulative:

Condition	Detail
Incorporation	Both companies incorporated in Malaysia
Residence	Both resident in Malaysia in the basis year for that year of assessment
Relationship	Related throughout the basis period and the 12 months immediately preceding it
Paid-up capital	More than RM2.5 million in ordinary shares at the beginning of the basis period, for both
Basis periods	12 months each, ending on the same day
Election	Irrevocable, made in the Form C furnished under s.77A for that year
Rate	Both taxed at the paragraph 2 rate of Part I of Schedule 1
Claimant	Must have a defined aggregate income for that year

The paid-up capital condition is the one nobody flags. It requires capital above RM2.5 million — the same threshold that, in the other direction, gates the SME rates in paragraph 2A. A company qualifying for 15% and 17% is therefore structurally excluded from group relief, and the rate condition reinforces it by requiring taxation at the paragraph 2 rate. Group relief is a large-company regime.

Related means at least 70% of the ordinary shares, held directly or indirectly through other companies resident and incorporated in Malaysia; paragraph 7.1 of the ruling notes that any shareholding through companies neither incorporated nor resident in Malaysia is disregarded in the computation, while a Labuan company incorporated under the Labuan Companies Act 1990 counts as incorporated in Malaysia. A second-level test under s.44A(7) then asks whether the claimant is beneficially entitled to 70% of residual profits and residual assets.

The three-year window

Section 44A(1) and (1A) confine surrender to three consecutive years of assessment, running from immediately after the surrendering company’s first 12-month basis period. Where the first basis period is not 12 months, the clock starts after the second. A company that commenced operations in 2019 with a calendar year end may surrender for YA2020, YA2021 and YA2022 — and from YA2023 it cannot surrender at all. Paragraph 5.2 of the ruling closes off the older population entirely: a company that commenced before YA2015 is not eligible.

Only current-year adjusted losses may be surrendered. Carried-forward losses stay with the company that incurred them.

Defined aggregate income

The claim is capped at the claimant’s defined aggregate income, which is aggregate income less current-year adjusted business loss under s.44(2), qualifying prospecting expenditure under Schedule 4, qualifying pre-operational business expenditure under Schedule 4B, and gifts and donations under the various limbs of s.44(6) to (11D). A claimant that has already absorbed everything with donations has no capacity left.

Common mistakes

• Applying the ten-year cap to unabsorbed capital allowances. Paragraph 75 of Schedule 3 has no time limit. Only s.44(5F) losses expire.
• Still quoting seven years. The Finance Act 2021 made it ten, retrospective to YA2019.
• Treating any change of control as fatal to losses. Since YA2006 the general Ministerial relaxation means only dormant companies actually lose them.
• Testing dormancy at the wrong date. The test is the financial year before the substantial change, not the year of the change or after it.
• Assuming a profitable SME can absorb its sister company’s loss. Group relief needs paid-up capital above RM2.5 million on both sides and taxation at the paragraph 2 rate.
• Leaving the election out of the Form C. It is irrevocable and must be made in the return for that year of assessment; there is no later application.
• Counting a foreign intermediate holding company toward the 70%. Shareholding through companies not incorporated and not resident in Malaysia is disregarded.

What’s next

If group relief is closed to you because of the RM2.5 million floor, the value sits in timing instead: keep the loss company trading enough to stay outside the dormancy definition, and track each year’s loss against its own ten-year expiry rather than as a single pooled balance. Confirm residence first, since both loss relief regimes and the SME rates all fail without it.