Tax Treatment of REITs and Property Trust Funds

Buy a unit in a Malaysian REIT and you are effectively a landlord who never sees a tax bill from the building — because the trust that owns it hands almost everything to you before the taxman can touch it. That single design choice, written into section 61A of the Income Tax Act 1967, is what makes real estate investment trusts (REITs) and property trust funds (PTFs) work. But in year of assessment (YA) 2026 the other half of the bargain — how you, the unit holder, are taxed — changed for the first time in years.

Why doesn’t the REIT itself pay tax?

A REIT or PTF listed on Bursa Malaysia is a pass-through vehicle. Under section 61A of the Income Tax Act 1967, it is exempt from income tax on its total income for a year of assessment if it distributes at least 90% of that total income to unit holders during the basis period.

The logic is simple: tax the money once, in the hands of the person who ultimately keeps it, rather than at both the fund and the investor level. Hit the 90% mark and the fund pays nothing; the income flows out to unit holders and is taxed there instead.

Miss it, and the picture flips. If a REIT distributes less than 90% of its total income in a year, the section 61A exemption does not apply for that year — the fund is taxed on its income like an ordinary trust body, and the distributions it then pays out carry a tax credit that unit holders can set off against their own liability. In practice, listed REITs distribute at or near 100% precisely to stay on the right side of the 90% line.

What does the 90% rule mean for the credit on my distribution?

This is the part investors most often get wrong. When the fund is exempt under section 61A, the income was never taxed — so there is nothing to credit. Distributions paid out of that exempt income generally do not carry a section 110 tax credit.

That matters because it means the withholding or reporting mechanism on the unit holder is doing the entire job of taxing that income. There is no earlier layer of tax to offset. (Where a fund was taxed — the sub-90% case — a credit does arise, and tax-exempt unit holders who suffer withholding can claim a refund.)

How were unit holders taxed before YA 2026?

For distributions paid out of a REIT/PTF’s exempt income, the fund withheld tax under section 109D of the Income Tax Act 1967 at the point of distribution. From YA 2020 through YA 2025 the rates worked like this:

Unit holder category	Withholding tax (until YA 2025)	Nature
Resident individual / non-corporate	10%	Final tax
Non-resident individual	10%	Final tax
Foreign institutional investor (e.g. pension fund, collective scheme)	10%	Final tax
Resident company	0% (taxed at company rate)	Reported in return
Non-resident company	24%	Final tax

The 10% rate was the headline attraction. For an individual or a foreign fund, tax on the distribution was “final and forget”: 10% was withheld at source, nothing needed to be reported, and no further tax was due regardless of how large the payout was.

What changed in YA 2026?

That preferential 10% rate sat under a sunset clause — a legislated expiry date — and it was not renewed; it expired on 31 December 2025. The Inland Revenue Board (LHDN) issued Practice Note No. 2/2026 in March 2026 to spell out the treatment that applies from YA 2026 onwards.

The core shift: the 10% final withholding tax on individuals and foreign institutional investors is gone. Instead of a flat, final deduction at source, most unit holders now bring the distribution into their own tax return and are taxed at their prevailing rates.

Unit holder category	From YA 2026
Resident individual	No final withholding tax; report the distribution and pay at scale rates (0%–30%)
Resident company / entity	No final withholding tax; report and pay at the applicable rate
Non-resident individual	Taxed at the standard non-resident individual rate of 30%
Foreign institutional investor	Old 10% final rate no longer available; taxed at prevailing rates
Non-resident company	Unchanged — 24% final withholding tax

For reporting purposes, a resident individual now declares the distribution — broadly, as statutory income from other gains or profits — rather than treating it as settled at source.

Who wins and who loses under the new rules?

It depends entirely on your marginal rate.

• Small resident retail investors can come out ahead. Someone whose personal income sits in the lower tax brackets — below the old 10% — now effectively pays their own (lower) rate on the distribution rather than a flat 10%.
• High-income residents pay more, because their scale rate runs up to 30% instead of the old 10% final tax.
• Non-resident individuals and foreign institutional investors are the clearest losers: the flat 10% is replaced by rates as high as 30%, which trims the post-tax yield that made Malaysian REITs attractive to overseas money.
• Non-resident companies see no change at all — still 24%, still final.

The reason given for ending the concession is that Malaysia’s REIT sector has matured into a widely accepted asset class that no longer needs preferential tax support to attract capital, with the change also broadening the tax base by aligning REIT distributions with standard income tax rules. Sell-side research broadly agreed the change dents sentiment more than fundamentals: Maybank Investment Bank estimated net distribution yields would still average roughly 4.7% to 6% and remain competitive against other sectors, and other houses — including BIMB Securities and RHB Research — kept constructive calls on the space.

What’s next

If you hold Malaysian REITs, the practical to-do list is short but real:

• Keep your distribution vouchers. From YA 2026 you need them to report REIT/PTF income in your return, not just to file away.
• Model your own marginal rate, not the old 10%. Whether the change helps or hurts you turns on which tax bracket you sit in.
• Foreign and non-resident investors should recheck post-tax yield assumptions and any applicable double-tax treaty relief before comparing Malaysian REITs with regional peers.

For the binding detail, read LHDN Practice Note No. 2/2026 alongside section 61A and section 109D of the Income Tax Act 1967, and confirm the current-year treatment with a licensed tax adviser — figures and thresholds can move with each Budget.