MALAYSIA has traditionally been on a dividend imputation system. An imputation system means the income tax that has been paid at the corporate level is “imputed” to the dividends paid to the shareholders.
Consequently, although dividends are taxable in the hands of shareholders, the tax imputed will be used to set off against the tax payable, resulting in the dividends being effectively “tax exempt” in the hands of the shareholders. However, where a shareholder’s tax bracket is below that of the dividend payer, any excess imputed tax is refunded to the shareholder.