Malaysia's Global Minimum Tax (Pillar Two) 2025–2026: The Complete Guide for Foreign MNE Groups — 15% ETR, DTT, MTT, Safe Harbours and the First Filing Deadline

On 1 January 2025, Malaysia quietly crossed a threshold that will reshape the tax strategies of every large multinational enterprise (MNE) operating on Malaysian soil. The Global Minimum Tax (GMT) — rooted in the OECD's Pillar Two GloBE Rules — formally came into force, backed by legislation enacted in the Finance (No. 2) Act 2023. For foreign companies from China, Taiwan, Hong Kong and Singapore that are part of large corporate groups, this is not an abstract international tax debate: it directly determines whether your Malaysian entity will owe an additional top-up tax to LHDN on top of its normal 24% corporate income tax rate, and whether your parent company's incentive structures remain viable.

Background: Why Malaysia Enacted the Global Minimum Tax

The OECD's Two-Pillar Solution emerged from years of concern about profit shifting by large multinationals into low-tax jurisdictions. Pillar Two specifically addresses this by establishing a global floor: if a corporate group earns profits in any jurisdiction taxed below 15%, another jurisdiction in the group's structure is entitled to collect a top-up tax to bring the rate to 15%.

Malaysia, as a member of the OECD/G20 Inclusive Framework on BEPS, formally joined over 140 jurisdictions in committing to implement Pillar Two. The legislation was enacted through the Finance (No. 2) Act 2023, published in the Official Gazette on 29 December 2023, inserting a new Part XI — spanning Sections 157 to 239 — into the Income Tax Act 1967. These provisions took effect for financial years commencing on or after 1 January 2025.

The strategic rationale for Malaysia is clear: the country has historically attracted foreign investment partly through generous tax incentives — Pioneer Status under MIDA, Investment Tax Allowances, and various sector-specific reliefs — which can reduce effective tax rates well below 15%. Without a domestic top-up tax, any shortfall from 15% could be collected by another jurisdiction (say, China or the Netherlands) under their Income Inclusion Rules. By enacting its own DTT, Malaysia retains the revenue domestically. As LHDN notes on its official GMT page, the GloBE Rules set a "new global minimum effective tax rate (ETR) of 15%" with a top-up tax charged whenever a group's ETR in a jurisdiction falls below that level.

For foreign companies, understanding this is essential: if your group is large enough to be in scope, the question is no longer whether you can achieve a low effective tax rate in Malaysia — it is whether achieving that low rate actually saves you money, or whether it simply redirects tax payments from LHDN to your home-country tax authority.

Who Is In Scope: The EUR 750 Million Revenue Threshold

The GMT does not affect every foreign company operating in Malaysia. The rules are targeted at large multinationals. The threshold test works as follows:

• An MNE group is in scope if its consolidated annual revenue is EUR 750 million or more in at least two of the four financial years immediately preceding the tested financial year.
• Both Malaysian-headquartered groups with foreign operations and foreign MNE groups operating in Malaysia fall within scope if the threshold is met.
• The rules apply regardless of industry or sector, and cover both publicly listed and privately held entities.
• There is a de minimis exclusion: even within an in-scope group, a particular jurisdiction will have its top-up tax deemed zero if (a) the average GloBE revenue for that jurisdiction is less than EUR 10 million, or (b) the average GloBE income or loss for that jurisdiction is less than EUR 1 million. For many early-stage Malaysian subsidiaries, this exclusion may apply.

A key nuance that many foreign groups miss: the revenue threshold test looks at the four years preceding the tested year — not the current year. This means a group that has grown rapidly and recently crossed EUR 750 million may already be in scope for FY2025 based on its FY2021–FY2024 revenue history, even if current-year revenue is temporarily below the threshold.

The Two Top-Up Taxes: DTT and MTT Explained

Domestic Top-Up Tax (DTT)

The DTT is Malaysia's Qualified Domestic Minimum Top-up Tax (QDMTT). It applies to a Constituent Entity (CE) — i.e., your Malaysian subsidiary or permanent establishment — when the jurisdictional ETR of all CEs in Malaysia falls below 15% for a financial year. LHDN issued dedicated guidelines on the DTT on 3 February 2026, providing detailed rules on scope, computation, filing obligations, and interaction with international GloBE rules.

The DTT tax liability is allocated among the relevant Malaysian CEs in proportion to each entity's GloBE Income relative to the total GloBE Income of all Malaysian CEs. Only entities with positive GloBE Income bear a DTT allocation. The practical consequence: if your Malaysian company enjoys Pioneer Status or ITA that brings its effective rate to, say, 8%, and no other mechanism pushes the Malaysian jurisdictional ETR to 15%, a DTT of approximately 7% of GloBE excess profits will be charged. Because Malaysia collects this domestically, your group's parent jurisdiction — whether China's SAT or Singapore's IRAS — should not levy an additional top-up tax under their own IIR for the Malaysian shortfall.

Multinational Top-Up Tax (MTT)

The MTT targets the reverse scenario: a Malaysian Ultimate Parent Entity (UPE) that owns subsidiaries in low-tax jurisdictions abroad. If those overseas subsidiaries have an ETR below 15% in their local jurisdiction, and Malaysia is the relevant collecting jurisdiction under the Income Inclusion Rule (IIR), Malaysia will charge the Malaysian UPE an MTT equal to the shortfall. This is primarily relevant for Malaysian-headquartered groups — but it is also a consideration for foreign companies that set up Malaysian holding or regional headquarter structures.

Importantly, LHDN has confirmed that the Undertaxed Profits Rule (UTPR) is not adopted in Malaysia at this stage, which simplifies the framework for the time being.

The Substance-Based Income Exclusion (SBIE): Your Built-In Carve-Out

Pillar Two acknowledges that genuine economic activity — real employees and real physical assets — deserves a carve-out from the top-up tax regime. The SBIE reduces the GloBE income that is subject to potential top-up tax by an amount equal to:

• 5% of eligible payroll costs for employees carrying out activities in Malaysia, plus
• 5% of the net carrying value of eligible tangible assets located in Malaysia.

During the initial eight transitional years (FY2025 to FY2032), Malaysia applies higher transitional percentages to ease the impact of GMT. The percentages gradually step down from 10%/8% in 2025–2026 toward the steady-state 5%/5% in 2033 and beyond. This means that manufacturing companies, logistics operators, and other capital- and labour-intensive businesses — precisely the type that foreign industrial investors typically set up in Malaysia — benefit the most from the SBIE in the early years. Companies with large payrolls and significant plant & machinery investment in Malaysia will see a meaningful reduction in their top-up tax exposure.

This is a compelling reason why asset-light holding companies or pure IP-licensing structures are far more exposed to GMT than genuine operational subsidiaries with workforce and fixed assets in Malaysia.

Transitional Safe Harbours: Simplifying Your First Filing Years

LHDN's implementation guidelines acknowledge the complexity of full GloBE computations and offer a Transitional CbCR Safe Harbour for the early years of implementation. This safe harbour allows an MNE group to use data from its Country-by-Country Report (CbCR) — a document most large groups already prepare for BEPS purposes — to apply simplified tests. If the jurisdiction passes any one of three tests, the top-up tax for Malaysia is deemed to be zero for that year:

1. De Minimis Test: GloBE revenue in Malaysia is less than EUR 10 million and GloBE income is less than EUR 1 million (average over three years).
2. Simplified ETR Test: The simplified ETR (using financial accounting data from the CbCR) equals or exceeds a transitional rate (15% for FY2023, 16% for FY2024, 17% from FY2025 onwards).
3. Routine Profits Test: The Profit (Loss) before income tax in Malaysia does not exceed the SBIE amount, indicating that all profits can be attributed to genuine substance.

The Transitional CbCR Safe Harbour applies for financial years starting on or after 1 January 2025, not exceeding 31 December 2026, and not ending after 30 June 2028. This means most groups should be able to use the safe harbour for FY2025 and FY2026, buying time to build the infrastructure for full GloBE computations before FY2027.

A note of caution from LHDN's guidelines: to qualify for the safe harbour, the CbCR itself must meet the Qualified CbC Report standard — meaning it must be prepared using the appropriate accounting standards and reflect a consistent methodology. Groups that prepare their CbCR loosely or inconsistently may find they do not qualify.

Filing Obligations, Deadlines and What LHDN Requires

For MNE groups within scope, the GMT creates new filing obligations in Malaysia that are entirely separate from the standard corporate tax return (Form C):

For a standard December 31 year-end group, FY2025 ends on 31 December 2025. The first GIR and TTR are due by 30 June 2027 (18 months from FY2025 year-end). Groups with a non-December year-end should calculate their own 18-month window accordingly. LHDN's May 2026 FAQ v7.0 also clarified that for joint ventures owned by two parent entities with different financial year-ends, the filing deadline is set as of the earlier of the two.

The filing may be made by the Malaysian CE itself, a designated local entity, the Ultimate Parent Entity, or a designated filing entity — but the election to use a surrogate filer must be made in writing no later than 15 months from the last day of the Reporting Financial Year.

LHDN also confirmed in its May 2026 FAQ update that domestic GMT provisions will automatically adopt OECD administrative guidance as it is issued, removing the need for Malaysia to separately legislate each piece of OECD technical guidance. This is a significant procedural simplification.

Worked Example: Chinese Manufacturing Group with Malaysian Subsidiary

Consider a Chinese listed manufacturing group (consolidated global revenue: EUR 2 billion in each of the past four years) that incorporated a Malaysian Sdn Bhd in Penang three years ago to manufacture electronics components. The Malaysian subsidiary was awarded Pioneer Status, reducing its Malaysian corporate income tax to 0% for five years. Its P&L for FY2025 shows:

• GloBE Revenue (Malaysia): EUR 45 million
• Profit Before Tax: EUR 4 million
• Eligible Payroll (Malaysia): EUR 3 million (280 employees)
• Eligible Tangible Assets (Malaysia): EUR 10 million (machinery, equipment)

Step 1 — Is the group in scope? Yes. Consolidated revenue exceeds EUR 750 million in each of the past four years.

Step 2 — Does de minimis apply? No. GloBE revenue is EUR 45 million (well above EUR 10 million), and profit is EUR 4 million (above EUR 1 million).

Step 3 — Try Transitional CbCR Safe Harbour (Simplified ETR Test). The Malaysian entity pays 0% income tax (Pioneer Status). Simplified ETR = 0% / 15% → FAILS the simplified ETR test (must be ≥ 17% for FY2025). The routine profits test: SBIE = (10% × EUR 3m payroll) + (8% × EUR 10m assets) = EUR 0.3m + EUR 0.8m = EUR 1.1m. Profit before tax is EUR 4 million, which exceeds SBIE of EUR 1.1m — FAILS the routine profits test. The de minimis test also fails. The group cannot use the safe harbour for this Malaysian entity in FY2025.

Step 4 — Compute DTT. Net GloBE Income = EUR 4m − EUR 1.1m SBIE = EUR 2.9m. Jurisdictional ETR = 0%. Top-up % = 15% − 0% = 15%. DTT = 15% × EUR 2.9m = approximately EUR 435,000 payable to LHDN by 30 June 2027.

Strategic implication: The five-year Pioneer Status, while saving 24% corporate income tax on profits earned in Malaysia, now results in a 15% DTT. The group's effective tax saving from Pioneer Status relative to normal 24% is reduced from 24 percentage points to approximately 9 percentage points. The Pioneer Status still provides value — but not as much as the group had originally modelled. A re-evaluation with a qualified tax adviser is warranted before the group applies for any further incentive extensions.

Common Mistakes Foreign MNE Groups Make — and How to Avoid Them

Mistake 1: Assuming the GMT Does Not Apply Because You Are "Below the Threshold"

The EUR 750 million threshold is tested on a four-year lookback basis. A group that recently exceeded EUR 750 million in two of the last four years is already in scope — even if current-year revenue has dipped below that level. Groups that are close to the threshold should model their status carefully each year rather than making a once-off assessment.

Mistake 2: Confusing Group-Level Scope with Entity-Level Tax

Being "in scope" of the GMT does not automatically mean your Malaysian entity will owe DTT. You still need to calculate the jurisdictional ETR for Malaysia. If your Malaysian company pays corporate tax at the standard 24% rate (no special incentives), its jurisdictional ETR is already above 15% — no top-up tax is payable. The issue arises specifically when incentives or losses reduce the effective rate below 15%.

Mistake 3: Ignoring the Impact on Pending MIDA Incentive Applications

Foreign companies that are currently applying — or planning to apply — for Pioneer Status or Investment Tax Allowance under MIDA's New Incentive Framework must factor in the GMT. An incentive that reduces the ETR below 15% may now trigger a DTT, reducing its net benefit. The Malaysian government has signalled it is exploring non-tax incentives and investment tax credits to substitute for or complement traditional income-based incentives in the GMT era. Factor this into your incentive strategy before committing to a structure.

Mistake 4: Failing to Assess CbCR Quality Before Using the Safe Harbour

The Transitional CbCR Safe Harbour is valuable, but it is only available if your CbCR meets the "Qualified CbC Report" standard. If your group's CbCR has been prepared loosely — for example, using management accounts rather than audited financial statements, or with inconsistent jurisdictional allocations — it may not qualify. Audit your CbCR quality now, ahead of the first filing deadline.

Mistake 5: Missing the 18-Month Filing Window

LHDN imposes penalties for non-compliance with the Top-up Tax Return filing obligations. For most groups, the first deadline is 30 June 2027 — but given the complexity of GloBE computations, preparation should begin immediately. The 18-month window sounds generous, but assembling the global data, computing jurisdictional ETRs for every jurisdiction in the group, and running the full GloBE model can take six to twelve months for large groups. The safe harbour elections and filing entity designations must also be submitted in writing within 15 months (i.e., by 31 March 2027 for a December year-end group).

What Malaysia Is Doing to Stay Competitive Under GMT

The Malaysian government is acutely aware that GMT changes the calculus for foreign investors. Several responses have been initiated:

• New Investment Incentive Framework (NIF): MIDA's new framework, being progressively implemented from 2026, shifts away from purely income-based incentives (which are neutralised by GMT top-up taxes) toward outcome-based and activity-based incentives, non-tax grants, and investment tax credits that are not affected by the ETR calculation.
• Non-tax incentives: The government has signalled readiness to offer cash grants, infrastructure support, and supply-chain integration support for qualifying investments — benefits that provide real economic value regardless of GMT status.
• Qualified Refundable Tax Credits (QRTCs): The OECD GloBE framework treats refundable tax credits more favourably than non-refundable credits. Malaysia is exploring QRTC structures that can be credited within the GloBE computation, reducing top-up tax exposure while maintaining incentive value.
• Accelerated capital allowances: As gazetted in 2026, accelerated capital allowances for ICT and e-Invoice infrastructure provide genuine deductions that raise the effective ETR, reducing DTT exposure while supporting digitalisation goals.

For foreign investors, the message is clear: Malaysia remains committed to attracting foreign direct investment, but the vehicle for delivering that commitment is evolving. The era of zero-percent corporate tax incentives as a standalone selling point is ending. Instead, the value proposition is shifting toward broader cost competitiveness, skilled talent, infrastructure, supply-chain depth, and targeted grants.

Step-by-Step Action Plan for Foreign MNE Groups with Malaysian Operations

1. Assess scope (now): Check your group's consolidated revenue against the EUR 750 million threshold for each of the past four financial years. If in scope, proceed to the next steps.
2. Map Malaysian CEs (now): Identify all Malaysian entities that are Constituent Entities of your MNE group — subsidiaries, branches, permanent establishments, joint ventures.
3. Compute preliminary jurisdictional ETR (Q3 2026): Estimate the Malaysian jurisdictional ETR using available accounting data. Identify whether incentives (Pioneer Status, ITA) reduce the ETR below 15%.
4. Test safe harbour eligibility (Q3 2026): Use your CbCR data to run the three simplified tests for the Transitional CbCR Safe Harbour. If your Malaysian ETR is near 15%, the safe harbour may pass. If clearly below (e.g., Pioneer Status with 0%), full GloBE computation will be required.
5. Assess SBIE carve-out (Q3 2026): Calculate eligible payroll and tangible asset values in Malaysia. Apply the transitional SBIE percentages to quantify the carve-out. This reduces the GloBE income subject to top-up tax.
6. Review MIDA incentive strategy (Q4 2026): For any pending or planned incentive applications, model the post-GMT net benefit. Engage with MIDA on NIF and non-tax incentive options.
7. Designate filing entity (by 31 March 2027 for December year-end groups): Decide whether the Malaysian CE, the UPE, or a designated filer will submit the GIR and TTR. Notify LHDN in writing.
8. Prepare and file GIR and TTR (by 30 June 2027): Complete the full GloBE computation (or safe harbour analysis), prepare the GloBE Information Return, and file the Top-up Tax Return with any tax payable.
9. Engage a qualified Malaysian tax adviser: Given the complexity of GloBE calculations and the interaction with local incentives, engaging a registered tax agent with specific GMT expertise is strongly recommended. Our Corporate Tax Filing service connects you with experienced professionals who handle LHDN compliance for foreign-owned Sdn Bhds, including GMT-related filings.

How ONEKEY BIZ Can Help

Navigating the Global Minimum Tax is a multi-disciplinary challenge that spans corporate structure, accounting systems, incentive strategy, and LHDN compliance. ONEKEY BIZ works with foreign companies — including groups from China, Taiwan, Hong Kong and Singapore — to ensure their Malaysian entities meet all tax obligations accurately and on time.

Our Corporate Tax Filing service covers the full annual LHDN compliance cycle for your Malaysian Sdn Bhd: preparation of financial statements, Form C filing, estimated chargeable income (ECI) submissions, and — critically for large MNE groups — coordination with your group's GMT advisers to ensure the Malaysian piece of the GloBE puzzle is correctly handled. We also help newly incorporated entities register with LHDN, obtain tax reference numbers, and set up the correct accounting systems from day one.

If your group has existing MIDA incentives that may be affected by GMT, or if you are planning a new Malaysian investment and want to model the post-GMT incentive economics before committing, speak to our consultants. We can connect you with tax specialists experienced in both MIDA applications and GloBE compliance — the two disciplines that must now be considered together.

Ready to understand your Malaysian GMT exposure? Contact our team today for a confidential, no-obligation assessment.

This article is general information only, not legal, tax or immigration advice. Policies, thresholds and official fees are set by the relevant Malaysian authorities and may change. Talk to our consultants about your specific situation.