Malaysia SST Expansion 2025–2026: The Complete RMCD Compliance Guide for Foreign Companies — New Sectors, Registration Thresholds, B2B Exemptions and 2026 Enforcement

1. Background: Why Malaysia Expanded SST in 2025

Malaysia replaced its Goods and Services Tax (GST) with the narrower Sales and Service Tax (SST) system in September 2018. While SST generated less revenue and covered fewer transactions, it was politically popular because of its lower compliance burden on consumers. By 2024, however, the government under Prime Minister Anwar Ibrahim was under fiscal pressure and began broadening the base.

The first major move came in March 2024, when RMCD raised the standard service tax rate from 6% to 8% for most taxable services. Then, in Budget 2025 (tabled October 2024), the government announced a second wave: a major expansion of Service Tax scope effective from what was initially 1 May 2025. After the relevant legislation was gazetted on 9 June 2025, the official implementation date was set as 1 July 2025.

This expansion was not a minor tweak. It pulled in entire sectors that had never before been inside the Service Tax framework, fundamentally changing the cost structure for businesses operating in Malaysia — including the many foreign-owned Sdn Bhd companies set up by investors from China, Taiwan, Hong Kong and Singapore. Understanding these changes is therefore essential before you sign any lease, hire a contractor, or launch a service business in Malaysia.

2. The Five New Taxable Sectors: What Changed on 1 July 2025

The 1 July 2025 expansion widened Service Tax to cover five major new service categories, each with its own rate, registration threshold, and set of exemptions. Below is a detailed breakdown.

Group K — Rental and Leasing Services

Prior to 1 July 2025, renting out commercial premises, warehouses, offices, or industrial equipment was not subject to Service Tax. From that date, rental and leasing of movable and immovable property (for non-residential use) became taxable at 8%, later revised to 6% for industrial use effective 1 January 2026 (announced by the government on 5 January 2026). The registration threshold is RM 1,000,000 per year — higher than the RM 500,000 that applies to most other service categories.

Crucially, residential property rentals remain exempt. This means if your Malaysian subsidiary rents out a condominium or landed house, no service tax applies. But if your company leases office space, a factory floor, or industrial equipment to another business, and your annual rental income crosses RM 1 million, you are now a Service Tax registered landlord.

The RMCD released a Rental & Leasing Services Guide (2nd Edition) on 14 May 2026, replacing the original 1st Edition. This revised guide clarified the SME Rental Service Tax Exemption Framework: eligible small tenants can register through the MyPMK System to obtain an exemption from paying rental service tax, reducing costs for qualifying MSME tenants.

Group L — Construction Works

Construction was entirely outside the SST regime before 1 July 2025. The new rules, gazetted under P.U.(A) 172/2025, impose a 6% Service Tax on construction, renovation, installation, repair, alteration, dismantling, and facility maintenance carried out on commercial and non-residential buildings. Residential construction remains exempt.

The registration threshold for construction service providers is RM 1,500,000 per year — the highest of all new categories. Government-contracted projects (federal, state, local authorities) must be included when calculating the threshold, but residential buildings and their associated public facilities are fully excluded from both the tax and the threshold calculation.

For mixed-development projects (residential + commercial), the rules as currently written apply Service Tax to the entire project value rather than only the commercial portion — a point that has attracted significant industry pushback and may be revised in future budgets.

Group H — Financial Services

From 1 July 2025, fee- and commission-based financial services provided by both regulated and unregulated financial service providers attract an 8% Service Tax. This includes banking transaction fees, brokerage commissions, fund management charges, insurance premium loads (where applicable), and similar fee-for-service charges. The registration threshold is RM 1,000,000 per year.

Important exemptions remain: pure interest payments, dividend distributions, and government-run financial services are not taxable. Credit and charge cards attract a fixed RM 25 per year levy per card.

Group M — Private Healthcare for Non-Citizens

Private hospitals, traditional medicine practitioners, and allied health professionals providing services to non-Malaysian patients must now charge a 6% Service Tax. Services to Malaysian citizens remain exempt. The registration threshold is RM 1,500,000 per year.

For foreign executives and their families in Malaysia on Employment Passes or Dependent Passes — a large and growing population — this means their private medical bills at major hospitals now carry a 6% surcharge if the provider is registered. For foreign companies managing HR costs, this is a real budget line item.

Group N — Private Education for International Students

Private education institutions are now subject to Service Tax when the tuition fee exceeds RM 60,000 per student per year. Below that threshold, education is not taxable. This effectively targets only premium international schools and private universities with high per-student fees.

3. Sales Tax on Imported Goods: The Parallel Obligation

While the Service Tax expansion attracts the most attention, foreign companies that import physical goods into Malaysia also face a layered tax structure that has seen several recent adjustments. Understanding this parallel system is critical if your Malaysian operation sources materials, components, or finished goods from overseas.

Malaysia's import tax structure has three components that apply at the border and are assessed together on your K1 import declaration:

• Customs Duty (Import Duty): Calculated on the CIF (Cost, Insurance, Freight) value of goods. Ad valorem rates range from 0% to 60%, depending on the HS Code classification. Malaysia follows the ASEAN Harmonised Tariff Nomenclature (AHTN), the regional version of the Harmonised System (HS) code.
• Sales Tax: The standard rate is 10% for most taxable imported goods; 5% for selected items including construction materials, some foodstuffs and petroleum oils. Essential goods (rice, chicken, basic medicines, local fish) remain exempt. From 1 July 2025, certain fruits previously taxed at 5% (apples, oranges, mandarin oranges, and dates) were moved to the exempt list following public feedback.
• Excise Duty: Applies to a narrow list of goods including alcohol, tobacco, motor vehicles and motorcycles. Rates are specific (e.g., RM 0.40 per cigarette stick) or ad valorem (up to 105% for certain motor vehicles). Budget 2026 proposed incremental increases in excise duties on tobacco products and alcoholic beverages.

For online imports specifically, a 10% Sales Tax on Low-Value Goods (LVG) applies to goods sold online with a CIF value not exceeding RM 500, delivered from overseas to customers in Malaysia — a rule effective since 1 January 2024. This directly impacts foreign e-commerce businesses dropshipping or selling into Malaysia.

4. B2B Exemptions and Non-Reviewable Contracts: The Relief Provisions That Matter

Malaysia's Service Tax is a single-stage tax — meaning it is intended to be charged only once, at the point of final consumption, not at every step in a supply chain. To prevent cascading tax in B2B transactions, RMCD provides the Business-to-Business (B2B) exemption: a registered taxable person acquiring the same type of taxable service that it provides is exempt from paying Service Tax on that acquisition.

Following industry pressure after the 1 July 2025 expansion, RMCD issued revised Service Tax Policies in October 2025 that expanded these exemptions:

• Construction: B2B exemption was granted retrospectively for the period 1 July – 31 August 2025 for newly registered contractors. Consultancy services under an integrated single design-and-build contract are now B2B-exempt when provided by the main contractor to the developer. Refund claims for Service Tax paid in July and August 2025 under the B2B rules were allowed, subject to submission by 30 November 2025.
• Financial Services: The B2B exemption scope was expanded to include reinsurance services related to non-taxable insurance lines (medical, life, and family takaful) — effective 17 October 2025 — preventing "hidden" Service Tax from being embedded in insurance premiums that are themselves exempt.
• Rental & Leasing: Intragroup relief (relief for transactions within a group of companies) was clarified to apply to imported rental and leasing services. For foreign multinationals that charge management fees or equipment leasing fees between related entities, this is a significant practical relief.

Non-Reviewable Contracts (NRC): Businesses with service contracts signed before 1 July 2025 that do not contain any clause allowing the price to be reviewed or revised could qualify for a one-year Service Tax exemption (1 July 2025 to 30 June 2026). On 5 January 2026, the government further extended the NRC exemption for construction contracts by one additional year, now valid until 30 June 2027. However, RMCD updated its guidance on 14 May 2026 to introduce four specific conditions that must be met for a contract to qualify as non-reviewable — conditions that were not expressly stated in earlier guidance. If your company has relied on the NRC exemption since July 2025, you should urgently review your contracts against the updated criteria.

5. Step-by-Step: How to Register for SST in Malaysia

All SST registration and return filing is managed through the official MySST portal at mysst.customs.gov.my, operated by RMCD. Registration for Sales Tax and Service Tax are separate processes, each with its own submission form. Here is the practical process for a foreign-owned company:

1. Determine your taxable threshold: Track your annual taxable turnover against the applicable Service Tax category threshold (RM 500,000, RM 1,000,000 or RM 1,500,000 depending on your service type). Sales Tax registration is required once manufacturing or import turnover exceeds RM 500,000.
2. Register on the MySST portal: Navigate to mysst.customs.gov.my and select the relevant Schedule (A for Sales Tax, B for Service Tax, C3/C4 for traders). Complete the registration form with your company's SSM registration number, business activity description, applicable taxable service category codes, and estimated annual taxable turnover. Registration must be completed within 30 days of crossing the applicable threshold.
3. Obtain your SST registration number: Upon submission, the system issues an approval letter and assigns your registration number immediately. Your effective registration date will be stated in the approval letter.
4. Issue compliant SST invoices: Every invoice for a taxable supply must state the SST rate, the SST amount, your SST registration number, and the client's details. For B2B exempt transactions, the invoice must indicate the client's SST registration number and the exempted value.
5. File bi-monthly SST-02 returns: Returns are submitted every two months through the MySST portal, due by the last day of the month following the end of each two-month taxable period. Late filing carries a penalty surcharge of 10–15% on the outstanding tax.
6. Integrate with e-Invoicing (MyInvois) if above RM 1 million: From 1 January 2026, companies with annual turnover between RM 1 million and RM 5 million must validate all invoices — including SST invoices — through LHDN's MyInvois system before issuing them. Unvalidated invoices are not recognised for tax purposes.

6. Key Figures and Deadlines at a Glance

7. Worked Example: A Chinese Manufacturing Company Sets Up in Malaysia

Let us walk through a realistic scenario for a foreign investor — a Chinese electronics manufacturer (we'll call it Alpha Electronics) that establishes a 100%-foreign-owned Sdn Bhd in Selangor to assemble and distribute products in Southeast Asia.

Sales Tax on Imported Components

Alpha Electronics imports circuit boards (HS Code 8534.00.00) from its parent factory in Shenzhen. Under the Malaysia Customs Duties Order, raw electronic components often attract 0% import duty under the Customs Duties (Exemption) Order 2017, especially for approved manufacturers — but Alpha must verify its HS Code with RMCD's Technical Services division. The imported boards are then used in manufacturing, and the finished goods (assembled electronics) would be subject to Sales Tax at either 5% or 10% when sold in Malaysia, depending on the product category.

Service Tax on Office and Factory Lease

Alpha rents a RM 120,000/month factory floor (RM 1.44 million per year) from a local industrial park operator. Post-July 2025, that landlord's annual rental income exceeds RM 1,000,000 and they are now a registered Service Tax person under Group K. The landlord must charge Alpha 6% Service Tax on industrial rental (effective January 2026), adding RM 7,200 per month to Alpha's occupancy cost. Alpha cannot claim this back as an input credit — SST has no input credit mechanism unlike GST. This is a genuine cost increase that should be built into initial financial modelling.

Service Tax on Fit-Out and Renovation

Alpha hires a contractor to fit out its factory floor — new electrical wiring, partitions, and equipment installation — for a project value of RM 600,000. The contractor is a registered Service Tax person under Group L (construction). Because the project is for a commercial/industrial building (not residential), the contractor must charge 6% Service Tax, adding RM 36,000 to Alpha's capex. If Alpha's fit-out contract was signed before 1 July 2025 and is a Non-Reviewable Contract that meets RMCD's updated four conditions, it may qualify for the transitional exemption — but Alpha must verify this against the May 2026 guidance.

Service Tax on Management Fees from Parent

Alpha Electronics Sdn Bhd receives management services from its Chinese parent company — IT support, HR advisory, and accounting shared services billed at RM 200,000 per year. These are imported services, and under Malaysia's Service Tax on Imported Taxable Services rules, Alpha Sdn Bhd (as the recipient in Malaysia) is the taxable person and must self-account for Service Tax. At 8%, this adds RM 16,000 annually. However, if Alpha is itself a registered Service Tax person providing the same category of service, the intragroup B2B relief may apply — a point confirmed by RMCD's October 2025 clarification on intragroup relief for rental/leasing, and worth exploring for management services too.

Net Compliance Takeaway

For Alpha Electronics, the 1 July 2025 SST expansion adds recurring costs (rental service tax, management fee self-accounting), one-off capex costs (construction service tax), and new compliance obligations (SST-02 filing, e-invoice validation). These costs are real but manageable with proper planning — the worst outcome is discovering them during a Customs audit two years after the fact, with backdated assessments and penalties on top.

8. Common Mistakes Foreign Companies Make — and How to Avoid Them

Based on the pattern of RMCD compliance activity and the most common pitfalls for foreign-owned businesses, here are the mistakes to avoid:

• Assuming "our sector wasn't taxed before, so we're fine." This was the most dangerous assumption after 1 July 2025. If you rent premises, provide financial services, or do construction work in Malaysia, you need to reassess immediately.
• Missing the 30-day registration window. Once your taxable turnover crosses the applicable threshold, you have 30 days to register. Every month you delay is a month of potential backdated SST assessments plus surcharges.
• Applying the wrong rate. Charging 8% when 6% applies (or vice versa) triggers either undercharging penalties (Customs assesses the difference plus a surcharge) or customer disputes for overcharging. Construction and healthcare are at 6%; most professional services and IT are at 8%.
• Relying on the Non-Reviewable Contract exemption without reading the May 2026 update. RMCD added four specific conditions in May 2026 that were not in earlier guidance. A contract that was assumed to be NRC-exempt may no longer qualify.
• Forgetting imported services. Many foreign companies receive IT services, management consulting, or IP licensing fees from overseas parent companies. These are imported taxable services and the Malaysian entity must self-account for Service Tax — even if no local invoice is issued.
• Not integrating SST with e-invoicing. If your company has annual turnover above RM 1 million, all invoices (including SST invoices) must pass through LHDN's MyInvois system. Unvalidated invoices are not legally recognised for tax purposes.
• Ignoring the SME exemption for tenants. If your Sdn Bhd is a qualifying MSME with annual sales below RM 1.5 million, you may be eligible for an exemption from paying Service Tax on your rental — but you must proactively register through the MyPMK System to activate it.

9. 2026 Enforcement Reality: What RMCD Is Looking For

The grace period that protected late registrants from prosecution ended on 31 December 2025. RMCD has signalled intensified compliance activity, and the department is well-equipped to find unregistered businesses. RMCD cross-references LHDN income-tax returns, bank transaction data, and SSM company filings to identify companies that should have registered but have not. Foreign-owned companies that have recently set up and are growing rapidly are among the higher-risk profiles.

RMCD is also looking for incorrect rate applications (8% vs 6%), failure to self-account for imported taxable services, and non-compliance with the e-invoicing obligation where it applies. Voluntary disclosures to RMCD, where errors are identified before an audit, can significantly mitigate the risk of penalties — and RMCD has historically been receptive to proactive compliance.

To stay ahead of your obligations, our team at ONEKEY BIZ provides a dedicated Corporate Tax Filing service that covers SST registration, rate classification, bi-monthly SST-02 return preparation, and e-invoice compliance setup — all handled by professionals who track RMCD policy updates in real time.

10. What to Do Next: Your Action Checklist

If you are a foreign company operating in Malaysia or planning to enter the market, here is your immediate action list:

1. Map your business activities against the seven Service Tax service groups (including the five new July 2025 categories) to determine which apply.
2. Calculate your last 12 months' taxable turnover for each applicable service category and compare against the relevant threshold (RM 500K / RM 1M / RM 1.5M).
3. Register immediately on mysst.customs.gov.my if you have already crossed the threshold. Do not wait.
4. Review your rental and service contracts — both as landlord/provider and tenant/recipient — for SST exposure, rate accuracy, and NRC exemption eligibility under the updated May 2026 conditions.
5. Audit your imported services — management fees, IT support, IP royalties paid to overseas group companies — and ensure you are self-accounting for Service Tax correctly.
6. Set up bi-monthly SST-02 return filing and align with e-Invoice (MyInvois) requirements if your turnover exceeds RM 1 million.
7. Train your finance team on correct invoice formatting for SST, including B2B exemption notations and the requirement to include the recipient's SST registration number.

The SST landscape in Malaysia will continue evolving. Budget 2027 (expected October 2026) is expected to further refine B2B exemption rules and potentially introduce an Indirect Tax Governance Framework similar to the direct-tax Corporate Governance Framework. Staying ahead requires ongoing monitoring — not a one-time compliance exercise.

If you need hands-on support with SST registration, rate analysis, return filing, or a full indirect tax health-check for your Malaysian entity, contact our team or explore our Corporate Tax Filing service to get started.

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.