Business may be conducted by inviting customers, compensating workers or marketing goods. These are activities that are referred to by the tax law as entertainment expenses. However, the major question that most business owners pose is: are entertainment expenses deductible?
The solution is not necessarily clear. There are expenses on entertainment that can be deducted 100 percent, 50 percent and there are those that cannot be deducted at all. The differences are understood to save you the maximum amount of tax and prevent disallowances that would not be necessary in an audit.
This article describes the regulations of the Income Tax Act (ITA) Malaysia, with examples, the allowable categories, and the most common errors made by businesses.
Section 18 ITA provides that entertainment expenses are included in:
The definition has been extended to include any type of entertainment incurred, effective from year of assessment (YA) 2014 which is done with the purpose of promoting business.
Examples:
It is deductible depending on the type of expense. In general, entertainment expenses can be divided into the following three categories:
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There are some classes of entertainment, which are absolutely deductible (refer to proviso (i) to (viii) under paragraph 39(1)(l) of ITA) as it is directly related to the business activity or employee well being. The categories of entertainment expenses as follow:
(i) Entertainment to employee
(ii) Entertainment to clients /customers provided in ordinary causes of business
ex : meals provided by airlines for customer
(iì) Promotional gift at fair / exhibitions held outside Malaysia → promotion export to Malaysia
(iv) Promotional samples of products of e business
(v) Entertainment for cultural / sporting events open to public → wholly to promote business
ex: cost of passage, refreshment , sports attire strictly for arts + sport (national parade = not include)
(vi) Promotional gifts within Malaysia consist of advertisements /logos of e business .
Notes : expensive gift to selected person or person do not have business relationship → not include
(vii) Entertainment wholly to sales
ex: Expenses of refreshment on launching a product.
(viii. ) Benefit / amenity to employee :
Leave passage to facilitate yearly events within Malaysia.
(involved employee, employer and immediate family member)
ex * Family day provide by company → Rm 40k = cost travel(viii)
→ Rm 30k = Refreshment(i)
Proviso (vii) to paragraph 39 (1)(l) of ITA=
Example :
Certain costs can be deducted partially. The ITA permits one to deduct 50% on the entertainment related to business but not included in the categories of full deductions. Examples include:
Although these are required to sustain business relationships, only half of the cost is deductible.
Not every type of entertainment is deductions. Expenses cannot be deductible when they are not directly connected with production of business income. Examples of non-allowable ones would include:
The principle is straightforward: this is not allowed to take place when the cost is not entirely and solely incurred in the generation of business income.
Tax risks that may arise due to the misclassification of entertainment expenses include:
To prevent this the businesses should:
For more detailed official guidance, you may refer to the PR3/2008 document from LHDN: PR3/2008 – Income Tax Public Ruling (HASiL Malaysia)
Yes. Entertainment for employees—such as annual dinners, family days, or local trips—is 100% deductible. For overseas trips, only food and accommodation are deductible; airfare is disallowed.
Yes. Promotional gifts are fully deductible if they bear the company logo or branding. If the gift does not include branding, it usually falls under the 50% deduction rule.
No. Entertainment to potential customers is not deductible, because it is not considered wholly and exclusively incurred in the production of gross income.
Yes, but only 50% deductible. Unless they qualify under promotional gift rules (e.g. bearing the company logo), they are treated as partial deduction items.
They can be, but only when redeemed under a promotional or customer reward scheme. Such expenses are 100% deductible when directly tied to business promotion.
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