While it’s now widely known that most commercial rental and leasing services in Malaysia are subject to an 8% Service Tax (SST), a critical question remains for many businesses: “Are there any exemptions available?” The answer is yes.

A key exemption exists specifically for business-to-business (B2B) transactions under the Service Tax (Person Exempted From Payment of Tax) Order 2018. This exemption is designed to prevent double taxation within the rental industry. This guide will break down the specific conditions required for your business to qualify for this valuable exemption.

Understanding the Foundation: Group K Rental Services

Before diving into the exemption, it’s important to remember what constitutes a taxable rental service. Under the Service Tax Regulations 2018, “Group K” covers the provision of all types of rental or leasing of tangible assets. Any person providing these services with a total annual value exceeding RM1,000,000 must register for and charge SST.

However, certain services are explicitly excluded from this tax, such as:

• The rental of residential properties (including SOHO and serviced apartments).
• The rental of assets located outside Malaysia.
• Finance Leases, which are treated as a financial service and are not subject to this SST.

The Core of the Exemption: Item 8 Explained

The B2B exemption for rental services is outlined in Item 8 of the Service Tax (Person Exempted From Payment of Tax) Order 2018. Its main purpose is to relieve businesses whose core model involves renting a property and then subletting or subleasing it to other businesses.

To qualify for this exemption, four specific conditions MUST be met:

1. You Must Be Registered: The business receiving the service (the tenant) must be a person registered for SST.
2. Your Landlord Must Be Registered: The service must be provided by a person who is also registered for SST under Group K (Rental Services).
3. It Must Be the Same Service: The service you are buying (renting the property) must be the same type of service you are selling (subletting the property).
4. The Purpose Must Be Subletting: The property must be rented for the specific purpose of subletting it to another party, not for your own company’s use or personal consumption.

A Practical Example

Let’s see how this works in the real world:

• Company A is a property management company whose business is to rent out serviced office suites.
• Company B is a building owner who leases an entire floor of their office tower to Company A.
• Both Company A and Company B are registered for SST, and their annual revenues exceed the RM1 million threshold.

Normally, Company B would have to charge Company A 8% SST on the floor’s rental. However, since Company A (the tenant) is renting the floor for the sole purpose of subletting it as smaller office suites (providing the same service), they can apply for the B2B exemption.

The Result: Company B does not charge SST to Company A. Then, when Company A sublets the individual office suites to its own tenants (e.g., startups, freelancers), Company A will charge those tenants the 8% SST. This prevents the tax from being applied twice on the same space.

What This Means for Your Business

If your business model involves renting and subleasing properties or equipment, this exemption is critical.

• Review Your Agreements: Assess your current rental agreements with your landlords to see if you qualify.
• Ensure Proper Application: Applying for this exemption requires correct documentation and communication with both your landlord and the authorities.
• Charge SST Correctly: If you are benefiting from this exemption, remember your obligation to charge SST to your own sub-tenants.

Expert Guidance on SST Exemptions

Navigating specific SST exemptions like this requires professional expertise to ensure full compliance. Misinterpreting the rules can lead to significant financial penalties.

At SMONE, we help businesses understand their specific tax obligations and opportunities. We can review your rental agreements and business model to determine if you qualify for the B2B exemption, ensuring you remain compliant while optimizing your costs.

Contact us today for a detailed consultation.

(Disclaimer)
This article is for general informational purposes and is based on the Service Tax (Person Exempted From Payment of Tax) Order 2018. It does not constitute legal or tax advice. Please consult with a qualified professional for advice tailored to your specific situation.