ENTERTAINMENT EXPENSES IN MALAYSIA

In Malaysia, the tax treatment of business entertainment expenses is strictly regulated under the Income Tax Act 1967 (ITA). Businesses must correctly classify and document these expenses, as deductibility can be either 100%, 50%, or completely non-deductible, depending on the nature of the expense and the recipient.

The primary governing principle is that an expense must be wholly and exclusively incurred in the production of gross income (Section 33(1) of the ITA). Even if this test is met, entertainment expenses are generally restricted, with the exceptions explicitly outlined in Section 39(1)(l) of the ITA.

Entertainment expenses are defined under Section 18 of the Income Tax Act 1967 as:

Any outgoings incurred in connection with entertainment, whether for clients, customers, suppliers, or employees.

LHDN divides entertainment into 3 key categories:

1. Fully deductible (100%)
2. Partially deductible (50%)
3. Non-deductible

Below is the full breakdown:

🟩 1. 100% TAX-DEDUCTIBLE ENTERTAINMENT

These expenses are fully deductible because they directly support business operations or employee welfare.

A. Entertainment for Employees

Allowed 100% because it relates to staff welfare and productivity.

Examples:

• Annual dinner / festival celebrations
• Staff recognition events
• Farewell parties
• Internal team-building activities
• In-office refreshments (coffee, tea, snacks)

Important: It must be for staff only. If clients attend, the expense becomes 50% deductible (partly entertainment).

B. Promotional / Publicity Entertainment for the Public

These are 100% deductible because they directly promote sales.

Examples:

• Free product samples
• Product launch events open to public
• Roadshows with free food/drinks
• “Buy one free one” promotions
• Corporate open houses for the public
• Free gifts with company logo (branding & marketing)

C. Free Services/Food/Drinks Provided in the Normal Course of Business

If entertainment is part of business activity, it is fully deductible.

Examples:

• A hotel offering complimentary drinks to guests
• A café offering free cookies to customers
• A showroom offering refreshments to walk-in customers

🟧 2. 50% TAX-DEDUCTIBLE ENTERTAINMENT

This is the most common category, and applies whenever the entertainment is for clients, suppliers, potential customers, or business associates.

Examples of 50% deductible expenses:

• Client meals in restaurants or hotels
• Business entertainment at golf clubs
• Gifts to clients (not promotional items)
• Company paying for client’s event tickets (concerts, sports events, etc.)
• Refreshments during business discussions with external parties
• Meeting clients at cafés

General Rule:

If the entertainment is intended to maintain relationships with business partners, it is 50% deductible unless it qualifies for 100% treatment.

🟥 3. NON-DEDUCTIBLE ENTERTAINMENT

These expenses are NOT allowed as deductions because they are personal, unrelated to business, or excessive.

Examples:

• Private family events
• Personal celebrations (birthdays, weddings)
• Lavish entertainment without business purpose
• Expenses with no receipts or documentation
• Alcohol for internal staff (unless business-related occasions)

⌂ Conclusion: Entertainment Expenses in Malaysia

The tax treatment of entertainment expenses in Malaysia is highly specific and restrictive, moving away from a general full deduction. Businesses must apply a three-step test to determine deductibility:

√ Is the expense considered 'Entertainment'? (Under Section 18, which is a broad definition and includes promotional expenses.)

√ Is it 'Wholly and Exclusively' incurred for income production? (Under Section 33(1).)

√ If YES to both, which category does it fall into?

🧾 CHECKLIST: IS AN EXPENSE ENTERTAINMENT & HOW MUCH IS DEDUCTIBLE?

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