Is custom software tax deductible in Malaysia?

Which rule covers custom software?

The Income Tax (Capital Allowance) (Development Cost for Customised Computer Software) Rules 2024, P.U.(A) 327/2024, apply from year of assessment 2024. They replace the 2019 rules, which gave 20% initial and 20% annual allowance, with two-fifths (40%) initial and one-fifth (20%) annual allowance.

The rules define the development cost as "any consultation fee, payment for rights of software ownership and incidental fee relating to the development of customised computer software". They apply to a person resident in Malaysia, so sole proprietors and partnerships are covered as well as companies.

The cost is treated as incurred in the year of assessment in which the software "is capable of being used for the purposes of his business". In practice, the claim starts when the system goes live, not when the deposit is paid. A project that starts in one year and launches in the next is claimed from the launch year.

What does LHDN count as a development cost?

LHDN Practice Note 2/2020 explains the same three items. Consultation fees cover building new software and modifying or upgrading existing software. Rights of ownership mean payment for the exclusive right to use the software. Incidental fees are costs that make the software usable and are capitalised, such as a change of requirement.

The Practice Note was written for the 2019 rules and has not been reissued, but the 2024 rules use the same definition, so it remains the clearest official explanation. It is published in Bahasa Malaysia only.

It also says what is left out. Consultancy fees for early procedures or the planning stage, such as a feasibility study or preliminary study, are excluded. If your project starts with a paid discovery or scoping phase, ask your tax agent how that phase should be treated, and ask your supplier to invoice it separately.

• Consultation feeProducing new software or improving existing software (para 4.1).
• Rights of ownershipPayment for the right to use the software exclusively (para 4.2).
• Incidental feeCosts that let the software be used in the business and are capitalised (para 4.3).

Can I expense it instead?

Not on top of the allowance. The 2024 rules do not apply to a cost for which a deduction under section 33 of the Income Tax Act has already been claimed, or for which other listed incentives were given. The same cost cannot be both expensed and claimed as capital allowance.

Section 33 is the general rule for expenses incurred in producing business income. Whether a particular payment is a revenue expense or a capital cost depends on what it buys, which is a judgement your tax agent makes with the facts in front of them. We have not found an LHDN ruling that classifies software subscriptions or SaaS fees, so we do not state one here.

Payments to a developer outside Malaysia raise a separate point: the Practice Note reminds readers that payments to non-residents may be subject to withholding tax under sections 109 and 109B.

Does Budget 2027 change this?

Budget 2027 proposes extending a separate Accelerated Capital Allowance, at 20% initial and 40% annual allowance for companies, which lists consultation, licensing and incidental fees for developing customised computer software. It would cover spending from 1 January 2027 until 31 December 2030, and it is a proposal until enacted.

That measure lets a company claim the cost within two years rather than three. Each set of rules excludes costs that already benefit from another accelerated allowance, so a business uses one or the other. Our article on the Accelerated Capital Allowance sets out both regimes side by side.

What to do before you commission a system: get a written quotation that separates custom development, consultation, licences and hardware; keep the go-live date on record; and send both to your tax agent before the year end in which the system goes live.