Your Director Loan Is a RM 100,000 LHDN Penalty Waiting to Happen

If your Sdn Bhd has ever lent money to a director, charged a management fee to a sister company, or bought goods from a related party — congratulations, you have controlled transactions. And LHDN expects documentation you almost certainly do not have.

Most SME founders hear the words "transfer pricing" and immediately reach for the exit. That’s for the MNCs. That’s for Petronas and the Big Four audit clients. Not us. This article exists to tell you, with some urgency, that this reflex is wrong — and that the Income Tax (Transfer Pricing) Rules 2023, effective from Year of Assessment (YA) 2023, carry a penalty of RM 20,000 to RM 100,000 per YA for directors and founders who are still not paying attention.

The TP Tax Audit Framework 2025 has just signalled active LHDN audit escalation. If your company group has any of the structures described below, May 2026 is the right time to act — not the day LHDN's 14-day notice arrives.

What "Controlled Transactions" Actually Means for Your Company

A controlled transaction is any transaction between persons who have a “control” relationship — defined broadly under s.139 of the Income Tax Act 1967 (ITA 1967). The most common examples in the Malaysian SME context:

• Director loans: You personally lent money to the company (or the company lent money to you). Even if the loan is interest-free, LHDN’s position under s.140A ITA 1967 is that an arm’s length interest rate should apply. No documentation = imputed interest exposure.
• Intercompany management fees: Your HoldCo charges your OpCo a monthly management or service fee. Arm’s length? You need to be able to prove it.
• Group purchases: One entity in your group buys raw materials or inventory and on-sells to a sister company. The transfer price needs to be arm’s length.
• Royalty or IP licensing: One entity holds a trademark or software licence and charges a related entity for use. Same requirement.
• Centralised payroll or treasury: One entity pays salaries on behalf of others, or provides group financing at a subsidised rate.

The common thread: if two entities share a common controlling shareholder or director, transactions between them are controlled transactions under Malaysian TP rules. The fact that you are “just a small SME” is not an exemption.

The Timeline You Need to Know

Every Sdn Bhd that filed Form C for YA 2023 with related-party transactions was already within scope. The Rules did not give you a grace year to get your house in order — they were effective immediately for YA 2023. The LHDN audit machinery is now fully operational.

The Three-Tier CTPD Threshold Map

The TP Rules 2023 set out a tiered documentation obligation. Here is the map in plain language:

The catch with the RM 1 million exemption: For any SME running even a modest HoldCo + OpCo structure with a director loan and a monthly management fee, RM 1 million in annual aggregate controlled transactions is not a generous threshold. A RM 600,000 director loan with RM 50,000/month management fees will breach it in the first year. Add group purchases, and you are in Minimum CTPD territory without realising it.

"Most SME founders I talk to assume the RM 1 million threshold gives them plenty of room. Then we add up the director loan, the management fee, and the intercompany stock purchases — and we’re at RM 1.4 million before we’ve finished the coffee."

The Penalty Stack — and Why It Stings Hardest for SMEs

Here is where the numbers become uncomfortable.

s.113B ITA 1967 imposes a penalty of RM 20,000 to RM 100,000 per YA (or up to 6 months’ imprisonment) for:

• Failure to furnish CTPD within 14 days of LHDN’s written notice;
• CTPD not prepared in accordance with the TP Rules 2023 or MTPG 2024;
• CTPD prepared after the tax return filing deadline (i.e. not contemporaneous).

s.140A(3C) ITA 1967 adds a 5% surcharge on the TP adjustment amount, effective 1 January 2024.

And then there is the underlying tax on the adjustment itself.

Worked example:

LHDN audits YA 2022, 2023, and 2024. Your HoldCo charged your OpCo a management fee that LHDN determines exceeds arm’s length by RM 500,000 in aggregate across three YAs. You have no CTPD.

This is before interest and any other non-compliance penalties. And it is entirely preventable.

The "Contemporaneous" Trap — The Detail That Catches Everyone

Section 113B’s most dangerous prong is the contemporaneity requirement. The CTPD must be completed and dated before the Form C filing deadline.

For a company with a 31 December financial year-end, Form C for YA 2025 is due 31 July 2026 (for e-filing, generally; extended to 31 August 2026 if applicable). That means your CTPD for YA 2025 must be dated before the submission, not after.

What happens in practice: LHDN issues a written notice requesting CTPD. The taxpayer scrambles to prepare it in the 14 days allowed. But the regulation is explicit — CTPD that was not prepared before the Form C deadline is treated as non-contemporaneous, and that is a penalty trigger in itself, regardless of how complete the document turns out to be.

You cannot prepare transfer pricing documentation retroactively and expect it to satisfy the contemporaneous requirement. The preparation must happen in real time, as the transactions occur — or at the very latest, before you sign off on the tax return.

Five Mistakes That Catch Malaysian SMEs Out

1. "Transfer pricing is for MNCs only."

Wrong. The definition of controlled transactions under s.139 ITA 1967 captures any transaction between related parties — including two companies both owned by the same Malaysian individual founder.

2. Interest-free director loans without any documentation.

LHDN’s published position: an interest-free loan between related parties is not arm’s length. A benchmarked interest rate should be applied and documented. If your company lent RM 800,000 to you (or you to the company) interest-free, that is a TP exposure.

3. Intercompany management fees without arm’s length benchmarking.

Charging a RM 20,000/month management fee from HoldCo to OpCo is legitimate — if you can demonstrate it reflects the actual services provided at a price consistent with what an unrelated party would pay. “We’ve always done it this way” is not documentation.

4. Assuming RM 1 million is a comfortable exemption ceiling.

For an SME running multiple entities with director financing, group services, and intercompany trading, RM 1 million in annual aggregate controlled transactions is easily exceeded. Do the inventory before assuming you are exempt.

5. Backdating CTPD when the LHDN notice arrives.

This is the most dangerous mistake. Preparing a CTPD after the audit notice and backdating it to before the Form C deadline is not just ineffective — it is potentially fraudulent. It does not cure the s.113B exposure and adds exposure under other provisions.

The 4-Step CTPD Readiness Sequence (Run This in May)

If you have never prepared CTPD before, here is the sequence to run now — before Form C YA 2025 is due.

Step 1: Inventory all related-party transactions across your company group.

List every transaction between your entities for YA 2025: director loans (principal and any interest charged), management fees, intercompany sales and purchases, service fees, royalties, treasury arrangements.

Step 2: Tally the annual aggregate value.

Add up the total value of all controlled transactions for the year. Compare against the RM 1 million threshold (Minimum CTPD trigger) and the RM 30 million gross income / RM 10 million cross-border thresholds (Full CTPD trigger).

Step 3: Classify your CTPD tier.

Exempt? Minimum CTPD? Full CTPD? Each tier has different mandatory content under Schedules 1–3 of the TP Rules 2023, but both Minimum and Full CTPD must be contemporaneous and ready before Form C.

Step 4: Instruct preparation of contemporaneous documentation NOW.

For YA 2025, Form C is due 31 July / 31 August 2026. That is the hard deadline for your CTPD to be completed and dated. Instructing a registered transfer pricing practitioner in May 2026 gives you a realistic window. Waiting until June or July makes it tight. Waiting for the LHDN notice makes it too late.

SME Structures That Are Almost Always Exposed

If your company group looks like any of the following, you almost certainly have a CTPD obligation:

• Owner-director with a personal loan into (or from) the company. Particularly common in the first three years of incorporation when the founder uses personal funds to capitalise the business.
• HoldCo charging OpCo a management or corporate services fee. This structure is common in Malaysian family-controlled groups of any size.
• Family-owned multi-entity setups — parent company, operating subsidiaries, and sister companies all owned by the same family. Every intercompany transaction is a controlled transaction.
• Group treasury arrangements — one entity acts as the internal bank, providing loans or credit facilities to related entities at subsidised rates.
• Centralised payroll — one entity employs and pays staff on behalf of others in the group, with cost-sharing or recharge arrangements.

None of these structures are unusual. All of them generate controlled transactions. And all of them require CTPD if the aggregate value exceeds RM 1 million per YA.

If You Have Never Prepared CTPD Before — What to Do Now

Voluntary preparation now is materially better than reactive preparation under audit notice.

A well-prepared contemporaneous CTPD for YA 2025 going forward demonstrates good faith and positions your company far more favourably in any LHDN review. It also gives you clarity on whether prior YAs carry exposure — which allows you and your tax agent to make informed decisions about voluntary disclosure or remediation.

If prior YA CTPD was not prepared, the s.113B exposure technically remains in scope. But arriving at an audit with contemporaneous documentation for the current YA, a clear explanation of your controlled transactions, and a structured arm’s length analysis is a fundamentally different audit posture compared to arriving with nothing.

The cost of CTPD preparation — typically a fraction of the potential penalty exposure — is one of the cleaner risk management decisions an SME founder can make in 2026.

What Muchen Can Do

If you would like Muchen to inventory your controlled transactions, classify your CTPD tier, and coordinate preparation with a registered transfer pricing practitioner, book a 15-minute scoping call. We can typically map a Sdn Bhd’s TP exposure in 30 minutes.

Contact us via WhatsApp or through muchen.co.

This article is general information, not legal or tax advice. Confirm with your engaged tax agent or counsel before acting on any of the above. Citations: s.139, s.140A, s.113B Income Tax Act 1967; Income Tax (Transfer Pricing) Rules 2023, P.U.(A) 167/2023; Malaysia Transfer Pricing Guidelines 2024; LHDN Transfer Pricing; EY Tax Alert — Malaysia Introduces New Transfer Pricing Rules 2023; EY Tax Alert — Enhanced Malaysia Transfer Pricing Guidelines 2024 and TP Tax Audit Framework; EY Tax Alert — Malaysia Transfer Pricing Tax Audit Framework 2025; Crowe Malaysia — Key Changes to Transfer Pricing Rules 2023.