“Boss, why do you owe your company RM500,000?”
“I needed money first.
My own company mah.

Later I pay back.”
“Did the company charge you interest?”
“No lah.

Left pocket lend right pocket.
Charge interest for what?”

The tax agent opened the tax computation.
“Boss, the company may have to pay approximately RM7,800 tax.”

The boss immediately sat up.
“Tax on what?

The company never earned anything.”
“Correct.

But LHDN may treat the company as if it earned interest.”

😂😂😂

Under Section 140B of the Income Tax Act 1967,
an interest-free or low-interest advance to certain directors may create deemed interest income for the company.

Even when the company never received one sen of interest.

For example:
Director’s loan: RM500,000.
Illustrative Average Lending Rate: 6.5%.
Deemed interest income: RM32,500.

At a 24% tax rate, the potential tax is RM7,800.
Actual interest received: RM0.
Potential tax payable: RM7,800.

The company never collected the interest.
But the tax may still be real.

😅😅😅

Does this apply to every director?
No.

But if you and your associates own or control at least 20% of the company, please pay attention.

For many Malaysian SMEs, the director is also the major shareholder.

So, Boss.
We are probably talking about you.

This rule generally applies when the advance comes from the company’s internal funds, such as capital, retained earnings or reserves.

If it genuinely comes from external borrowings, the treatment may be different.

But you must be able to prove it.
“I think it came from the bank loan,” is not proof.

One more trap.
LHDN looks at the outstanding balance at the end of each calendar month.
Not only the balance appearing at year-end.

Take RM500,000 in January.
Repay it in December.
The earlier eleven months do not magically disappear.

If your accounts show a large “Amount Due From Director”, ask your accountant or tax agent for three things:

✅ The director’s loan balance for every month.
✅ Evidence showing where the money came from.
✅ The Section 140B deemed interest computation.

Do this before filing the company’s tax return.
Not three years later when LHDN asks:
“Boss, what is this RM500,000?”

Read the full content in our blog
https://www.ktp.com.my/blog/deemed-interest-on-director-loan/24aug2026