Service Tax on Rental or Leasing Services: Everything You Need to Know
The Royal Malaysian Customs Department (RMCD) has published the Guide on Rental or Leasing Services (as at 9 June 2025) to help businesses understand their Service Tax obligations arising from the Budget 2025 announcement. Effective 1 July 2025, rental and leasing services are brought within the scope of Service Tax 2018, classified under Group K of the First Schedule, Service Tax Regulations (STR) 2018, at a rate of 8%.
This article summarises the key provisions from that guide to help your business determine whether it is affected and what steps need to be taken.
1. Background and Effective Date
Rental and leasing services were not previously subject to service tax. Following the Budget 2025 announcement on 18 October 2024, the Ministry of Finance broadened the scope of service tax to include this category of services as part of its initiative to expand the nation's tax base.
Effective Date: 1 July 2025
Tax Rate: 8%
Classification: Group K, First Schedule, STR 2018
2. What Is Rental or Leasing?
For service tax purposes, rental or leasing is defined as granting the right or permission to use a tangible asset from one party to another for a specified period, whether the agreement is in writing or made verbally.
Importantly, only operating leases are subject to service tax. A finance lease — where ownership of the asset is transferred to the lessee at the end of the lease period — is not subject to service tax.
Operating Lease vs Finance Lease
The key distinction:
Operating lease: ownership remains with the lessor; asset is returned at end of lease period — subject to service tax.
Finance lease: ownership transfers to the lessee at end of lease period — NOT subject to service tax.
3. Registration Threshold
Any person providing rental or leasing services (excluding Federal Government, State Governments, and Local Authorities) must register under the Service Tax Act 2018 if the total value of taxable services exceeds RM500,000 within a 12-month period.
Threshold: RM500,000 within 12 months
To determine whether the threshold is reached, a business must calculate the total value of taxable services for the current month and the next eleven months. If the projected total exceeds RM500,000, a registration application must be submitted by the last day of the following month. Registration takes effect the month after.
Example: If the threshold is reached in August 2025, registration must be submitted during September 2025. Service tax obligation commences from 1 October 2025.
4. Taxable Rental and Leasing Services
All types of rental and leasing services involving tangible assets located in Malaysia are generally taxable, including:
Commercial property rentals (e.g. office space, retail lots, warehouses, SOFO units)
Equipment and machinery leasing (e.g. printers, laptops, drilling machines, harvesters)
Vehicle rental services — hire and drive cars, charter buses, excursion buses
Rental of animals or plants (e.g. horses for performance events)
Rental of vessels or moveable assets located in Malaysia (even if used internationally)
Rental packages that include maintenance, repair, or other ancillary services
Imported rental services — where a Malaysian company rents an asset (located in Malaysia) from a foreign provider
Note: Hire car services, which were previously taxable under Group I, will cease to be a separate taxable service from 1 July 2025 and are re-categorised under Group K.
5. Non-Taxable Rental and Leasing Services
The following categories are explicitly excluded from the scope of service tax:
Housing accommodations — includes terrace houses, bungalows, condominiums, flats, serviced apartments, SOHOs, serviced condominiums, serviced suites, and residential suites (note: a SOHO rented for residential purposes is exempt; rented for business/office use is taxable)
Reading materials — books, comics, magazines, and similar materials
Assets located outside Malaysia — rental of tangible assets physically situated outside Malaysia
Finance leases — any lease where ownership transfers to the lessee at end of term
Transactions entirely within or between Special Areas or Designated Areas — e.g. within Langkawi, within Labuan, or between two Designated Areas
6. B2B Exemption for Subletting and Subleasing
A Business-to-Business (B2B) exemption is available where a registered person rents property for the purpose of subletting or subleasing it to others. All of the following conditions must be met:
Both the service provider and the service recipient are registered persons under Group K
The taxable service being exempted is the same type of service provided by the registered person under Group K
The rented asset is intended for sublet or sublease, and not for personal consumption
Important: If the rented premises are not sublet during any taxable period, the tenant (as the person exempted from payment) must self-account for service tax for that period. Service tax is payable on the full value of the rental for the period during which no sublease is in place.
For partial subletting, the exemption applies only to the portion intended for subleasing. The portion retained for own use remains taxable.
7. Other Exemptions
Small and Micro Enterprises (SMEs)
Tenants who qualify as micro or small enterprises with annual revenue of less than RM500,000 are exempted from the payment of service tax, pursuant to subsection 34(3) of the Service Tax Act 2018.
Non-Reviewable Contracts
Rental or leasing contracts that do not contain a review clause are granted a one-year exemption from service tax from the effective date of 1 July 2025, subject to prescribed conditions.
Government Entities
Rental or leasing services provided to Federal Government, State Governments, and Local Authorities are not subject to service tax.
8. Accounting for Service Tax
Registered persons must issue invoices and charge service tax on the value of taxable services provided. Service tax is accounted for based on the earlier of:
The date payment is received for the taxable service rendered
The day after 12 months from the date the taxable service was provided (if payment has not yet been received)
For imported taxable services: the date payment is made or the date the invoice is received, whichever is earlier
9. Transitional Rules for Existing Contracts
For rental or leasing agreements that span the 1 July 2025 effective date:
Service tax applies only to the proportion of the service attributable to the period from 1 July 2025 onwards
Payments received before 1 July 2025 for services to be rendered on or after 1 July 2025 are not subject to service tax
Existing agreements that do not contain a review clause benefit from a one-year exemption
10. Responsibilities of Registered Persons
Once registered, businesses providing rental or leasing services must:
Charge and collect service tax on all taxable services provided
Issue proper tax invoices and receipts for all transactions
Submit SST-02 returns electronically and pay service tax by the due date
Maintain proper records of all service tax transactions for a minimum of 7 years
Key Takeaways
Service tax on rental and leasing services is a significant development that will affect a broad range of businesses — from commercial property landlords to equipment leasing companies and vehicle rental operators. The critical steps are:
Review your rental income to assess whether the RM500,000 threshold will be reached
Determine whether your existing contracts contain a review clause
Register with the RMCD under Group K by the required deadline
Update your invoicing systems to reflect the 8% service tax charge
Assess whether the B2B subletting exemption or SME exemption applies to your circumstances
This article is prepared based on the RMCD Guide on Rental or Leasing Services (as at 9 June 2025) for general educational purposes. It does not constitute professional tax advice. Readers are encouraged to refer to the official guide at mysst.customs.gov.my or consult a qualified tax professional for advice specific to their circumstances.
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