Malaysia operates a territorial tax system, meaning income derived from within the country is subject to taxation. For foreigners living or working in Malaysia, understanding taxable income is crucial to ensure compliance and avoid unnecessary liabilities.
TAX RESIDENCY AND APPLICABLE TAX RATES
1. A foreigner’s tax liability in Malaysia depends largely on their residency status. Under Malaysian law, an individual is considered a tax resident if they spend 183 days or more in the country in a calendar year. Residency status determines the tax rates applicable:
2. Non-resident individuals – If a foreigner stays in Malaysia for less than 182 days in a year, they are considered a non-resident and taxed at a flat rate of 30 percent on income earned in Malaysia.
3. Resident individuals – Foreigners who stay in Malaysia for 182 days or more in a calendar year are considered residents and are subject to progressive tax rates ranging from 0 to 30 percent, depending on their income level.
4. This distinction is critical, as tax residents benefit from lower tax rates, exemptions, and deductions, while non-residents face higher tax rates with limited relief options.
WHAT CONSTITUTES TAXABLE INCOME IN MALAYSIA?
1. Taxable income in Malaysia for foreigners includes various types of income earned or received within the country. Understanding what qualifies as taxable income helps expatriates plan their finances efficiently. Some key taxable income sources include:
2. Employment income – Salaries, wages, bonuses, and other employment-related earnings provided by an employer in Malaysia are fully taxable.
3. Business and self-employment income – Profits from business activities, freelance work, or self-employment conducted in Malaysia are subject to taxation.
4. Dividends, interest, and discounts – Earnings from investments such as stocks, bonds, and other financial instruments in Malaysia may be taxable.
5. Rental income – Any rental income earned from properties located in Malaysia must be declared and taxed at progressive rates.
6. Royalties and premiums – Payments received for the use of intellectual property or other rights are subject to taxation.
7. Pensions and annuities – Regular payments received after retirement may be taxable, depending on their source.
8. Perquisites – Benefits provided by an employer that can be converted into cash, such as company credit cards, loans, or sponsored tuition fees, are considered taxable income.
9. Foreign-sourced income – Malaysia currently exempts foreign-sourced income for tax residents until 2026, but certain conditions apply. Non-residents, however, may be taxed on foreign income depending on remittance rules.
TAXATION OF EMPLOYMENT INCOME FOR FOREIGNERS
1. For foreigners working in Malaysia, taxation applies not just to salary but also to various employment-related benefits. The following elements must be considered when calculating taxable employment income:
2. Basic salary and bonuses – Fully taxable under Malaysian tax laws.
3. Benefits-in-kind (BIK) – Employer-provided housing, cars, and other perks may be taxable depending on their value.
4. Tax-exempt allowances – Some allowances, such as relocation costs or certain expatriate perks, may be exempt if they meet specific conditions.
SPECIAL TAX CONSIDERATIONS FOR EXPATS
1. Expatriates working or investing in Malaysia should take note of special tax considerations that may affect their liability:
2. Malaysia My Second Home (MM2H) Program – Participants of the MM2H program enjoy tax exemptions on foreign income, but they must comply with investment and residency conditions.
3. Double taxation avoidance agreements – Malaysia has treaties with multiple countries to prevent double taxation. Foreigners should check whether their home country has a DTAA with Malaysia.
4. Tax reliefs for foreigners – While fewer than those available to locals, some tax deductions may still apply to foreign residents.
5. Reporting foreign assets – Those with significant foreign income or assets should be aware of compliance requirements when remitting funds to Malaysia.
BUSINESS AND SELF-EMPLOYMENT TAXATION IN MALAYSIA
1. Foreigners operating businesses or working as freelancers in Malaysia must comply with business tax regulations. Important considerations include:
2. Definition of business income – Revenue from consultancy, trade, or services performed in Malaysia is fully taxable.
3. Allowable business deductions – Business owners can deduct operational expenses such as office rent, staff salaries, and marketing costs to reduce taxable income.
4. Withholding tax for foreign contractors – Foreign professionals offering services in Malaysia may be subject to withholding tax.
5. Labuan tax regime – Malaysia’s Labuan jurisdiction offers special tax incentives for businesses in financial services and trading sectors, which some foreigners may find beneficial. Companies incorporated in Labuan can benefit from a low corporate tax rate of 3 percent on audited net profits or opt for a fixed tax of 20,000 ringgit (US$4,476) per year, making it an attractive choice for offshore businesses.
INVESTMENT INCOME AND TAX IMPLICATIONS
1. Foreign investors earning income from Malaysian sources should be aware of how different investment returns are taxed:
2. Bank interest – Interest from Malaysian banks is generally tax-exempt for individuals.
3. Dividend income – Malaysia has a single-tier tax system where dividends are not taxed at the individual level.
4. Capital gains on property and investments – Real Property Gains Tax (RPGT) applies to foreigners selling Malaysian real estate, with rates depending on the holding period.
5. Exemptions on certain investments – Some investment incentives, such as government bonds, offer tax exemptions.
Source:
https://www.aseanbriefing.com/news/what-foreigners-need-to-know-about-taxable-income-in-malaysia/
