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Asia Briefing

Individual Income Tax in Malaysia for Expatriates

Malaysia_1461724297_57235Personal income taxation in Malaysia is laid out in general terms under the Income Tax Act of 1967. While this is the principal piece of legislation covering taxation in Malaysia, further legislation has since been introduced to supplement and clarify existing policy.

Enacted on an annual basis, the Malaysian budget is one of the most readily available tools governing authorities have for altering existing taxation policy—allowing for yearly clarification of the income tax regimes’ application.

The passage of Malaysia’s 2016 budget on 23 October, 2015 has predictably brought along with it changes to taxation policy. Under the theme “Prospering the Rakyat,” the 2016 budget, although expected, has resulted in substantial changes to existing policy. This is partly a result of it being the first budget issued under the 11th Malaysia Plan—which aims to gradually reduce the nation’s fiscal deficit, increase the purchasing power of average citizens, and ease costs of living.

Incomes Subject to Income Tax in Malaysia and Exemptions

Source-Taxation Principle and Its Exceptions in the Case of Malaysia
Malaysia has adopted a territorial principle of taxation, meaning only incomes that have a source in Malaysia are taxable there, regardless of where the expatriate is paid. All types of income are taxable, including gains from employment or business activities, dividends, etc.

Consequently, profits sourced elsewhere are not subject to Malaysia personal income tax. However, this principle of taxation is subject to three main exceptions:

  1. Malaysia has signed numerous double taxation agreements. When addressing instances of double taxation, this wide, bilateral network of tax treaties can be an exception to the territoriality taxation principle. It sometimes allocates the right to other countries to tax domestically earned income of Malaysian tax residents. In these instances, tax residents will be exempted from paying personal income tax in Malaysia.
  2. Expatriates may benefit from a special tax regime exemption on their incomes if the two following conditions are verified:
    • Not being defined as a fiscal resident
    • If the period of employment in Malaysia does not exceed 60 days per calendar year
  3. For income derived from specific industries–including air transport and banking–Malaysia doesn’t apply the territoriality basis, but instead employs a worldwide basis for taxation.

Tax Residency Status
Even though Malaysia has adopted a territoriality principle when it comes to taxation of income, knowing which individuals qualify for residency for tax  purposes is still useful to determine the tax regime applicable to individuals receiving incomes sourced in Malaysia. Indeed, a non-resident expatriate who is liable for income tax in Indonesia will be taxed, but on a different taxation regime than are residents.

Residency for tax purposes in Malaysia is defined by Part II, Section 7 of the 1967 law. If an individual, regardless of nationality, fulfills one of the following, he must be considered a tax resident of Malaysia:

  • The individual has been resident in Malaysia for 182 days of the tax year
  • The individual has been resident in Malaysia for fewer than 182 days of the tax year, but was resident in the country for a total of 182 consecutive days linked to days from the year immediately preceding or following that tax year
  • The individual has been resident in Malaysia for at least 90 days of the current tax year and was resident in Malaysia for at least 90 days in three of the four preceding years

The individual will be resident in Malaysia in the year following and has been resident in Malaysia in the three years preceding the one being taxed.

Tax System in Malaysia

Increased Individual Income Tax Rates in 2016
To determine the type of rate (progressive or flat) and which tax percentage is applicable to an item of income, the taxpayer must determine whether he qualifies as a resident for tax purposes in Malaysia, as different regimes apply.

Indeed, expatriates who do not qualify for tax residency in Malaysia are taxed on all of their Malaysia-sourced income at a flat rate of 26% before 2016, and at a flat rate of 28% from the 2016 assessment year onward.

Regarding expatriates who qualify for tax residency, Malaysia has a progressive personal income tax system in which the tax rate increases as an individual’s income increases, starting at 0% and being capped at 25% before the assessment year of 2016, and 28% from 2016 onward. See the rates applicable to each income bracket in Table 1.

Tax Relief and Deductions
Several tax deductions are available for individual income tax payers in Malaysia. However, non-resident expatriates are not eligible to benefit from these tax-relief methods, unlike expatriates who qualify for resident status for tax purposes. Some of these tax-relief provisions are:

  • For spouse
  • For taxpayers who have to pay parental care
  • For each child below 18 years old
  • For children studying at tertiary level (post-secondary education)

In an effort to reduce the living costs of its citizens and the financial burden of taxpayers who have to take care of their parents or raise children, deductible amounts pertaining to these and other activities have been increased from 2016 onward.

In addition, the 2016 Budget created a new tax relief provision: the Tax Relief on Employees’  Contribution to Social Protection. Currently, employees receive no tax relief for contributions to the Social Security Organization (SOCSO).

Compliance and Payment
In Malaysia, the tax year parallels the calendar year, beginning on 1 January and ending on 31 December. All tax returns must be completed and returned before 30 April of the following year.

Regarding expatriates who are considered residents, employers withhold that income tax from their salaries, and the balance must be settled at the end of the financial year upon filing of a tax return.

In case of late payment or incorrect returns, and non-compliance that can be discovered through tax audit, penalties will be applied.

Since its establishment in 1992, Dezan Shira & Associates has been guiding American investors through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, including liaison offices in Boston and Waltham specifically established to support our American clients, we are your reliable partner for business expansion in Asia and beyond. For inquiries, please email us at [email protected]. For further information about our firm and how we can support American investors in Asia, please visit our North American Desk.