Individual Income Tax in Malaysia for Expatriates
- Malaysia adopts a territorial principle of taxation, meaning only incomes which are earned in Malaysia are taxable.
- Expatriates working in Malaysia for more than 60 days but less than 182 days are considered non-tax residents and are subject to a tax rate of 30 percent.
- Foreign workers should seek help from registered local tax advisors to better understand their tax liabilities.
Malaysia uses both progressive and flat rates for personal income tax (PIT), depending on an individual’s duration and type of work in the country. As expatriates may fall into either tax category, it is important to understand Malaysia’s basic tax structure.
The Income Tax Act of 1967 structures personal income taxation in Malaysia, while the government’s annual budget can change the rates and variables for an individual’s taxation.It is advisable for expatriates to use the services of registered local tax advisors to better understand their tax liabilities in Malaysia and to stay compliant.
Taxation principle and its exceptions
Malaysia adopts a territorial principle of taxation, meaning only income earned in Malaysia is taxable, regardless of where the expatriate is paid. All types of incomes are taxable, including gains from employment or business activities and dividends.
While profits sourced elsewhere are not subject to PIT there are three main exceptions:
- Malaysia has signed numerous double taxation avoidance agreements. When addressing instances of double taxation, the wide bilateral tax treaties network can be an exception to the territoriality taxation principle, as it sometimes allocates the right to other countries to tax domestically earned income of Malaysian tax residents. In such instances, tax residents will be exempted from paying PIT in Malaysia.
- Expatriates may benefit from a special tax regime exemption on their income if the following two conditions are verified:
- Not being defined as a fiscal resident; and
- If the period of employment in Malaysia does not exceed 60 days per the calendar year.
- Finally, for income derived from specific industries – including air transport and banking – Malaysia does not apply the territorial basis, but instead employs a worldwide basis for taxation.
Tax residency status
Not all foreign workers in Malaysia have to file PIT. Expatriates working in Malaysia for less than 60 days are exempt from filling out taxes.The Malaysian government considers expatriates working in the country for more than 60 days but less than 182 days as “non-residents” and subjects them to a flat taxation rate of 30 percent. Non-residents are ineligible for tax deductions.
Expatriates who qualify as “residents” for tax purposes pay progressive tax rates and are eligible for tax deductions.
Under Part II, Section 7 of the Income Tax Act, 1967, the Malaysian government considers an individual – regardless of their nationality – a tax resident if that individual fulfills one of the following criteria.
- The individual has been resident in Malaysia for 182 days of the tax year;
- The individual has been a resident in Malaysia for less than 182 days of the tax year, but was a 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 a resident in Malaysia for at least 90 days of the current tax year and was a resident in Malaysia for at least 90 days in three of the four preceding years; or
- The individual will be a resident in Malaysia in the year following and has been a resident in Malaysia in the three years preceding the one being taxed.
Tax rates in Malaysia
The Malaysian 2020 budget raised the maximum tax rate an individual could pay to 30 percent (from 28 percent) for chargeable income exceeding 2 million ringgit (US$489 thousand).
For expatriates that 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 percent, and capped at 30 percent.
The applicable tax rates are the following:
Tax relief and deductions
The Malaysian government offers several tax deductions and benefits that expatriate workers who qualify as tax residents are eligible for.
- Tax relief for a spouse (so long as the spouse does not earn an income in or out of Malaysia);
- Tax relief for taxpayers who have to pay parental care;
- Tax relief for each child below the age of 18; and
- Tax relief for children studying at the tertiary level.
There is also an income tax exception granted for women looking to return to the workforce after a career break, through the Malaysians@Work program.
This program provides a maximum 12-month income tax exemption for women aged between 30 and 50 years old. The incentives include the following:
- Employee – 500 ringgit per month for two years; and
- Employers – 300 ringgit per month for two years.
Budget 2020 has extended this program until 2023.
Further, there is income tax relief of up to 6,000 ringgit granted on expenses for medical treatment of serious illnesses. Budget 2020 has now expanded this to include expenses incurred for fertility treatments.
Compliance and payment
In Malaysia, the tax year runs in accordance with the calendar year, beginning on January 1 and ending on December 31. All tax returns must be completed and returned before April 30 of the following year.
To file income tax, an expatriate needs to obtain an income tax number from the Inland Revenue Board of Malaysia (IRB). Typically, companies obtain income tax numbers for their foreign workers. However, if a company fails to obtain one, the worker can register for an income tax number at the nearest IRB office.
If an expatriate makes an incorrect tax return either by omitting or understating their income, the IRB has the right to fine that individual 100 percent of the undercharged tax.
Late income tax submissions may result in a disciplinary fee amounting to a 10 percent increment of the tax payable.
Editor’s Note: The article was first published on February 16, 2016, and has been updated on January 2, 2020.