Income Tax in Malaysia

Personal income tax:

Everyone working in Malaysia is required to pay income tax, and all types of incomes are taxable, including gains from business activities and dividends. However, the duration of your stay in Malaysia and the type of work that you do will decipher which tax category you fall in.

If you are working in the country for more than 60 days but less than 182 days in one year, you will be considered a “non-resident” and subjected to a flat taxation rate of 28%. As a non-resident, you will also not be eligible for any tax deductions.

If you are working in Malaysia for more than 182 days a year, the government considers you to be a “tax resident,” and you will pay progressive tax rates and be eligible for tax deductions. Malaysia's progressive personal income tax system involves the tax rate increasing as an individual’s income increases, starting at 0% for up to RM5,000 earned, to a maximum of 28% for annual income of over RM1 million.

When you come to the end of your employment contract, or if you resign from your job or leave Malaysia for more than three months, you need to apply for tax clearance. This is a certificate or letter from the Malaysian Inland Revenue (LHDN) that determines whether you owe income tax or not. Once this letter has been received, your employer should release the balance of any money owed to you after you settle any outstanding taxes.

Residence rules:

The residence of an individual is determined by his/her physical presence in Malaysia. An individual may qualify as a resident for the basis year for a particular year of assessment under any one of the following circumstances.

·       The individual is in Malaysia in the basis year for a period or periods totaling 182 days or more.

·    The individual is in Malaysia for less than 182 days in that basis year and that period is linked by or to another period of 182 or more consecutive days (hereinafter referred to in this paragraph as such period) throughout which the individual is in Malaysia in the adjoining year. Temporary absences from Malaysia due to service matters, attending conferences, seminars, or study abroad connected with the services in Malaysia, ill-health involving the individual or any immediate member of the family and social visits not exceeding 14 days in aggregate shall be taken to form part of such period or that period, as the case may be, if he/she is in Malaysia immediately prior to and after that temporary absence.

·    The individual is in Malaysia for a total of 90 days or more in the basis year and in any three out of four immediately preceding basis years, the individual was either resident or in Malaysia for at least 90 days.

·      The individual will be a resident for the year if he/she is resident the following year and has been resident for the immediately preceding three years.

Exemptions and benefits:

Not all expatriates in Malaysia are required to file personal income tax. Foreigners working in Malaysia for less than 60 days are exempt from filling out taxes, as are those who are employed on board a Malaysian ship, or those aged over 55 years old who are receiving a pension from employment in Malaysia.

Only income that has its source in Malaysia is taxable in the country, regardless of where you are paid. However, there are some exceptions to this territorial principle. Malaysia has signed numerous Double Taxation Avoidance agreements, so certain nationalities will be exempt from paying personal income tax in Malaysia if their earned income is taxed in their home country. If your income is derived from specific industries, such as air transport or banking, a worldwide basis for taxation is applied instead of the territorial principle.

The Malaysian government offers several tax deductions and benefits for expatriate workers who qualify as tax residents. These include: tax relief for a spouse that does not earn an income anywhere; tax relief for those who have to pay parental care; tax relief for each child below 18 years old; and tax relief for children studying at a tertiary level. As of 2017, there is also tax relief for childcare centres and breast feeding equipment, and lifetsyle goods — such as books, electronic and sporting equipment — fall in a category called 'lifestyle tax relief', which is limited to RM2,500 per year.

Filing your tax return and penalties:

In Malaysia, the tax year begins on 1 January and ends on 31 December, in simple accordance with the calendar year. All expatriates must complete and file their tax returns before 30 April of the following year or you are likely to incur a disciplinary fee of a 10% increment of the tax payable.

To complete your tax return, you will need details of the total amount paid to you during the assessment year. This Yearly Remuneration Statement (EA form) is issued by the end of February each year.

Every individual who is liable to pay tax is required to declare his income to the Inland Revenue Board of Malaysia (IRBM). The taxpayer is responsible for submitting their completed Income Tax Return Form (ITRF), keeping records of supporting documents for auditing purposes for seven years, and paying the income tax due.

To file their income tax, an expatriate needs to obtain an income tax number from the IRBM. Usually, your company will take on the responsibility of obtaining income tax numbers for their foreign employees. However, if your company fails to do this, you should register yourself for an income tax number at your nearest IRB office within two months of your arrival in the country.

You can file your tax return either online via e-filing or manually. For e-filing, you first must register as an online user by either going to the nearest IRBN office or by sending an email to pin@hasil.gov.my and attaching a copy of your passport. Alternatively, if you'd rather go through the process manually, you can go to your nearest IRBM office to obtain the relevant form. Form B is for individuals who have a business in Malaysia, so won't apply to you if you are employed by a company. Form BT is for an individual who has been approved as a skilled expert. The most common forms for expatriates are Form BE, which is for those who are employed by a company, and Form M, which is for non-residents.

If an expatriate submits an incorrect tax return in which they omit or understate their income, the IRB has the right to fine that individual 100% of the undercharged tax.

Corporate income tax:

If you own a business that is a tax resident company in Malaysia, meaning that its management and control are exercised in Malaysia, then you will be liable to pay corporate income tax. Resident companies are taxed at the rate of 24%, while those with paid-up capital of RM2.5 million or less are taxed 18% for their first RM500,000 and 24% for earnings in exces of RM500,000. Tax is generally payable in 12 monthly installments, starting from the second month of the company's financial year, and income-generating expenses are deductible when calculating the taxable income.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.