Individual Income Tax in Malaysia
Malaysia has a tax-friendly environment, even for expatriates, or expats. With the MM2H visa, which is the most popular visa issued for expats, you may open an account anywhere in the country. You can bring in an unlimited amount of money without tax. That is why the expatriate’s individual income tax is so attractive.
Even for those who are working in Malaysia, their taxes are low. The personal income tax with the highest rate is only 27%. Also, taxes such as estate duties, earnings tax, yearly wealth taxed, or federal taxes do not get levied in Malaysia.
Under the tax law, those who stay more than 182 days in Malaysia are considered residents. Those who stay less than that are non-residents and will be taxed differently.
Here is more information you need to know about it:
The Taxation Principle of Malaysia:
Malaysia’s taxation is based on territory. That means only the Malaysia-sourced income is taxable, where the expatriates are paid.
The profits that are sourced somewhere else do not have a personal income tax rate, but there are exceptions:
- Double-taxation agreements – If an expat is a tax resident from two countries, they might have to pay taxes in those countries based on the same income. That means they are going to be taxed twice that in a year. Since Malaysia has double taxation agreements with over 70 countries, being taxed twice can be avoided.
- Worldwide taxation basis – This is applicable to specific industries like air transport and banking, where Malaysia is not using a territorial tax system.
- Tax regime exemptions – Expatriates could benefit from the tax exemptions if they are not a tax resident of Malaysia, or if the employment period is less than 60 days.
The expat employees who are not residents should pay tax based on the progressive system of Malaysia. There are a number of tools and resources that help in calculating tax liability.
The tax year of Malaysia is based on the calendar year, which runs from January 31 to December – and all these returns should be back by April 30 during the following year.
If you want to file an income tax return, employees should have a tax number and get it from the Inland Revenue Board of Malaysia (IRB). It is a standard for employers to have their income tax numbers ready for expat employees. In case they do not have it yet, they can get it from the IRB office and apply for it individually.
It is important to take considerations and take care when you are filing an income tax. The IRB might have to impose a fine of 200% of an uncharged tax in case there is an error. Beyond the error of penalties, income tax returns late submission might have a fine of 45% based on the payable tax.
Expatriates could benefit from a tax regime exemption if these conditions are verified:
- They are not a fiscal resident
- If their employment period in Malaysia is not more than 60 days in every calendar year
Lastly, for income that comes from certain industries, including banking and transport, Malaysia does not base it on territorial rule. It will instead apply a worldwide taxation basis. The status of tax residency is still useful in determining the tax regime that is applicable to individuals that receive incomes in Malaysia. This applies even if the territorial principle does not apply to taxable income.
A non-resident expatriate who is liable for Indonesia income tax is indeed taxed, but on a legal regime compared to the residents. For taxes in Malaysia, if an individual fulfills the following criteria, they are a Malaysia tax resident:
- The person has been in Malaysia for at least 182 days within the tax year
- Person has been a Malaysia resident for less than 182 days within the tax year but was a country residence for consecutively 182 days that is linked to days from the year that precedes or follows the tax year
- The person has been in Malaysia for 90 days or more within the current tax year. He was also a resident of Malaysia for 90 days or more in 3 or 4 of the preceding years
- The person will become a Malaysia resident the following year and was a resident in Malaysia for three years that precede the taxable year
In case an expat’s contract is ending, resigning, or leaving Malaysia for more than three months, they must apply for tax clearance. This will determine if they need to pay taxes or not.
If you are an expat in Malaysia and need help understanding your taxes or doing your taxes in general, you should contact 3E Accounting. They are the best income tax service provider in Malaysia, and they know what their clients exactly need.