Malaysia: Taxation of foreign nationals working in Malaysia

Section 13(2) of the Income Tax Act, 1967 (“ITA”) provides that employment income is deemed derived from Malaysia when employment is exercised in Malaysia. Generally, income from employment is taxed in the country where the services are actually performed, irrespective of the place where the contract is entered into or where the remuneration is paid. In other words, a foreign national working in Malaysia is liable to tax under Malaysian domestic law in respect of his employment income derived in Malaysia.

The basis year for a year of assessment for employment income is the basis period for that year of assessment. Employment income is assessed on a current calendar year basis i.e. income for the basis period of 1.1.2016 to 31.12.2016 is assessed as year of assessment 2016. 

The residence status of an individual is determined by reference to the physical presence of that individual in Malaysia in a basis year for a year of assessment. In certain situations, the physical presence for the basis years preceding and basis years following a particular year of assessment is taken into consideration. Generally, an individual is a non-resident if his physical presence in Malaysia is less than 182 days in a basis year. 

The tax rates applicable to foreign nationals would depend on their residence status in Malaysia. Resident individuals are eligible to claim personal relief; nonresident individuals, however, are not entitled to any personal relief. From year of assessment 2016 onwards, resident individuals are charged to tax at scale rates ranging from 1% to 28% while non-resident individuals are subject to tax at 28%. The income of a non-resident individual from an employment exercised by him in Malaysia for a period of employment not exceeding 60 days may be exempted from tax. 

When a foreign national derives employment income from Malaysia but is a resident of another country, income tax may be payable in both Malaysia and the country of residence. The Malaysian Government has entered into Agreements for the Avoidance of Double Taxation (“DTA”) with a number of other countries in order to eliminate instances of double taxation should the same income be subject to tax in more than one country. 

For foreign nationals exercising employment in Malaysia, the Dependent Personal Services (“DPS”) Article of the relevant Malaysian DTA or tax treaty is applicable for tax treaty relief. The precise terms of the DPS Article in each DTA may vary from country to country. Bilateral credit is allowed against Malaysian tax only to a person who is charged to Malaysian tax for a year of assessment and who is resident for the basis year for that year of assessment. In the absence of a tax treaty, the domestic tax laws of both Malaysia and the relevant foreign country remain applicable. 

Foreign nationals who are non-residents in Malaysia are required to file an Income Tax Form i.e. Form M for the respective year of assessment. If they qualify as a resident in Malaysia for the relevant year of assessment, a Form BE should be filed. The due date of submission of the Income Tax Form is on or before 30 April in the following year.

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