Malaysia: Taxation on foreign-sourced income

Malaysia has been adopting a territorial scope of taxation, where income accruing in or derived from Malaysia would be subject to income tax. Resident companies in the business of banking, insurance or sea or air transport are taxed on worldwide income. Foreign-sourced income received in Malaysia is exempt. 

Section 3 of the Income Tax Act, 1967 provides:

 “Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.” 

Paragraph 28 of Schedule 6 exempts income arising from sources outside Malaysia and received in Malaysia by any person who is not resident in Malaysia. Effective year of assessment 2004, Paragraph 28 is amended to exempt income of any person, other than a resident company carrying on the business of banking, insurance or sea or air transport, for the basis year for a year of assessment derived from sources outside Malaysia and received in Malaysia. 

In line with the commitment to comply with international tax standards, it is proposed in Budget 2022 that income tax be levied on Malaysian tax residents in respect of income derived from outside Malaysia and received in Malaysia.

In force from 1 January 2022, Paragraph 28 is substituted to exempt income arising from sources outside Malaysia and received in Malaysia by any person who is not resident in Malaysia i.e. the position prior to year of assessment 2004. 

During the transitional period from 1 January 2022 to 30 June 2022, foreign-sourced income received in Malaysia will be taxed at 3% on a gross basis. From 1 July 2022 onwards, the foreign-sourced income received in Malaysia would be taxed at the prevailing income tax rate. 

In response to diverse feedback and discussion, the Government has agreed to exempt Malaysian tax residents from the imposition of tax on the following foreign-sourced income: 

• Dividend income received by companies and limited liability partnerships; and 
• All types of foreign-sourced income received by individuals (except for those carrying on a partnership business in Malaysia). 

The above exemption is effective from 1 January 2022 to 31 December 2026, subject to conditions outlined in the Guideline to be issued.

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