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Do Foreigners Need to Pay Tax in Malaysia?

Published in Malaysia Tax for Foreigners 4 mins read

Yes, foreigners working or earning income in Malaysia are generally required to pay tax on that income. Malaysia's tax system stipulates that any individual, irrespective of their tax residency status (whether tax resident or non-resident), is subject to tax on income that accrues in or is derived from Malaysia.

While all income sourced from Malaysia is taxable for both residents and non-residents, there's a key distinction: tax residents are also liable for tax on foreign-sourced income if it is received in Malaysia. However, for non-residents, the tax obligation primarily focuses on income earned from Malaysian sources.

Understanding Tax Residency

The determination of your tax status as a 'resident' or 'non-resident' significantly impacts your tax obligations and the applicable tax rates in Malaysia.

  • Tax Resident: Generally, an individual is considered a tax resident in Malaysia if they are present in Malaysia for 182 days or more in a calendar year, or meet certain other criteria related to presence over several years. Tax residents typically benefit from progressive tax rates, which can range from 0% to 30%, and are eligible for various personal reliefs and deductions.
  • Non-Resident: If you do not meet the criteria for tax residency, you are considered a non-resident for tax purposes. Non-residents are taxed at a flat rate on their Malaysian-sourced income, usually without the benefit of personal reliefs. For example, employment income for non-residents is often taxed at a flat rate of 30%.

Tax Implications: Resident vs. Non-Resident

Understanding the differences in tax implications based on your residency status is crucial:

Feature Tax Resident Non-Resident (Foreigner)
Tax Scope Malaysian-sourced income & foreign-sourced income received in Malaysia Only Malaysian-sourced income
Tax Rates Progressive rates (0% to 30%) with various reliefs and deductions Flat rate (e.g., 30% for employment income, varies for other income types)
Personal Reliefs Generally eligible for personal reliefs, spouse relief, children relief, etc. Generally not eligible for personal reliefs

What Income is Taxable for Foreigners in Malaysia?

Foreigners, as non-residents, are taxed on income sourced from Malaysia. This commonly includes, but is not limited to:

  • Employment Income: This covers salaries, wages, commissions, bonuses, director's fees, and other benefits derived from employment exercised within Malaysia.
  • Business or Professional Income: Profits from any trade, business, or profession carried out in Malaysia, including independent contractor work.
  • Rental Income: Income derived from properties located in Malaysia, whether residential or commercial.
  • Royalties and Interest: Royalties, interest, and other income arising from sources within Malaysia.
  • Other Income: This may include pensions, annuities, and certain other types of income received from Malaysian sources.

Practical Steps for Foreigners with Malaysian Income

If you are a foreigner earning income in Malaysia, it's crucial to understand your tax obligations and take the necessary steps to ensure compliance:

  1. Register with LHDN: You will need to register with the Inland Revenue Board of Malaysia (Lembaga Hasil Dalam Negeri, LHDN) to obtain a tax file number. This is a mandatory step before you can file taxes.
  2. Understand Your Residency Status: Accurately determine whether you are a tax resident or non-resident, as this directly impacts your applicable tax rates, deductions, and reliefs.
  3. File Annual Tax Returns: Regardless of your residency status, if you have taxable income in Malaysia, you are required to file an annual income tax return with LHDN.
  4. Keep Records: Maintain accurate records of all your income, expenses, and any relevant documents (e.g., employment contracts, rental agreements, payment slips).
  5. Consult a Tax Professional: For complex situations, or to ensure full compliance with Malaysian tax laws, seeking advice from a Malaysian tax consultant or expert is highly recommended.

For more detailed information on Malaysian personal income tax, you can refer to resources like PwC's tax summaries: Malaysia - Individual - Taxes on personal income.