Malaysia Cross-Border Tax Guide

182-Day Tax Residency Rule

• Basic rule — 182 days in a calendar year: An individual is considered a tax resident of Malaysia if the individual is present in Malaysia for 182 days or more in a calendar year (the "basis year" — the "tahun asas"). The days need NOT be consecutive — the aggregate presence of 182 days or more in the calendar year (January 1 to December 31) qualifies the individual as a tax resident. The presence on any part of the day counts as a full day for the residency test.
• Less common — 90-day rule for returning residents: The individual who has been the tax resident in the previous year and is present in Malaysia for at least 90 days in the current year (but less than 182 days) may still be treated as a tax resident under the "returning resident" rule. The rule applies if the individual was the tax resident for at least 3 out of the 4 preceding years. The rule does NOT apply to the first-time residents.
• Less common — 182-day rule across 2 consecutive years: The individual who is present in Malaysia for 182 days or more in the current year and for 182 days or more in the preceding year, but who is present for less than 182 days in the current year, may be treated as a tax resident if the continuous period of presence extends across the 2 years and totals 182 days or more, with at least 90 days in the current year. This rule is rarely applied in practice.

Resident vs Non-Resident Taxation

• Resident — progressive rates 0% to 30%: The tax resident pays the individual income tax at the progressive rates of 0% to 30% on the chargeable income (the "pendapatan bercukai" — the "taxable income"). The first MYR 5,000 of the chargeable income is taxed at 0%. The top marginal rate of 30% applies to the chargeable income above MYR 2,000,000. The resident is entitled to the personal relief of MYR 9,000 and the various other tax reliefs.
• Non-resident — flat rate of 30%: The non-resident individual pays the income tax at the flat rate of 30% on the gross Malaysian-source income. No personal relief or other tax reliefs are available to the non-resident. The non-resident is taxed on the Malaysian-source income (the "employment income, the business income, the rental income, the royalties, and the technical fees" sourced in Malaysia).
• Withholding tax on non-residents: The payments to the non-residents may be subject to the withholding tax: (a) the interest — 15%; (b) the royalties — 10%; (c) the technical fees — 10%; (d) the contract payments — 10% (for the non-resident contractor or the consultant); (e) the rental of the movable property — 10%. The withholding tax rates may be reduced under the applicable DTA.

Foreign Income Exemption

• Foreign income received in Malaysia — exempt for most individuals: The foreign income (the "pendapatan luar negara" — the "foreign-source income") that is received in Malaysia by the resident individual is exempt from the Malaysian income tax. The exemption applies to the foreign income of any nature — the employment income, the business income, the dividend income, the interest income, the rental income, and the capital gains — provided the income is received in Malaysia. The exemption was previously limited but was broadened in 2022.
• 2022+ foreign income rules: For the years of assessment 2022 onwards, the foreign income received in Malaysia (the "FII" — the "foreign income received in Malaysia") is exempt from the Malaysian tax for most individuals, subject to the specific conditions. The exemption does NOT apply to the foreign income derived from the business carried on in Malaysia or where the foreign tax rate is lower than the Malaysian tax rate (the "anti-avoidance" rule).
• Reporting requirement: The resident individual must still report the foreign income in the annual tax return (the "Form BE") even if the income is exempt. The exemption is claimed by including the foreign income in the "exempt income" section of the return. The failure to report may result in the penalty.

Double Taxation Agreements (DTAs) and Foreign Tax Credit

• DTA network — 75+ countries: Malaysia has the Double Taxation Agreements with over 75 countries, including the UK, the US (limited — the shipping and the air transport only), Australia, Japan, Singapore, China, India, and the EU member states. The DTA allocates the taxing rights between Malaysia and the treaty partner and provides the reduced withholding tax rates (e.g., the interest rate reduced from 15% to 10% under the DTA).
• Foreign Tax Credit (FTC): The Malaysian resident who pays the foreign tax on the foreign income may claim the Foreign Tax Credit (the "kredit cukai luar negara" — the "foreign tax credit") against the Malaysian tax liability on the same income. The FTC is limited to the lower of: (a) the foreign tax actually paid; or (b) the Malaysian tax attributable to the foreign income. The FTC is claimed in the annual tax return (the "Form BE").
• Unilateral relief: If the DTA does not cover the foreign tax, the unilateral relief (the "pelepasan unilateral" — the "unilateral relief") may be available. The unilateral relief allows the credit for the foreign tax paid on the foreign income that is taxable in Malaysia, up to 50% of the Malaysian tax on the foreign income. The unilateral relief is available only if the foreign tax is of the similar character to the Malaysian income tax.

FAQs

Is the foreign employment income taxable in Malaysia?

The foreign employment income (the salary earned while working outside Malaysia) is generally exempt from the Malaysian tax if the employment is exercised outside Malaysia and the income is received in Malaysia. However, if the employment is exercised partly in Malaysia (the "split employment"), the portion of the income attributable to the Malaysian workdays is taxable.

How does the 182-day rule apply to the digital nomads?

The digital nomads (the remote workers) who are present in Malaysia for 182 days or more in a calendar year are treated as the tax residents and are taxable on the Malaysian-source income. The foreign income (the income earned from the overseas clients) received in Malaysia is generally exempt, but the digital nomads should seek the professional advice on the application of the exemption.

Does Malaysia have the exit tax?

No. Malaysia does NOT impose the exit tax on the individuals leaving Malaysia. There is no "departure tax" or "exit tax" on the accrued gains or the unrealised income at the time of leaving the country.