Tax Guide for US Expats Living and Working in Malaysia
Who Is Liable For Income Taxes in Malaysia
Residents and nonresidents are subject to tax on Malaysian-source income only. Effective from 1 January 2004, remittances of foreign-source income into Malaysia by tax residents of Malaysia are no longer subject to Malaysian income tax.
Individuals are considered resident in any of the following circumstances:
- They are physically present in Malaysia for 182 days or more during the calendar year.
- They are physically present in Malaysia for less than 182 days during the calendar year, but are physically present in Malaysia for at least 182 consecutive days in the second half of the immediate preceding calendar year or in the first half of the immediate following calendar year. Periods of temporary absence are considered part of a period of consecutive presence if the absence is related to the individual’s service in Malaysia, personal illness, illness of an immediate family member or social visits not exceeding 14 days.
- They are present in Malaysia during the calendar year for at least 90 days and have been resident or present in Malaysia for at least 90 days in any three of the four preceding years.
- They have been resident for the three preceding calendar years and will be resident in the following calendar year. This is the only case in which an individual may qualify as a resident even though he or she is not physically present in Malaysia during a particular calendar year.
For the purposes of determining residence, presence during part of a day is counted as a whole day.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Gross income from employment includes wages, salary, remuneration, leave pay, fees, commissions, bonuses, gratuities, perquisites or allowances (in money or otherwise) arising from employment. An individual employed in Malaysia is subject to tax on income arising from Malaysia, regardless of where the employment contract is signed or the remuneration is paid. Gross income also includes income for any period of leave attributable to employment in Malaysia and income for any period during which the employee performs duties outside Malaysia incidental to the employment in Malaysia.
Education allowances provided by employers to their employees’ children are taxable for income tax purposes.
Employee benefits and amenities not convertible into money are included in employment income. The cost of leave passages for an employee and the employee’s immediate family are also taxable, but the following items are exempt:
- Leave passage within Malaysia, up to three times in a calendar year
- One leave passage in a calendar year from Malaysia to any place outside Malaysia, up to a maximum of RM 3,000
- Certain allowances, perquisites and benefits-in-kind are exempt from tax, including, among others, the following:
- Petrol/traveling allowances with respect to travel for official duties, up to RM 6,000 a year
- Meal allowances
- Parking
- Telephone, including mobile phone
The cost of moving expenses, approved pension contributions, and the cost of any medical or dental treatment borne by an employer are not taxable to an employee.
Short-term visitors to Malaysia enjoy a tax exemption on income derived from employment in Malaysia if their employment does not exceed any of the following periods:
- A period totaling 60 days in a calendar year
- A continuous period or periods totaling 60 days spanning two calendar years
- A continuous period spanning two calendar years, plus other periods in either of the calendar years, totaling 60 days
Noncitizen individuals working in Operational Headquarters (OHQs), Regional Offices, International Procurement Centres (IPCs) and Regional Distribution Centres (RDCs) are taxed only on that portion of income attributable to the number of days that they are in Malaysia.
Self-employment and business income. All profits accruing in Malaysia are subject to tax. Effective from 1 January 2004, remittances of foreign-source income into Malaysia by tax residents of Malaysia are no longer subject to Malaysian income tax.
Income from any business source is subject to tax. A business includes a profession, a vocation or a trade, as well as any associated manufacture, venture or concern.
Contract payments to nonresident contractors are subject to a total withholding tax of 13% (10% for tax payable by the nonresident contractor and 3% for tax payable by the contractor’s employees).
Income derived in Malaysia by a nonresident public entertainer is subject to a final withholding tax at a rate of 15%.
Investment income. Interest income received by individuals from monies deposited in approved institutions is exempt from tax.
Other interest, dividends, royalties and rental income are aggregated with other income and taxed at the rates. As a result of the introduction of the single-tier tax system, dividends received by individuals are exempt from tax, effective from the 2008 year of assessment. Dividends distributed under the imputation system continue to be taxable.
Certain types of income derived in Malaysia by nonresidents are subject to final withholding tax at the following rates.
Directors’ fees. Directors’ fees are considered employment income; therefore, fees derived from Malaysia are taxable. Fees are deemed to be derived from Malaysia if the company is resident in Malaysia for the year of assessment. If the fees are derived from a country other than Malaysia, they are not taxed. Remittances of foreign-source income into Malaysia by tax residents of Malaysia are not subject to Malaysian income tax.
Employer-provided stock options. Tax legislation governs the taxation of employer-provided stock options. Under the tax legislation, employer-provided stock options are subject to tax as employment income. The taxable income is calculated based on the difference between the fair market value of the underlying stock at the exercise date or exercisable date, whichever is lower, and the strike price. This amount is recognized at the time the option is exercised, and is taxed as current-year income (that is, it is no longer related back to the year of grant).
Capital gains. In general, capital gains are not taxable. However, gains derived from the disposal of real property located in Malaysia and gains derived from the sale of shares in closely controlled companies with substantial real property interests are subject to real property gains tax (RPGT). RPGT is not imposed on the disposal of chargeable assets between 1 April 2007 and 31 December 2009.
Disposals made within five years after the acquisition date are taxed at an effective rate of 5%. All disposals made after such five-year period are exempt from RPGT.
The rules described below apply to disposals of chargeable assets on or after 1 January 2010 and to all resident and nonresident persons, effective from 1 January 2010.
Deductions
Deductible expenses. Although provisions are made for the deduction of all expenditures incurred wholly and exclusively to produce income, the terms of the provisions tend to limit deductibility in practice. Deductions for employees usually cover specific travel and entertainment costs as well as professional subscriptions. The cost of traveling from home to work is not deductible.
No general deduction is allowed for interest costs, but interest on borrowings used to finance the purchase of income-producing property or investments may be deducted from the income received.
Donations of cash to the government, a local authority or an institution or organization approved by the tax authorities are deductible.
A tax deduction of up to RM 10,000 per year is allowed for housing loan interest for house purchases from developers or third parties, subject to the following conditions:
- The individual must be a Malaysian citizen and tax resident.
- The sale and purchase agreement must be executed during the period of 10 March 2009 through 31 December 2010.
- The house purchased must not be used as a rental property.
The deduction is limited to one residential house including a flat, apartment or condominium. It is granted for three consecutive years beginning with the first year in which the housing loan is paid.
Personal deductions and allowances. In determining taxable income, an individual resident in Malaysia may subtract from total income the following personal deductions. These deductions are not available to nonresidents.
Business deductions. The deductions and expenditure allowable against business income are those incurred wholly and exclusively in the production of gross income from the same source.
Depreciation charged in the financial accounts is not a deductible expense. However, straight-line capital allowances based on cost may be claimed on qualifying assets used in a business. In addition, an initial allowance of 20% of the cost of the asset is granted in the year of acquisition.
Nonresidents are subject to withholding taxes on certain types of income. Other income is taxed at a rate of 26%.
If a Malaysian or foreign national “knowledge worker” resides in the Iskandar Development Region and is employed in certain qualifying activities by a designated company and if his or her employment commences on or after 24 October 2009 but not later than 31 December 2015, the worker may apply to be subject to tax at a reduced rate of 15%. The individual must not have derived any employment income in Malaysia for at least three years before the date of the application.
Under a proposal, effective from the 2012 year of assessment, Malaysian professionals returning from abroad to work in Malaysia would be taxed at a rate of 15% for the first five consecutive years following the professional’s return to Malaysia under the Returning Expert Programme (REP). However, the relevant legislation for this proposal has not yet been gazetted.
Relief for losses. Individuals may carry forward business losses indefinitely.
B. Other taxes
Malaysia does not impose estate, gift or net worth taxes.
C. Social security
No social security tax is levied in Malaysia, but employees who are Malaysian citizens are required to contribute to the Employees’ Provident Fund (EPF). The EPF is a statutory savings scheme to provide for employees’ old-age retirement in Malaysia.
Under the Employees’ Provident Fund Act 1951, all employers and employees are required to make monthly contributions to the EPF.
The statutory contribution rate is 23% of monthly wages, 12% paid by the employer and 11% by the employee. Employers may increase their contributions up to 19% without restrictions by the Malaysian tax authorities, and still deduct the amounts for corporate tax purposes. Employees’ contributions are deducted at source. No ceiling applies to the amount of wages subject to EPF contributions. Expatriates are not required to contribute to the EPF, but may elect to contribute to take advantage of the available tax relief.
Self-employed persons may elect to contribute to the EPF. The individual may make voluntary contributions at a fixed monthly rate of any amount from RM 50 to RM 5,000. EPF contributions and interest credited are not subject to Malaysian tax on withdrawal. The contributions may be withdrawn by an employee on reaching 55 years of age or at an earlier time if the employee leaves Malaysia permanently with no intention of returning. Contributions may also be withdrawn on the death of an employee or if he or she is physically or mentally incapacitated and is prevented from further employment. Employees may make partial withdrawals to purchase a house or to finance medical treatment, or when they attain 50 years of age.
Tax treaties
Malaysia has entered into double tax treaties with the following countries.
Albania
Japan
San Marino
Argentina (a)
Jordan
Saudi Arabia
Australia
Kazakhstan
Senegal
Austria
Korea (South)
Seychelles
Bahrain
Kuwait
Singapore
Bangladesh
Kyrgyzstan
Slovak
Belgium
Lebanon
Republic (c)
Bosnia
Luxembourg
South Africa
Herzegovina (b)
Malta
Spain
Brunei
Mauritius
Sri Lanka
Darussalam (c)
Mongolia
Sudan
Canada
Morocco
Sweden
Chile
Myanmar
Switzerland
Croatia
Namibia
Syria
Czech Republic
Netherlands
Thailand
Denmark
New Zealand
Turkey
Egypt
Norway
Turkmenistan (b)
Fiji
Oman (c)
United Arab Emirates
Finland
Pakistan
France
Papua New Guinea
United Kingdom
Germany
United States (a)
Hungary
Philippines
Uzbekistan
India
Poland
Venezuela (b)
Indonesia
Qatar
Vietnam
Iran
Romania
Yemen (c)
Ireland
Russian
Zimbabwe (b)
Italy Federation
(a) This is a limited agreement.
(b) The treaty has been gazetted, but it is not yet in force.
(c) The treaty is not yet in force.
Under the above treaties, a foreign tax credit is available for the lesser of Malaysian tax payable on the foreign income or the amount of foreign taxes paid. For non-treaty countries, the foreign tax credit available is limited to one-half of the foreign tax paid. Under most of Malaysia’s tax treaties, a business visitor to Malaysia for varying periods of up to 183 days is exempt from Malaysian income tax if the services performed are for, or on behalf of, a nonresident person and if the remuneration paid for the services is not directly deductible from the income of a permanent establishment in Malaysia. Agreements with some countries provide for reduced withholding taxes under certain conditions.
To learn more about the history, culture, economy and other information about Malaysia
We have been preparing US income tax returns for US Citizens and permanent residents living in Malaysia for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Malaysia and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Malaysia.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email