Tax Guide for US Expats Living and Working in Malawi
Who Is Liable For Income Taxes in Malawi
Resident individuals and nonresident individuals with a permanent establishment in Malawi are subject to income tax on their income deemed to be from a source in Malawi. Income is deemed to be from a source within Malawi if it is derived from the carrying on in Malawi of a “trade.” For this purpose, “trade” covers any employment, profession, business, calling, occupation, or venture, including the leasing of property. Foreign-source income is exempt from tax.
Income subject to tax
Employment income. As noted in Who is liable, income derived from employment in Malawi is subject to income tax.
Investment income. A final withholding tax of 10% is imposed on dividends distributed to resident and nonresident individuals.
Interest and rent are included in assessable income.
Amounts received for the right of use or occupation of land and buildings or plant and machinery or for the use of patents, designs, trademarks or copyrights or other property, which in the opinion of the Commissioner General of the Malawi Revenue Authority is of a similar nature, is included in assessable income.
Self-employment and business income. As noted in Who is liable, income derived from the carrying on of self-employment or business activities in Malawi is subject to income tax.
If land is sold and if timber that is intended for sale is growing on the land, the market value of the timber is included in the seller’s taxable income. However, a deduction is allowed. If the land was acquired by the taxpayer for valuable consideration, the Commissioner General apportions a reasonable portion of that consideration to the timber and this amount may be deducted. If no valuable consideration was given for the land, the Commissioner General sets a reasonable value for the standing timber, which may be deducted.
Other income. An annuity is taxable. However, on the maturity of a purchased annuity, the purchase price of the annuity is deductible.
Realized foreign-exchange gains and losses are assessable. Unrealized foreign-exchange gains and losses are not taxable.
Exempt income. Certain income is specifically exempt from tax under the Taxation Act. The following are examples of exempt income:
- Foreign-source income
- Redundancy pay of up to K 50,000
- Terminal benefits not exceeding K 5,000, received from approved pension funds (terminal benefits are amounts paid to employees from pension funds on the cessation of employment, on the employee’s withdrawal from the fund or on the winding up of the fund)
- War disability or war widows pensions
Capital gains and losses. Capital gains derived by individuals are included in assessable income and subject to tax at the normal progressive income tax rates. However, capital gains derived from the following transactions are not subject to tax:
- Disposal of the individual’s principal residence
- Transfers between spouses, or former spouses or to a spouse from the estate of a deceased spouse
- Disposals of personal and domestic assets not used in connection with a trade
Capital losses on assets not qualifying for capital allowances can be offset only against current or future capital gains. However, such capital losses may be set off against other income in the year of the death of the taxpayer. Otherwise, they cease to exist. Capital losses with respect to assets on which capital allowances have been granted are fully deductible from taxable income.
For assets qualifying for capital allowances, capital gains and losses equal the difference between the sales proceeds and the written-down tax value of the assets. For other assets, capital gains and losses equal the difference between the sales proceeds and the annual cost or costs adjusted by applying the consumer price index published by the National Statistics Office on the date of disposal of the asset. For purposes of determining capital gains or losses, costs incurred in or before 1980 are aggregated. If an asset value was determined as of 1 April 1992 and was accepted by the Commissioner General by September 1995, that value may be used instead of the earlier indexed costs.
Deductions. Expenditure and losses are allowable as deductions in determining the assessable income of an individual if they are not of a capital nature and if they are wholly, exclusively and necessarily incurred for the purposes of the trade or in the production of income. For tax purposes, certain expenses are not allowed as deductions, including the following:
- Losses or expenses that are recoverable under insurance contracts or indemnities
- Tax on the income of individuals or interest payable on such tax
- Expenses relating to income that is not included in taxable income
- Expenses for which subsidies have been or will be received
- Rent or cost of repairs to premises not occupied for purposes of trade
- Costs incurred by individuals to maintain themselves and their families
- Domestic or private expenses of individuals including the cost of travel between the individual’s residence and place of work
Individuals may deduct donations to charitable organizations that are approved and gazetted by the Minister of Finance.
In determining the taxable income derived from farming, expenses with respect to the following are allowed as deductions:
- The stumping, leveling and clearing of land
- Works for the prevention of soil erosion
- Boreholes
- Wells
- Aerial and geophysical surveys
- Water control work with respect to the cultivation and growing of rice, sugar or other crops approved by the Minister of Finance and water conservation work (reservoir, weir, dam or embankment constructed for the impounding of water)
Rates
Progressive income tax rates. The following progressive income tax rates are imposed on the assessable income of resident individuals and nonresident individuals with a permanent establishment in Malawi.
Withholding taxes. Certain payments are subject to withholding tax. The tax is withheld by the payer and remitted to the Malawi Revenue Authority on a monthly basis by the 14th day of the following month. Recipients of the payments treat the withholding tax as an advance payment of tax that offsets income tax subsequently assessed.
Withholding Tax Exemption Certificates may be issued to qualifying taxpayers whose affairs are up to date. Under the Taxation Act, exemption from withholding tax is not granted for bank interest, rent, royalties, fees, commission, payments for casual labor, payments to contractors and subcontractors, and payments to suppliers of foodstuffs and other goods.
The Commissioner General may exempt from withholding tax the receipts of certain persons or organizations that are exempt from tax under the Taxation Act.
Relief for losses. Assessed losses attributable to trading operations may be carried forward to offset assessable income in the following six years. Losses incurred in manufacturing, agricultural and mining operations may be carried forward indefinitely.
Loss carrybacks are not allowed.
B. Other taxes
Estate duty. Estate duty is payable by the executors of estates of deceased individuals. The following are the rates of the estate duty.
Property tax. Property tax is levied by local authorities on the value of industrial, commercial or private properties owned by a taxpayer in the district. The tax is payable semiannually. The rates vary depending on whether the property is located in an urban or rural area and whether it is an industrial, commercial or private property.
C. Social security
Malawi does not require social security contributions.
Double tax relief and tax treaties
If foreign income that has been taxed in a foreign country is included in taxable income in Malawi, a tax credit may be available to reduce the tax payable in Malawi. To qualify for this relief, the income must be derived from a foreign government, state corporation or local authority. An individual must prove to the Commissioner General that he or she has paid the tax on the income in the foreign country. On receipt of this proof, the Commissioner General grants the relief.
Malawi has entered into double tax treaties with the following countries.
Denmark
Netherlands
Sweden
France
Norway
Switzerland
Kenya
South Africa
United Kingdom
To learn more about the history, culture, economy and other information about Malawi
We have been preparing US income tax returns for US Citizens and permanent residents living in Malawi 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 Malawi 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 Malawi.
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 consultation by phone, skype or email