The Complete Malaysia Tax Guide: Everything You Need To Know

Last Updated on 14 January 2025

Navigating the tax landscape in Malaysia can be complex, especially for expats and entrepreneurs looking to set up business operations.

Did you know that Malaysia follows a territorial taxation system where income is taxed based entirely on its source?

Our comprehensive guide aims to demystify the Malaysian tax system by providing an overview of all types of taxes, recent changes, potential reliefs, and obligations specifically for foreign businesses and individuals.

Key Takeaways

• Territorial Taxation System: Malaysia implements a territorial system of taxation where income is taxed based on its source within the country. This principle is a crucial factor for businesses and individuals to understand in their financial planning.
• Primary Tax Types: The main taxes in Malaysia include corporate tax, individual income tax, and Sales and Service Tax (SST), replacing the previous Goods and Services Tax (GST).
• Recent Tax Updates: Notable recent changes in the Malaysian tax system include extended deadlines for tax filing in the event of natural disasters, special income tax rates for non-citizens in key positions, and the introduction of a prosperity tax on high-earning companies.
• Tax Reliefs and Incentives: Malaysia offers various tax reliefs and incentives, such as those for victims of terrorism, green financing, family offices, and reduced stamp duty for stock market trades.
• Foreign Business Considerations: For foreign businesses and individuals, it’s important to understand specific tax obligations and opportunities in Malaysia, including investment opportunities for foreign investors, tax obligations for non-resident property owners, employment permits for foreign workers, and the process of setting up a business.
• Corporate Tax Residency and Rates: The tax residency of a company in Malaysia depends on whether or not it is managed and controlled within the country. Tax rates for resident companies and SMEs vary, with special considerations for SMEs to encourage growth.
• Double Taxation Agreements: Malaysia has double taxation agreements with many countries, offering benefits and preventing double taxation for income earned in multiple jurisdictions.

Territorial Basis of Taxation and Tax Residency

Generally, Malaysia adopts a territorial system of income taxation where individuals and companies are assessable on income accrued in or derived from Malaysia.

This system offers several benefits, including simplicity and ease of administration.

Under this system, income derived from sources outside Malaysia and remitted by a tax resident or resident company is exempt from tax, except in certain cases.

However, the tax residency of a company plays a crucial role in determining its tax obligations.

Tax residency is determined by the management and control exercised in Malaysia during the base year.

This has a significant impact on foreign companies operating in Malaysia, as their tax liabilities are determined by their residency status.

Types of Taxes in Malaysia

Malaysia has three main types of taxes:

• Personal income tax
• Corporate income tax
• Value Added Tax
• Sales and Service Tax
• Withholding tax
• Real property gains tax
• Stamp duty

Personal Income tax

If you live in Malaysia for most of the year, you are a tax resident.

In Malaysia, people pay an individual income tax on the money they make.

This includes salaries and dividends.

The amount of tax depends on how much you earn.

It can be anywhere from 0% to 30%.

But if you do not live in Malaysia most of the year, a flat rate of 30% applies to your taxable income, no matter what it is.

Another thing to note about taxes here is that individuals handle their own tax assessment or self-assessment system, as it is called here, when filing their returns annually by April 30 for non-business income and June 30 for business income.

For some lucky ones, the Malaysian government plans to cut down on these rates in Budget 2023!

Corporate tax

In Malaysia, companies have to pay corporate tax.

The rate is 24% for both types of firms: resident and non-resident.

Yet, there is a lower rate for some resident firms.

If they have a paid-up capital of 2.5 million ringgit or less and earn under 50 million ringgit, their first 600,000 ringgit gets taxed at just 17%.

This lowered amount helps smaller businesses keep more money in their pockets to grow their firm.

Value-added tax

Malaysia does not use a value-added tax system.

In 2018, it got rid of the Goods and Services Tax (GST).

It now uses the Sales and Services Tax (SST) method.

The sales tax rate is 10%.

The service tax rate is 6%.

Some goods have a lower tax rate. They are taxed at only 5%.

If your company sells taxable goods worth more than 500,000 ringgit in one year, you must pay this sales tax.

For restaurants, this limit goes up to 1.5 million ringgit.

Sales and Services Tax (SST)

The sales tax rates are set at 5% and 10%, while the service tax is fixed at 6%.

Companies previously registered under GST are automatically enrolled in the MySST system for SST compliance.

Withholding tax

Withholding tax in Malaysia is a tax levied on payments to non-resident individuals.

This tax is deducted by the payer from the income of the non-resident payee and then remitted to Malaysia’s Inland Revenue Board.

Withholding tax is crucial for ensuring a consistent revenue flow for the government and avoiding double taxation.

The term ‘payee’ includes non-resident individuals or entities in Malaysia, covering payments made by both foreign and Malaysian companies or government agencies to non-residents.

In Malaysia, the Income Tax Act 1967 mandates withholding tax on various income types earned by non-residents, as listed below, excluding the income of non-resident public entertainers.

This tax must be paid to the Director General of Inland Revenue within a month of the income received by the non-resident.

Payment Types and Their Withholding Tax Rates:

• Contract Payment: 10% + 3% of gross payment
• Interest: 15% of gross payment
• Royalty: 10% of gross payment
• Public Entertainer: 15% of gross payment
• Special Classes of Income: 10% of gross payment
• Other Income: 10% of gross payment

Withholding tax applies to non-residents without a business presence in Malaysia who receive any of the aforementioned incomes.

The tax is also applicable under the following conditions:

• The recipient is a non-resident.
• The recipient receives payment for services or any income stated above.
• The recipient does not have a business presence in Malaysia.

Real Property Gains Tax or Capital Gains Tax

Real Property Gains Tax (RPGT) in Malaysia, as defined by the Real Property Gains Tax Act 1976, is a capital gain tax imposed on profits from selling land or real property.

It applies to individuals (citizens, permanent residents, and foreigners) and companies.

Originally aimed at curbing speculative property trading, RPGT also serves as a revenue source.

RPGT rates have evolved since their introduction in 1995. The most recent change in 2022 exempts Malaysians and permanent residents from the 5% RPGT on property sales from the sixth year of ownership onwards.

However, foreigners and companies continue to be taxed at 10%.

The 2022 Budget announced an exemption from Real Property Gains Tax (RPGT) for Malaysian citizens and permanent residents on property disposals from the sixth year onwards, effective January 1, 2022.

This update removes the previous 5% and 10% RPGT rates, reducing them to 0% for these sales.

Understanding RPGT, including how to calculate applicable rates and available exemptions, remains important for both local and foreign property owners and companies.

Stamp Duty

Understanding Stamp Duty in Malaysia

Essentially, it’s a charge applied to legal, commercial, and financial documents.

There are two main categories of stamp duties: ad valorem duty and fixed duty.

Typically, a stamp duty of 0.5% is applied in Malaysia.

However, this rate has been reduced, and duties exceeding 0.1% may be remitted, depending on the service agreement.

The cost of ad valorem duty varies based on the type and value of the document, while fixed duty typically starts at RM10 per document.

For documents executed within Malaysia, stamping must occur within 30 days of execution.

If the document is executed outside of Malaysia, it should be stamped within 30 days of its arrival in Malaysia.

This section discusses the process and significance of adhering to Malaysian stamp duty regulations for your documents.

Types of Documents Subject to Stamp Duty

1. The First Schedule of the Stamp Duty Act 1949 lists the various documents that are subject to stamp duty, including some exceptions for exemption.
2. The duty rates depend on the document’s nature and the values involved. Examples of documents that incur stamp duty include:
   • a. Transfer of shares
   • b. transfers of real estate (such as land, houses, buildings)
   • c. Stamping of general contracts or agreements
   • d. Tenancy, lease, or rental agreements
   • e. Security-related documents
   • f. Sale of annuities

Recent Tax Updates and Changes

The Malaysian tax system has undergone recent updates and changes, including extended tax deadlines for natural disaster victims, special income tax rates for non-citizens in key positions, and the imposition of the prosperity tax.

Extended tax deadlines for natural disaster victims

If you have been affected by a natural disaster in Malaysia, there is some good news when it comes to your taxes.

The government has extended the tax deadlines for victims of natural disasters, giving you more time to file your returns.

This can provide much-needed relief during difficult times.

Just remember to take advantage of this extension and make sure you meet all the necessary requirements for eligibility.

Special income tax rates for non-citizens in key positions

Non-citizens in important roles at Malaysian companies can benefit from special income tax rates.

These rates are set at 15% and are lower than the regular individual income tax rates, which range from 0% to 30%.

To qualify for this special rate, individuals must have a monthly salary of at least 25,000 ringgit, hold a high-ranking position for five consecutive years, and be a Malaysian tax resident.

This applies to key personnel like executives and directors who play significant roles in their companies.

It’s important to note that the Malaysian government plans on reducing income tax rates for certain resident taxpayers in the future as well.

Imposition of the prosperity tax

In 2022, Malaysia introduced the prosperity tax as a way to redistribute wealth.

This tax applies to companies that earn more than 100 million ringgit in chargeable income.

If a company exceeds this threshold, it will have an additional 9% corporate income tax imposed on it.

The purpose of this tax is to ensure that highly profitable companies contribute more towards the country’s development.

It’s important to note that the prosperity tax is separate from regular corporate income tax rates.

Determining Tax Residency for Companies

Tax residency for companies in Malaysia is determined by the management and control exercised in Malaysia during the base year, specifically through the authority that determines company policies.

This means that the controlling authority that makes decisions for the company plays a crucial role in determining its tax residency.

In Malaysia, management and control are considered to be exercised where the directors meet to conduct the company’s business.

If at least one meeting of the board of directors is held in Malaysia concerning the management and control of the company, it is considered resident in Malaysia.

However, branches of foreign corporations in Malaysia are generally treated as non-residents unless management and control are exercised in Malaysia.

Tax Rates for Resident Companies

Resident companies in Malaysia are subject to a tax rate of 24%.

This rate applies to companies that have their management and control exercised in Malaysia during the base year.

However, for small and medium enterprises (SMEs), different tax rates are applied based on their chargeable income.

SMEs with chargeable income up to RM150,000 are taxed at 15%, while those with chargeable income between RM150,001 and RM600,000 are taxed at 17%.

SMEs with chargeable income above RM600,000 are taxed at the standard rate of 24%.

It is important to note that non-resident companies in Malaysia are subject to different tax rates, which vary depending on the nature of their income.

These tax rates and implications are essential for foreign investors considering business operations in Malaysia.

Malaysian Taxation of Foreign-Sourced Income

How does Malaysia tax foreign-sourced income for residents?

Malaysia adopts a territorial system of income taxation where companies are assessable on income accrued in or derived from Malaysia.

However, income derived from sources outside Malaysia and remitted by a resident company is generally exempt from tax, except in certain cases.

Effective from YA 2022, foreign-sourced income of Malaysian residents may be subject to tax if received in Malaysia.

Branches of foreign corporations in Malaysia are generally treated as non-residents unless management and control are exercised in Malaysia.

To further understand the implications of tax residency for foreign companies, refer to the table below:

Tax Rates for Small and Medium Enterprises (SMEs)

Small and medium enterprises (SMEs) in Malaysia are subject to varying tax rates based on their chargeable income.

Here are the tax rates for SMEs:

• SMEs with chargeable income up to RM150,000 are taxed at 15%.
• SMEs with chargeable income between RM150,001 and RM600,000 are taxed at 17%.
• SMEs with chargeable income above RM600,000 are taxed at 24%.

These tax rates provide an incentive for SMEs to grow their businesses and contribute to the Malaysian economy.

By offering lower tax rates for smaller businesses, the government aims to support their growth and development.

Additionally, SMEs benefit from the single-tier system, where the income tax payable on their chargeable income is a final tax.

These benefits encourage investment and entrepreneurship among SMEs in Malaysia.

Understanding the Single-Tier System

The implementation of the single-tier system in Malaysia’s corporate income tax regime offers distinct advantages for companies and shareholders.

Under this system, income tax payable on a company’s chargeable income is considered a final tax.

This means that dividends distributed by the company are exempt from tax in the hands of the shareholders.

This provides a simpler and more efficient tax structure for companies and eliminates the need for double taxation of dividends.

Eligible Tax Deductions for Businesses

To understand the eligible tax deductions for businesses in Malaysia, it is important to consider the various outgoings and expenses that can be deducted from the income generated.

Here are some key tax deductions for startups and tax planning strategies:

• Research and development (R&D) expenses: Startups can claim tax deductions for R&D activities conducted to innovate and improve their products or services.
• Capital expenditure: Businesses can deduct expenses incurred for the acquisition or improvement of tangible assets, such as machinery or equipment, used for the production of income.
• Employee costs: Salaries, wages, bonuses, and other employee-related expenses can be deducted, including contributions to the Employees Provident Fund (EPF) and Social Security Organization (SOCSO).
• Rental expenses: Businesses can claim tax deductions for rent paid on premises used for business operations.
• Professional fees: Fees paid to consultants, lawyers, accountants, or other professionals for services rendered to the business are deductible.

Non-Allowable Expenses for Tax Deductions

Non-allowable expenses for tax deductions in Malaysia include expenses that are not eligible for deduction in the calculation of taxable income.

Some examples of non-allowable expenses include personal expenses, fines and penalties, contributions to political parties, donations to certain organizations, and expenses that are not related to the production of income.

It is important for businesses to understand these non-allowable expenses to avoid any tax implications and to effectively plan their taxes.

By being aware of these non-allowable expenses, businesses can ensure that they accurately claim tax deductions and avoid any potential issues with the tax authorities.

Proper tax planning and compliance with the regulations regarding allowable and non-allowable expenses are crucial for businesses to manage their tax liabilities effectively.

Tax Incentives for Selected Industries

What types of tax incentives are available for selected industries in Malaysia?

• Investment Tax Allowance: Companies investing in qualifying projects or activities can enjoy a tax deduction of up to 100% of qualifying capital expenditure incurred within a specified period.
• Pioneer Status: Companies undertaking new projects in promoted industries can be granted a tax exemption of up to 100% of their statutory income for a specific period.
• Reinvestment Allowance: Companies that reinvest their qualifying capital expenditures within a specified period can enjoy a tax deduction of up to 60% of the reinvested amount.
• Accelerated Capital Allowance: Companies investing in qualifying capital assets can claim an accelerated capital allowance, enabling them to deduct a higher percentage of the capital expenditure in the first year.
• Green Technology Incentive: Companies engaged in green technology activities can benefit from tax relief and incentives, including an accelerated capital allowance, an investment tax allowance, and import duty and sales tax exemptions on qualifying equipment.

These tax incentives aim to attract and encourage investment in targeted industries, foster economic growth, and promote sustainable development in Malaysia.

Tax Relief and Incentives

Explore the various tax reliefs and incentives available in Malaysia, from tax exemptions for family offices to special income tax rates for non-citizens in key positions.

Discover how you can benefit from these incentives and optimize your tax planning strategies.

Tax relief for victims of terrorist attacks

Victims of terrorist attacks in Malaysia can receive tax relief to help them recover financially.

The government provides compensation and financial assistance to survivors of these attacks, offering support to those affected by such tragic incidents.

Through tax deductions and incentives, individuals impacted by terrorism can ease their financial burden and receive the necessary aid they deserve.

These relief programs aim to provide financial support for victims, allowing them to rebuild their lives and move forward after experiencing the devastating effects of terrorism.

Tax incentives for green financing

The Malaysian government offers tax incentives to promote green financing, which means providing financial support for projects that have a positive impact on the environment.

These incentives are aimed at encouraging investments in sustainable and eco-friendly initiatives such as renewable energy projects, energy efficiency initiatives, and green infrastructure development.

Taxpayers who engage in qualifying green financing activities can benefit from tax deductions or exemptions.

Tax exemptions for family offices

Family offices in Malaysia can benefit from tax exemptions provided by the government.

These exemptions apply to income that is sourced from outside of Malaysia, meaning that family offices can enjoy tax benefits on their foreign-sourced income.

This includes dividends received by companies and limited liability partnerships as well.

It’s important to note that these tax exemptions for family offices are in effect from January 1, 2022, until December 31, 2026.

By taking advantage of these exemptions, family offices can maximize their financial resources and enhance their overall investment strategies.

Reduced stamp duty for stock market trades

The Malaysian government has implemented a reduced stamp duty for stock market trades as part of their efforts to encourage and incentivize stock market activity.

This means that the fees for buying or selling stocks in Malaysia have been lowered, making it more affordable for investors to participate in the stock market.

The details and conditions of this reduced stamp duty can be found in this Complete Malaysia Tax Guide, which provides all the necessary information for expats and entrepreneurs looking to take advantage of these tax benefits.

By creating a favorable tax environment, Malaysia aims to stimulate stock market participation and attract more investors to boost economic growth.

Taxation for Foreign Businesses and Individuals

Foreign businesses and individuals in Malaysia have various tax obligations and opportunities, including:

• investment opportunities for foreign investors
• tax obligations for non-resident property owner
• employment permits for foreign workers,
• and a clear relocation and setup process for foreign businesses.

Opportunities for foreign investors

Foreign investors have several enticing opportunities in Malaysia.

They can benefit from tax incentives and exemptions designed to attract overseas investment.

For example, resident companies with a lower capital and income threshold can enjoy a reduced corporate income tax rate of 17% for the first 600,000 ringgit.

Additionally, individual taxpayers are eligible for tax exemptions on foreign-sourced income until December 31, 2026.

These measures aim to create an attractive business environment for expats and entrepreneurs looking to invest in Malaysia.

Tax obligations for non-resident property owners

Non-resident property owners in Malaysia have certain tax obligations that they need to fulfill.

This includes corporate income tax, value-added tax, income tax, and digital service tax.

The corporate income tax rate for non-resident companies is 24%.

Additionally, non-resident property owners may be subject to withholding tax on their sourced income from Malaysia.

However, it’s important to note that Malaysia provides a tax exemption on foreign-sourced income for both companies and individual taxpayers.

So if you own property in Malaysia but do not reside there, make sure you understand your tax responsibilities and comply with the regulations.

Employment permits for foreign workers

Foreign workers in Malaysia are required to obtain employment permits.

Here are some important facts about employment permits for foreign workers:

• Foreign workers must have a valid work permit to legally work in Malaysia.
• The work permit is usually applied by the employer, who wishes to hire the foreign worker.
• Different types of work permits are available depending on the industry and duration of employment.
• The employer is responsible for applying for the work permit on behalf of the foreign worker.
• The work permit application process involves submitting the necessary documents and meeting certain requirements.
• The Malaysian government sets quotas for each industry, limiting the number of foreign workers allowed.
• Work permits may have restrictions on job titles, working hours, and contract duration.
• Employers must ensure that their foreign workers have a valid work permit at all times during their employment.

Relocation and setup processes for foreign businesses

Setting up a business in Malaysia as a foreigner involves several important steps and considerations.

Here is a guide to help you navigate the relocation and setup process:

Company Registration:

• Choose a company name that complies with Malaysia’s guidelines.
• Prepare the necessary documents, such as identification, proof of address, and passport copies for directors and shareholders.
• Submit the required forms and documents to the Companies Commission of Malaysia (SSM).
• Pay the registration fees.

Obtaining the Necessary Permits:

• Determine if your business requires special permits or licenses based on its activities or industry.
• Apply for any necessary permits or licenses from relevant authorities, such as the Ministry of International Trade and Industry (MITI) or local government agencies.

Hiring local employees:

• Understand Malaysia’s employment regulations regarding hiring foreign workers.
• Obtain the necessary work permits and visas for your employees through the Malaysian Immigration Department.

Taxation Obligations:

• Familiarize yourself with Malaysia’s tax laws for businesses.
• Register for corporate income tax with the Inland Revenue Board (IRB).
• Ensure compliance with other taxes like value – added tax, digital service tax, withholding tax, etc.

Finding office space:

• Research suitable locations for your business operations.
• Engage with real estate agents or consult property websites to find office spaces that meet your requirements.
• Negotiate lease agreements and ensure legal compliance.

Banking and Financial Matters:

• Open a business bank account in Malaysia to facilitate financial transactions.
• Secure appropriate banking facilities to manage payment processing and other financial needs.

Foreign investors:

• In Malaysia, corporations are subject to corporate income tax, value-added tax, income tax, and digital service tax.

Double Taxation Agreements

Malaysia has established double tax agreements with numerous countries to benefit both its resident taxpayers and those in contracting states who earn income from both locations.

Malaysia’s double tax agreements offer significant advantages to residents and contracting state members earning income in both regions.

These countries are:

Asia: Bangladesh, Brunei, Cambodia, China, Hong Kong, India, Indonesia, Iran, Japan, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Laos, Lebanon, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, Philippines, Qatar, Saudi Arabia, Singapore, South Korea, Sri Lanka, Syria, Taiwan, Tajikistan, Thailand, Turkmenistan, UAE, Uzbekistan, Vietnam, Yemen

Europe: Albania, Austria, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Kosovo, Latvia, Lithuania, Luxembourg, Malta, Moldova, Montenegro, Netherlands, North Macedonia, Norway, Poland, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom

Africa: Algeria, Egypt, Kenya, Libya, Mauritius, Morocco, Namibia, Seychelles, South Africa, Sudan, Tunisia, and Zimbabwe

North America: Canada, Mexico, and the United States of America

South America: Argentina, Brazil, Chile, Colombia, Ecuador, Peru, Uruguay, and Venezuela

Oceania: Australia, Fiji, New Zealand, and Papua New Guinea

Conclusion

Understanding Malaysia’s tax system is crucial for expats and entrepreneurs who want to navigate the country’s taxation laws.

From corporate tax rates to personal income tax filing requirements, this complete guide provides important facts for individuals and businesses operating in Malaysia.

Ensure compliance with Malaysian tax regulations and consider seeking professional assistance to maximize the tax relief, incentives, and deductions available.

The tax rates for resident companies and SMEs vary based on their chargeable income.

As we wrap up this in-depth exploration of Malaysia’s tax system, it’s evident that understanding these complexities is vital for expats and entrepreneurs aiming for successful ventures in the country.

Simplify your experience with Nomad Offshore Academy´s comprehensive tax services in Malaysia.

Our guide has delved into various taxes, recent updates, and the significant reliefs available, especially for foreign entities.

Remember, staying compliant with the Malaysian tax regulations is paramount, and utilizing the available incentives can significantly enhance your financial outcomes.

For those seeking further clarity or assistance, professional tax services can provide tailored support, ensuring a smooth and efficient fiscal experience in Malaysia.

Frequently Asked Questions

How do I file my taxes in Malaysia?

To file your taxes in Malaysia, you need to register with the Inland Revenue Board (IRB) and submit an income tax return form before the deadline.

What documents do I need to prepare for filing my taxes?

You will need documents such as your identification card, employment income statements (EA Form), bank statements, receipts, and any other relevant financial records.

Are there any tax deductions or reliefs available in Malaysia?

Yes, there are various tax deductions and reliefs available in Malaysia for specific expenses such as medical expenses, education fees, insurance premiums, and contributions to approved funds or organizations.

How can I check my tax refund status?

You can check your tax refund status through the online portal of the Inland Revenue Board (IRB) by providing your taxpayer identification number and filling out the necessary details.

What happens if I fail to file my taxes on time in Malaysia?

If you fail to file your taxes on time in Malaysia, you may be subjected to penalties or legal consequences imposed by the Inland Revenue Board (IRB). It is important to meet all deadlines and fulfill your tax obligations promptly.