When Are You a Tax Resident in Malaysia?
If you are reading this, perhaps, you are:
- a. Malaysian citizen who had recently returned from overseas and start working as an employee or is setting up a business.
- b. Malaysian citizen who will be terminating his existing employment or business in Malaysia to embark a new career, business opportunities or further studies in overseas.
- c. Foreigner who works as an employee or runs a business in Malaysia.
You may wonder, ‘Am I a tax resident of Malaysia?’
Here, I’ll share the privileges of being a tax resident of Malaysia and a couple of pointers to help you ascertain, whether or not, you are indeed a tax resident of Malaysia. Therefore, here are 2 things you need to know about tax residency in Malaysia. They are as follows:
#1: Why should I be a Tax Resident of Malaysia?
If you are deriving income from employment or business in Malaysia, there are several benefits that you would enjoy if you are a tax resident of Malaysia. This includes, but not limited to:
- Tax Rates
Income earned by residents are subjected to a scaled income tax rates, from 0% to 28%. Whereas, for non-residents, income earned would be subjected to a flat tax rate of 28%.
- Personal Reliefs
Residents are entitled to a number of personal reliefs that would lower their final chargeable income which is subjected to income tax. These reliefs, however, are not claimable by non-residents.
- Tax Rebate
Residents would enjoy RM 400 rebate on their income tax payments if their chargeable income is below RM 35,000. The rebate would not be available for non-residents.
- Tax Exemptions
Residents would enjoy tax exemptions for several types of income that are not available to non-residents. This includes royalty income derived from literary or artistic works, income from cultural performances that are approved by the Ministry of Culture, Arts, and Tourism, and income from musical compositions.
#2: How to Determine Your Residency Status?
Is it based on your nationality? The answer is nope. A person’s residency status is determined based on the amount of days he is physically present in Malaysia in a year. For instance, under Section 7(1)(a) of Income Tax Act (ITA) 1967, if he stays in Malaysia for a total of 182 days or more in one year, he is qualified as a tax resident of Malaysia and thus, enabling him to enjoy the tax benefits stated above. That year is known as a Resident Year.
However, if he stays lesser than 182 days in a year, there are 3 instances which he could qualify himself to be a tax resident of Malaysia.
- Linked to a Resident Year
Under Section 7(1)(b) of ITA 1967, if a person stays in Malaysia for less than 182 days in one year and the period is linked to both immediately preceding or immediately following a Resident Year, he is still classified as a Resident in the year despite not fulfilling a minimum of 182 days in Malaysia. Let me give you some examples:
Example 1: Linked to Preceding Resident Year
Assuming, you have been staying in Malaysia from 1 August 2017 to 31 December 2018. In 2018, you had fulfilled a minimum of 182 days as required and hence, qualified as a tax resident. Whereas, in 2017, your stay in Malaysia is ‘linked’ to year 2018 as you were present in both 31 December 2017 and 1 January 2018. Hence, you are also a tax resident in 2017 despite not fulfilling the 182 days requirement.
Example 2: Linked to Following Resident Year
Likewise, if you have been staying in Malaysia from 1 January 2017 to 1 March 2018, you qualify as a tax resident in 2017 as your length of stay in Malaysia has surpassed 182 days. In 2018, you would also be viewed as a tax resident as you were present in both 31 December 2017 and as well as 1 January 2018.
- The 90 Days Rule
Under Section 7(1)(c) of ITA 1967, if a person who stays in Malaysia for 90 days or more and has been either a resident or be in Malaysia for 90 days or more in 3 out of 4 immediate preceding years, he qualifies as a tax resident in Malaysia for that year. Let me explain:
Example 3: The 90 Days Rule
You stayed in Malaysia for 90 days from 1 June 2018 to 31 August 2018 and, for other parts of the year, you were overseas. You will still be a tax resident in 2018 if you are a tax resident in 2015, 2016, and 2017 in Malaysia despite you not fulfilling both the minimum of 182 days and a ‘linked’ period of stay under Section 7(1)(b).
- The Rule of a Missing Year
Under Section 7(1)(d) of ITA 1967, if a person is not present in Malaysia at all for the entire year, he is a tax resident in the ‘missing’ year if he is a tax resident in three immediate preceding years to the ‘missing’ year and a tax resident in the immediate following year to his ‘missing’ year. Here is another example:
Example 4: The Missing Year
You were in overseas throughout the entire year of 2017 after working and staying in Malaysia in the year 2014, 2015, and 2016. In 2018, you had returned to Malaysia and stayed permanently. In this case, you are still a tax resident of Malaysia in 2017 despite you not being present totally in Malaysia in that year.
It is a privilege to be a tax resident of Malaysia as you would enjoy a handful of tax benefits which leads to great tax savings. It is a mistake to assume that you are automatically a tax resident in Malaysia because you are a citizen. Likewise, if you are a foreigner, please do not assume that you are not a tax resident as it is based on the number of days you spent in Malaysia.
Your situation could be more complex and thus, needing the assistance of a tax consultant. If so, you may use the form below, we connect you to quality accounting, audit, and tax service providers in Malaysia.
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