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Income Tax and Taxable Benefits in Malaysia: A Guide for Overseas Employers

When you hire an employee overseas, you will find yourself in the middle of a foreign tax system, with different rates and rules than you may be used to at home.  The bottom line is that you have to make the correct tax withholding and payments for your employees, on time and in the right format, even if it is unfamiliar.

So how do you go about finding the correct withholding and filing requirements, as well as what benefits are taxable?  Should you DIY or look for expert assistance?

Here is an overview of income tax and taxable benefits in Malaysia, as a guide to get you started, and suggestions on getting the help you need to stay in compliance.

Personal Income Tax Rates in Malaysia

Personal income tax in Malaysia ranges from 0-28% for residents, and non-residents pay a flat 28%.  If you hire a local citizen they are already residents, and some expats on assignment may also meet the resident criteria if they stay long enough in Malaysia.

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When is an individual considered a resident for tax purposes in Malaysia?

Because the tax rates are different for residents, it is important to know the definition and qualification as a tax resident.  There are four different ways to become a tax resident:

  1. The individual is in Malaysia for a cumulative total of 182 days or more in the calendar year.
  2. Same as number 1), but instead a ‘rolling year’ is used to meet the 182 day rule.
  3. The individual is in Malaysia for a cumulative total of 90 days in the current year, as well as 90 days in any three out of four preceding years.
  4. The individual has been a resident for the past three years, and expects to be a resident next year.

Absences from Malaysia for some purposes may affect the number days counted.  These rules apply primarily to expats, and a good way to think about it is that any assignment longer than six months will result in tax residency.

Case Example: Taxable Benefits in Malaysia

Many benefits in Malaysia are taxable, and one of our clients with employees there asked us about the categories and how the process would work re: taxation and making sure their employees did not bear the burden of extra tax on benefits.

We told them that there are five categories of benefits in Malaysia:

  1. Accommodation (fixed amount)
  2. Car Hire (varies)
  3. Utilities (varies)
  4. School Fees (periodic according to school term)
  5. ‘Tax on Tax’ (when the employer pays the tax on benefits, this also taxable, paid once a year in May)

Because all of these are taxable benefits, the amounts will be included each month in taxable income, and reflected in the payslip.  We in turn will calculate the additional tax to the employee and invoice our client separately for that amount, and in turn pay the tax bureau directly.  This way the employees’ net income is unaffected.

The Shield GEO Solution

If you are hiring employees in a new country like Malaysia, you will wonder how to find the right information and expertise.

  • How do you calculate tax withholding on salary and benefits?
  • What do you do when the amounts change each month such as car or utility allowances?
  • Where are tax payments and filing made?

A vetted and experienced local partner can assist you with all of this, and remove the risk of non-compliance or underpayment of taxes.

Our client in this example had asked us if they needed to hire a tax advisor to make the right calculations and payments, but we assured them that with our local in country experts, we could handle all of that for them.  This is the heart of the Shield GEO solution, where we make international employment simple for your HR department through our employer of record, taking care of all aspects of payroll, taxation and immigration for your overseas staff.

 Need more information about employing in a new country? Learn more about:

Looking to Hire an Employee in Malaysia? Get in touch.

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