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How Does Tax Residency Status Change in Malaysia? A Guide for Overseas Employers

Once you have hired employees overseas you will need to withhold taxes from their pay that reflects local rates.  This may seem simple at first, but there may be different rates depending on whether the employee is a tax resident or non-resident.

Usually, a local citizen of the country will be a tax resident, but expat employees may not be, depending on the length of their assignment.  There are tests to determine tax residency, and that is the case in Malaysia.  If you have employees in Malaysia, you will need to know at what point they become tax residents, and how that may affect their taxes at home, including any credits and offsets available under a tax treaty.

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This is important for making the correct withholding, especially if there is a change in status affecting the tax rate.  This guide will show you how tax residency is defined in Malaysia, and how to apply the different rates in payroll.

How is Tax Residency Defined in Malaysia?

The basic test of tax residency in Malaysia is when you stay longer than 182 days in a calendar year, or in a rolling 12 month period.  Another way to qualify for tax residency is if you spend 90 days or more in the current tax year, plus 90 days in three of the past four years.

How Do You Apply for a Certificate of Residence (COR) in Malaysia?

The Certificate of Residence (COR) is used to verify your tax residence status, and can allow you to claim credits under tax treaties with Malaysia.  The COR is applied for in person with tax authorities, and the employee must present their passport and documentation of travel in and out of Malaysia for the past year.  The COR is free and will be ready within three days.

Income Tax Rates for Residents vs Non-Residents

Tax residents pay progressive income tax rates of 1-28%, based on income level.  Non-residents pay a flat 28% on taxable income, so it is advantageous for your employee to qualify as a resident.  Another advantage of the resident status is that deductions from income are available, while non-residents cannot use those to reduce their taxable income.

Case Study: A Change in Tax Residency Status in Malaysia

Context:

One of our clients had an employee in Malaysia who thought they were now a tax resident and asked why their payslip still reflected the 28% flat rate for non-residents.

Solution:

Our local employer of record asked the employee to submit the documents that showed they now were qualified as a tax resident.  They did confirm that the employee’s status had changed, and the progressive resident tax rate would now apply for a lower withholding amount. 

Because the change in status had occurred in the prior month, but was not calculated for that payslip, the employee would have the status applied retroactively, and the difference would be included in their next payslip.  All future payslips would use the resident rate for withholding as well.

Do You Need More Information About Malaysia?

You may still have questions about tax withholding and status in Malaysia such as:

Does the tax status of the employee affect their status and tax rate in their home country?

Do resident tax payers in Malaysia have to pay tax on income earned outside the country?

What are the deductions available for tax residents?

Through our local experts and partners, we can help you understand the intricacies of tax status, withholding and running payroll, as well as meeting immigration and employment laws.  We make international employment simple.

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Looking to hire an employee in Malaysia? Get in touch.

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