Why would anyone want to become a tax resident of Malaysia?
As it turns out, that’s a pretty easy question to answer. Along with the promise of low taxes, foreigner-friendly property ownership laws, beautiful scenery and a diverse culture, Malaysia is booming and the go-to destination for expats all over the world.
Even if you’re not interested in establishing a base there, it’s still an excellent investment option and, without doubt, is one of the top five Asian countries to invest in.
Malaysia – Country Overview
Malaysia is situated in Southeast Asia and comprises two regions: West Malaysia and East Malaysia. The capital, Kuala Lumpur, is in the western region. The current population of Malaysia is just under 35 million, and the official language is Malay. However, most people in the urban areas can speak English.
With a melting pot of cultures, the nation boasts a diverse mix of Malay, Indian, Chinese and European influences. In the last half-century, Malaysia has developed from a country primarily dependent on raw material exports to one of the most stable and fastest-growing economies in Southeast Asia.
Today, investors and entrepreneurs know Malaysia as a business and expat-friendly jurisdiction with developed infrastructure and political stability.
In recent times, the country has introduced favourable tax laws, strengthened its private sector and taken other measures to become as investment-friendly as possible.
Tax Residency in Malaysia
Each country sets its own rules for tax residency but many rely on similar methods. The most common test is the physical presence test. In Malaysia, the Income Tax Act 1967 (ITA) provides detailed criteria for residence status.
You’ll be considered a tax resident in Malaysia if you fulfil any of the criteria mentioned below:
- 182 Days Rule: You’re physically present in Malaysia for at least 182 days or more during the tax year.
- Less than 182 Days Rule: You’re physically present in Malaysia for less than 182 days during the year. However, you were physically present for at least 182 days in the second half of the previous calendar year or the first half of the following calendar year (excluding temporary absence for specific reasons).
- 90 Days Rule: You’re present in Malaysia for at least 90 days during the calendar year and have been resident/present in Malaysia for 90 days in any three of the past four years.
- No Physical Presence: You’ve been a Malaysian resident for the past three calendar years and will be a resident the following year.
Taxable Income for Malaysian Tax Residents
Not so long ago, Malaysia used to tax its residents and non-residents on their Malaysia-sourced income only (employment, self-employment, business income, director’s fees and other sources). However, during the tabling of budget 2022, the government announced it would begin taxing the foreign-sourced income of Malaysian tax residents.
Thus, all foreign-sourced income remitted to Malaysia, regardless of its nature, including employment income, interest, dividends, rent and pension income, became taxable.
The foreign income tax exemption was one of the most significant attraction points for foreigners moving to Malaysia, so naturally, the announcement came as a major blow to many. However, the government recently announced a tax exemption on foreign-sourced income that provides temporary relief.
According to the latest amendment, foreign income received in Malaysia will not be taxed, provided it has been taxed in its country of origin. This tax exemption will be valid from January 1, 2022 until December 31, 2026.
Thus, Malaysian tax residents can currently claim certain tax relief rebates. Their Malaysian-sourced income is taxed at a progressive rate ranging from 0% to 30%, payable through self-assessment.
None of this affects non-residents – their foreign income is still tax-exempt, regardless of these conditions. Meanwhile, the Malaysian-sourced income of tax non-residents is subject to a flat tax rate of 30%. Certain types of income are also subject to withholding taxes and it’s not possible to claim any tax reliefs or rebates.
How to Establish Residency in Malaysia
Now that you know the criteria for tax residence in Malaysia, let’s briefly explore some ways to enter, work and stay there.
Entry Permit
An entry permit, also known as a Malaysian Permanent Residence Permit, is available to specific categories of foreigners – investors, experts, professionals and dependents of a Malaysian citizen (spouse and children under six years old). A Malaysian entry permit may also be granted based on a points system.
The key requirements for a residence permit are:
Investor
- Must have at least a US$2 million fixed deposit in a Malaysian bank (withdrawal is allowed after five years)
- Spouses and minor children also become eligible for permanent residency after five years.
Expert
- Must demonstrate expertise recognised as ‘World Class’ by any international organisation
- Must be recommended by a relevant Malaysian agency
- Must demonstrate a certificate of good conduct from one’s native country.
Professional
- Must be recommended by a relevant Malaysian agency
- Must demonstrate a certificate of good conduct from one’s native country
- Must demonstrate outstanding professional skills in any field
- Must have worked in a Malaysian government or private agency for at least three years.
All categories need a Malaysian sponsor to apply for the Entry Permit.
Point System
The point system scores an individual based on age, qualification, duration of stay in Malaysia, work experience and proficiency in the Malaysian language, among other criteria. Those who score at least 65 marks are eligible to apply for the Entry Permit.
Malaysia My Second Home (MM2H) Program
Probably the most popular Malaysian visa program, MM2H is a multiple-entry visa allowing applicants and their dependents to live in Malaysia and lasts for up to ten years.
Malaysia has approved over 40,000 visas from 130 different countries under the MM2H program so far.
The program is open to all nationalities and the only notable requirement is meeting the financial threshold:
- Offshore income worth a minimum MYR40,000 (approximately US$8,500) per month
- Liquid assets worth a minimum MYR1.5 million (approximately US$318,000).
Upon approval, successful applicants must invest MYR1 million (approximately US$212,000) plus MYR50,000 (approximately USD$10,500) per dependent. This investment must be maintained throughout the applicant’s stay in the country under the program. However, applicants are permitted to withdraw up to MYR 500,000 (approximately US$106,000) after the first year. This can be used for approved expenses relating to a house purchase, education for your children in Malaysia, or medical purposes.
To learn the requirements and benefits, see our ultimate guide to the MM2H visa program.
Labuan Work Permit
Labuan is a federal territory of Malaysia known for its financial services. In fact, it’s quickly becoming Asia’s hidden gem for offshore company incorporation.
A Labuan work permit is initially valid for two years and can be renewed for another two to three years. It allows foreigners 100% ownership of the business and, moreover, it can grant a yearly multiple-entry visa for family members of business owners.
Malaysian Tax Residency: FAQs
In principle, foreign residents are not taxed on their worldwide income or assets. However, they are taxed on what they remit to the country to live on at progressive rates ranging from 0% to 30%.
Until January 2022, you didn’t have to worry about foreign-sourced income when filing your tax returns. However, unless specific conditions were met the exemption on foreign income was removed and the foreign income of tax residents from outside Malaysia was deemed taxable. The government has since rolled back on this, temporarily at least, by granting an extended exemption until December 31, 2026.
It applies if your qualifying foreign income has been taxed in your country of origin or in the country where it comes from. If the tax system in your home country doesn’t impose tax, or if the income is below the taxable threshold, you won’t pay tax there. In short, you pay very little tax if you structure things properly in Malaysia.
You can acquire high-quality housing for a very reasonable price in some of the country’s best locations. For example, there are options beginning at around US$1,500 per square metre for larger properties. Malaysia is also one of the few Asian countries where foreigners can buy land.
It’s relatively rare for foreigners to be granted citizenship in Malaysia but the country’s residence programs allow you to stay there for a number of years.
The process is relatively easy if you’re willing to place some cash into the Malaysian financial system. But you will need to spend over six months in the country to be deemed a tax resident and avail of lower taxes.
Should You Consider Establishing Tax Residency in Malaysia?
At Nomad Capitalist, we’ve been saying for years now that Malaysia is a friendly, affordable and pleasant place to live. The tax benefits, fast-growing economy and foreigner-friendly environment, have combined to make it a popular destination for many expats.
Malaysian income tax rates are progressive and you can benefit from many tax exemptions introduced by the government to lower your corporate bills. So, it’s an excellent jurisdiction to benefit from an array of tax exemptions and other incentives.
If you’re keen to enter the Malaysian market but aren’t sure where to begin, look no further. Nomad Capitalist will help you discover the ideal strategy to pay lower taxes, protect and grow your assets, invest in real estate and enhance your lifestyle in this beautiful Southeast Asian country. We have helped 1,500+ high-net-worth individuals and can help you, too. Find out how here.
