Foreign source income tax.
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Malaysia adopts a territorial tax principle. According to Section 3 of the Income Tax Act 1967, foreign-source income received or derived in Malaysia should be taxed in the corresponding year of assessment.
Taxation of foreign-source income.
Following the announcement of the 2022 Budget on October 29, 2021, any foreign-source income received by Malaysian tax residents in Malaysia will be taxed from January 1, 2022, in accordance with the amendment to Paragraph 28 of Schedule 6 of the Income Tax Act 1967.
The proposed amendment is as follows:
- Malaysian residents are subject to income tax on foreign-source income received domestically
- From January 1, 2022, to June 30, 2022, a 3% income tax will be levied on total foreign-source income received by Malaysian tax residents in Malaysia. After July 1, 2022, such income will be taxed at the prevailing tax rates.
- Exemptions under Paragraph 28 of Schedule 6 of the Income Tax Act still apply to individuals who are not Malaysian tax residents.
The changes are effective from 2022.
To further mitigate this significant change in tax law, two exemptions were announced on July 19, 2022:
- Income Tax (Exemption) (No. 5) Order 2022
- Income Tax (Exemption) (No. 6) Order 2022
According to these announced exemptions, the exemption period is from January 1, 2022, to December 31, 2026. Individuals are exempt from all types of income, including income from employment, dividends, rental, and interest. Companies and limited partnerships are only exempt from foreign-source dividend income. To qualify for the exemption, the following conditions must be met, summarized as follows
Taxpayer categories | Exempt income types | Eligibility criteria |
Individuals | All types of income except partnership income | The income has been taxed in the country of origin. |
Companies, limited partnerships, and individual partners engaged in partnership business in Malaysia | Dividends |
|
This exemption will be effective from January 1, 2022, to December 31, 2026. Except for the above circumstances, from January 1, 2022, Malaysian tax residents receiving foreign-source income (FSI) in Malaysia will be subject to taxation in Malaysia
For individual taxpayers, the government provides exemptions, except for individuals engaged in partnership business in Malaysia, who must pay tax on foreign-source income received in Malaysia. Non-resident categories (individuals, companies, etc.) are still eligible for exemptions
Following the announcement by the Ministry of Finance on December 30, 2021, the following exemption orders were published in the Gazette on July 19, 2022
- Income Tax (Exemption) (No. 5) Order 2022 – Exemption for foreign-source income (FSI) received by resident individuals
- Income Tax (Exemption) (No. 6) Order 2022 – Exemption for foreign-source income (FSI) related to partnership business in Malaysia received by resident companies, limited liability partnerships (LLPs), and their individuals
According to the exemption orders, foreign-source income (FSI) of the following categories and sources received from outside Malaysia will be exempt from tax from January 22, 2026, to December 31, 2026.
| Taxpayer categories | Exempt categories of foreign-source income (FSI) |
| Resident individuals | All sources of income (excluding income sources from outside Malaysia that belong to partnership business in Malaysia) |
Resident companies/limited liability partnerships (LLPs) Resident individuals (dividend income received in Malaysia, from outside Malaysia, and related to partnership business in Malaysia) | Dividends received in Malaysia from outside Malaysia |
Exempt income should have been taxed according to laws of the income’s source country with taxes similar to income tax
For dividend income, the dividends should have been taxed according to the laws of the income’s source country with taxes similar to income tax, and at a rate similar to income tax, which is not less than 15% of the income generated
The Inland Revenue Board subsequently released the “Guidelines on the Tax Treatment of Foreign-Sourced Income” on September 29, 2022, to explain what constitutes foreign-source income, how it is taxed or exempted, and any available reliefs or exemptions
Qualifying conditions for exempt foreign-source dividend income are:
- Dividends have been taxed in the country of origin (Note 1); and
- The total tax rate is at least 15% (Note 2); and
- Meets economic substance requirements (Note 3)
Common questions about overseas income taxation.
Starting from 2022, if you are a Malaysian tax resident, any form of income you have from abroad is considered foreign-source income (FSI). Once this foreign-source income is brought into Malaysia, it is subject to tax in Malaysia.
These incomes include:
- Business income
- Employment income
- Dividends, interest, or discounts
- Rental income, royalties
- Pensions, annuities or other periodic payments
Malaysian Tax Residents (persons residing in Malaysia for 182 days or more in a year)
The government has announced that it will exempt overseas income (FSI) until 2026 in the following 2 cases:
- All overseas income received by an individual (except partnership income)
- This income needs to have been reported abroad
- Dividends received by a company, LLP or partner
- The income has been taxed abroad
- The highest tax rate in the country is not less than 15%
These overseas earnings will be calculated based on your personal income tax rate. However, the PKPP scheme announced by the government earlier will enable taxpayers to get a concession by getting a special tax rate of 3% on any overseas income remitted during the January to June 2022 period!
Briefly:
| Time of remittance of foreign income to Malaysia | Tax rates |
|---|---|
| 01.01.2022 – 30.06.2022 | 3% |
| After 01.07.2022 | Based on personal income tax rate |
LHDN has introduced the Special Income Remittance Scheme (SIRS) for those who have foreign income that needs to be brought into Malaysia. Anyone with foreign income can enjoy a tax rate as low as 3% through this scheme.
Anyone who is a resident of Malaysia can participate, including taxpayers, companies, limited partnerships, co-operatives, trusts, business trusts, associations and more.
Can. The applicant is required to retain proof that the tax has been paid.
Form BE：
- If your overseas income is already exempted by the government, you need to fill in Part K and all your income will be exempted from tax.
- If your overseas income is taxable:
- Remittance to Malaysia between 01.01.2022 – 30.06.2022: enter Part B14 to receive a special tax rate of 3%.
- Remittance to Malaysia after 01.07.2022: fill in Part B4 & Part E, subject to personal income tax rate.
Form B：
- If your overseas income is already exempted by the government, you need to fill in Part L and all your income will be exempted from tax.
- If your overseas income is taxable:
- Remittance to Malaysia between 01.01.2022 – 30.06.2022: enter Part B25 to receive a special tax rate of 3%.
- Individual income remitted to Malaysia after 01.07.2022: enter Part B10 & Part F, subject to personal income tax rates.
- Business income remitted to Malaysia after 01.07.2022: enter Part B3 & Part E, subject to personal income tax rate.
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