Is Foreign Income Subject to Tax for Individuals?
Key Takeaway
Foreign income received in Malaysia may be taxable, with specific exemptions, conditions, documentation, and double-taxation relief available.
Malaysia generally operates on a territorial basis of taxation. Under section 3 of the Income Tax Act 1967 (“ITA 1967”), income accruing in or derived from Malaysia, as well as income received in Malaysia from outside Malaysia where applicable, may fall within the Malaysian income tax framework.
With effect from 1 January 2022, foreign-sourced income (“FSI”) received in Malaysia by a Malaysian resident is, in principle, brought within the scope of Malaysian taxation. However, specific exemptions are available for qualifying resident individuals.
For resident individuals, the key exemption is contained in the Income Tax (Exemption) (No. 5) Order 2022 [P.U.(A) 234/2022], as amended. The exemption generally covers foreign income received in Malaysia, other than income from a partnership business in Malaysia, subject to the relevant conditions.
With effect from 1 January 2022, foreign-sourced income (“FSI”) received in Malaysia by a Malaysian resident is, in principle, brought within the scope of Malaysian taxation. However, specific exemptions are available for qualifying resident individuals.
For resident individuals, the key exemption is contained in the Income Tax (Exemption) (No. 5) Order 2022 [P.U.(A) 234/2022], as amended. The exemption generally covers foreign income received in Malaysia, other than income from a partnership business in Malaysia, subject to the relevant conditions.
What is “Income Received from Abroad”?
For purposes of the exemption order, “income received in Malaysia from outside Malaysia” refers to income arising from outside Malaysia which is brought into Malaysia. Accordingly, the distinction between:
is important in determining the Malaysian tax treatment.
- income arising from Malaysia;
- income arising outside Malaysia; and
- whether the foreign income is actually received in Malaysia
is important in determining the Malaysian tax treatment.
Examples of foreign income potentially relevant to an individual include:
- foreign employment income;
- foreign business or professional income;
- foreign dividends;
- foreign interest;
- foreign rental income;
- foreign royalties; and
- other income of an income nature.
Exemption for Resident Individuals
A resident individual may qualify for an exemption from Malaysian income tax on most types of foreign income received in Malaysia under section 4 of the ITA 1967. However, this exemption does not apply to income from a partnership business in Malaysia.
One of the main conditions is that the foreign income must generally have been subject to a tax similar to income tax in the country where the income was earned. This condition may still be met in situations where:
One of the main conditions is that the foreign income must generally have been subject to a tax similar to income tax in the country where the income was earned. This condition may still be met in situations where:
- Income tax or withholding tax was charged or paid in the foreign country;
- No tax was charged because of the foreign country’s tax system;
- The income was below the foreign country’s tax-free threshold;
- The income was exempt from tax under a tax incentive; or
- For certain foreign dividend income, the income was subject to tax at an underlying level or came from profits that benefited from certain tax rules or incentives.
Duration of the Individual Exemption – Important Update
The original exemption order applied from 1 January 2022 to 31 December 2026. However, the Income Tax (Exemption) (No. 5) Order 2022 (Amendment) Order 2024 amended the expiry date from 31 December 2026 to 31 December 2036.
Foreign Tax Credit – Where Malaysian Tax Arises
Where foreign income is not exempt, Malaysian tax may arise where the income falls within the Malaysian charging provisions. Where the same income is also subject to foreign tax, relief from double taxation may potentially be available under:
- section 132 ITA 1967, where an applicable double taxation agreement or the relevant statutory conditions apply; or
- section 133 ITA 1967, for unilateral relief in appropriate circumstances.
