FOREIGN-SOURCED INCOME - MALAYSIAN INCOME TAX
Updated: May 25, 2019
Foreign-sourced income is NOT subject to tax in Malaysia, except for certain activities, such as banking, insurance, and air and sea transport operations.
References - Income Tax Act, 1967
Section 3 of the Income Tax Act, 1967 (ITA) states that “income shall be charged for the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia”. The phrase accruing in or derive from Malaysia means the source of income must be in Malaysia
With effect from YA 2004, foreign source income derived from sources outside Malaysia and received in Malaysia by any person is NOT subject to Malaysian income tax
Section 12 of the Income Tax Act, 1967 is about the determining the source of income or derivation of income
The tax exemption is stated in the Schedule 6, Paragraph 28 of the Income Tax Act, 1967 - click the link below for the PDF copy of the Schedule 6;
How to determine income derived from Malaysia or Outside Malaysia (Foreign-Sourced)
Derivation of income is defined in Section 12 of the ITA.
Determining the source of income is indeed difficult and often open to discussion and also can be complex and contentious. There is no exact guide that can be applied to every scenario to determine whether an income is Malaysian-sourced or foreign-sourced. It depends on the nature of the income and of the business transactions which give rise to such income.
Generally, the income shall be deemed derived from outside Malaysia if the income is attributed directly to activities conducted outside Malaysia. The burden is on the tax payer to prove that his income is foreign-sourced.
As per the Section 12(1)(a), gross income that is not attributable to operations of business carried on outside Malaysia would be deemed Malaysian derived income.
Therefore, if the gross income is related to the work performed outside Malaysia and the taxpayer wishes to treat it as foreign source income, the taxpayer would need to substantiate that it is attributable to operations of business carried on outside Malaysia.
General points to consider in determining source of income
Where does the contracts concluded - in Malaysia or Outside Malaysia?
Whether the ownership risk of the business is in Malaysia or Outside Malaysia
Whether services are rendered in Malaysia or Outside Malaysia
These factors are not conclusive on their own and must be considered collectively.
We wish to advise you to consult your accountants, auditors and tax agents extensively before determining foreign-sourced income, due to the complexity of the law and the diverse range of income and circumstances.