Let’s picture a scenario; you and one of your friends start a business. The type of the business doesn’t matter, but what’s important is that the business is growing. So now you and your friend are discussing your next steps. While discussing the next growth avenue for your business, one of you came up with the idea of branching out overseas.
So now just for the sake of this scenario, let’s imagine that your overseas expansion was a huge success. Business is booming, and you and your friends are making a lot of money from overseas. Life is all fine and dandy.
However, this does raise the question; for your income from your local business, you know how the taxation rule works. But what about your overseas business? What happens with that income?
Is overseas income taxable in Malaysia? Well, that is what we’re going to discuss in this article.
Determining what is overseas income
Overseas income or foreign source income (FSI) as it might be called, is exactly as you’d think, which is any form of income that comes from foreign sources.
In which, “Cash” means paper money, coins and cheques; whereby “Electronic Fund Transfer” means bank transfer (e.g. credit transfer, debit transfer), payment card (debit card, credit card and charge card), electronic money (e-money), privately-issued digital assets (e.g. crypto-assets, stable coins) and Central Bank Digital Currency (CBDC).
According to the Income Tax Act (1967), foreign income is defined as “any form of income that is derived or accrued from a tax jurisdiction outside of Malaysia.”
This means that FSI refers to;
(a) gains or profits from a business;
(b) gains or profits from an employment;
(c) dividends, interest or discounts;
(d) rents, royalties or premium;
(e) pensions, annuities or other periodical payments; and
(f) gains or profits not falling under any of the above.
So now that we understand what FSI actually is, let’s get to the meat of the question, is overseas income taxable?
Is overseas income taxable in Malaysia?
The simple answer to this question is; yes it is. However, the long answer is a bit more complicated than that.
The Ministry of Finance has announced that the tax exemption on FSI will be given by concession for a period of five (5) years, from 1 January 2022 to 31 December 2026 on certain categories of FSI.
There are tax exemptions given in relation to overseas income received in Malaysia by residents subject to certain conditions.
The categories of FSI that will enjoy this tax exemption are as follows;
- Companies : Foreign sourced dividend income
i. Income has been subjected to taxation in the country of origin;
ii. Highest tax rate (headline tax) of the country of origin is not less than 15%; and
iii. Comply with economic substance requirements
- Individuals : All types of foreign sourced income received other than partnership income will be tax exempted.
Companies carrying on the business of banking, insurance or sea or air transport are not eligible to enjoy this tax exemption.
So all in all, the answer to our main question, which is overseas income taxable or not, depends on what type of tax payer you are.
To help you visualise and understand just which types of FSI are taxable and which are not, here are three example scenarios;
Overseas income received in Malaysia is subject to tax in the country of origin.
Ali, a resident of Malaysia, works as a Finance Manager in Singapore. Ali and his family live in Johor Bahru and he commutes from his residence to Singapore every day. At the end of each month, he brings back the salary received from his employment in Singapore to Malaysia where the employment income has been taxed in Singapore. Part of his salary was credited to a retirement fund in Singapore by his employer.
Under P.U. (A) 234/2022, income arising from Singapore brought into Malaysia by Ali is exempt from tax in Malaysia because the income has been taxed in Singapore.
Company A owns a share of a company based in Australia. Any income from the dividend received from that company is exempt from tax.
Company A provides loans to related companies overseas. The gross interest income received from overseas is not exempt from tax. It is taxable income in Malaysia.
How much do I have to pay in tax for my overseas income?
Now that you clearly understand which types of FSI are taxable, now we’ll get to the second most pressing question; which is what is the tax rate for FSI?
For the period of 1 January 2022 to 30 June 2022, foreign gross income received in Malaysia will be taxed at a rate of 3% under the provisions of Part XX Schedule 1 of the Income Tax Act 1967.
From 1 July 2022, overseas income received in Malaysia is subject to the current tax rate.
In conclusion, although the tax rules in Malaysia might be a little confusing, with enough reading from the correct source, there will be no issues for you to figure out which income of yours is taxable, even if it’s from a foreign source.
However, if you still need help with your taxes, why not hire a reputable accountancy firm like StanleyCo to help you and your company and save yourself from a huge headache.
*This article was written based on the guidelines provided by LHDN, which was last updated on the 29th of December 2022. We hold no responsibility for any loss or damage of any kind incurred as a result of reliance on any information provided on this article.