This article attempts to explain how Malaysian tax affects expatriates and non-residents. As an expat is not usually a non-resident and a non-resident is not usually an expat but there is some overlap which makes it convenient to deal with them together. However, there are subtle differences between the two groups as far as tax exposure is concerned.
Expatriates are different from others – true or false?
In common usage, the term expatriate is used to mean any person living in a different country from where he or she is a citizen. In its narrower sense, it refers specifically to professionals sent abroad (in this case to Malaysia) by their companies, as opposed to locally hired staff. However, Malaysia has a growing number of retired or semi-retired individuals who, with or without their families, spend considerable amounts of time in Malaysia having been granted the Malaysia My Second Home (MM2H) status. This allows them to settle in Malaysia and to come and go freely for a period of years (currently ten) and so they can also be considered to be expats.
As many expats have found out to their delight on arrival, Malaysia has a tax regime that compares very favourably with the one they have left behind. There is no capital gains tax, except for the real property gains tax, no inheritance tax and no value added tax. In most cases, the only tax that expatriates have to contend with is income tax.
In essence, there is no difference between Malaysians and expats in the way that they are taxed. All are dealt with under the same system. What makes the Malaysian tax system so comfortable for many expats is the tax exemption given to foreign income.
This applies to virtually all persons including companies regardless of whether the foreign income is remitted to Malaysia or not, which helps them to shelter their foreign income and pensions from tax (but not necessarily from tax in the home country). In addition many types of income derived from Malaysia including dividends and bank deposit interest are exempt from tax. Usually, expats will only be exposed to income tax if they have employment income, directors’ fees or income from property in Malaysia.
Non-residents are not concerned with Malaysian tax – or are they?
This statement in not true, of course, as will be evident from the explanations given in the previous paragraph. Although non-residents are usually liable to income tax on the same kinds of income as everybody else, they are taxed in a different way. They are denied certain beneficial features of the tax system which are available to resident individuals.
These include being taxed at graduated rates which start from a low of 0% and rise in steps to 26% as well as the ability to deduct various kinds of payment or expense and to claim a range of personal allowances and rebates. By this means, the tax burden of residents can be reduced quite considerably. In contrast, non-resident individuals, including those rare cases where an expat is a non-resident for tax purposes, are required to pay tax on all of their chargeable income at the rate of 26%.
Being married can also present some advantages to a resident individual which are not available to a non-resident. Spouses are taxed separately unless they deliberately choose joint taxation. This means that each spouse who is a resident can enjoy the deductions, allowances and rebates as well as the reduced rates. By planning to divide the income of the family unit between spouses, the tax burden can be reduced further and perhaps eliminated altogether. Non-residents do not enjoy this advantage.
Non-residents often invest in property for renting and they need to be aware that their net rents are liable to tax in Malaysia and that they will be taxed at the non-resident rate without the benefit of personal allowances.
Tax residence of an individual in Malaysia is determined solely on the basis of his presence in Malaysia. Nationality, citizenship, permanent residence, MM2H status and intention have nothing to do with it. A person is likely to bear less tax as a resident than as a non-resident so residence status is something to be aimed for and cherished by all expats including MM2H-status individuals.
Are you resident or non-resident?
It is just a matter of arithmetic. An individual’s residence status is determined for each tax year, which is the calendar, and for the whole year without splitting. If the person is present in Malaysia for at least 182 days in a year he is resident. Any day on which he is present in Malaysia at all counts as a day of presence. In theory, a person could catch the first flight to Singapore on Saturday morning and return on the last flight the next day and, for tax purpose, he would not have left Malaysia.
Without the ‘linking rule’ the 182-day requirement would operate harshly where a person first came to Malaysia in the second half of a year (say 2009) as he would be treated as a non-resident for that year. What happens in practice is that he would still be treated as resident for 2009 if, in 2010, he had an unbroken period of at least 182 days during which he was present in Malaysia and that period was linked to the shorter period in 2009. The linking of the two periods is vital but certain qualifying absences in 2010 can be ignored.
There are other time-based rules which help a person to maintain his residence status but space does not permit a discussion of them here.
Tax Tips for MM2H Property Investors
- Borrow as much of the purchase price as possible if you intend to or are likely to rent out your property in the future. The interest on any loan used to acquire or improve the property qualifies as a tax deduction from the rents.
- For residential property not intended for letting for which you have signed up before 2011, make use of the ‘one off’ tax relief for interest on a housing loan.
- Understand what is tax deductible and what is not especially if you are spending money on ‘renovations’.
- Split family income between spouses.
- Try to avoid a year of non-residence.
- Hang on to all of the receipts for improvements and other expenditure which you might want to claim for real property gains tax. (There is no guarantee that it will be gone after five years).
Income Tax Guide for Non-Resident Investors
- Direct property expenses, including loan interest, is all that you can deduct for tax. Aim to maximise them.
- If you are borrowing from a non-resident, you have to deduct tax at 15%. Your right to set it off against your rent may be prejudiced if you fail to do so.
- Remember that real property gains tax applies to non-residents as well as residents on a sale within five years of acquisition and that the buyer is required to deduct tax upfront.