Residency status: How does it impact one’s tax affairs?

THE principal difference between a nonresident and resident is rate of taxation: flat rate of 28% is applied to income brought to tax in Malaysia without any personal reliefs and deductions, versus a tax resident who will enjoy the reliefs and deductions and most importantly, benefit from the graduated rates of tax.

Being a non-resident has other disadvantages. He will suffer withholding taxes on payments received for services rendered, interest and royalties etc, received from Malaysian residents/payers and will not be accorded any relief available under the Malaysian double tax agreements.

Basis of taxation

Residency determines the rates of taxation. But the basis of taxation in Malaysia is based on the “accruing in or derived from Malaysia” principle (income from Malaysian source). Source in simple terms is located where the originating cause or activity that generates the income lies. Example, the source for rental income is where the property is located or source for pension income is where the fund is located or interest source is where the loan/deposit is located.

Does citizenship or domicile have any impact on Malaysian taxation? The answer is: No.

Determining tax resident status

An individual is regarded as tax resident if he is: in Malaysia for at least 182 days in a calendar year; or in Malaysia for a period of less than 182 days during a year but that period is linked to a period of physical presence of 182 or more consecutive days in the following or preceding year. Temporary absences from Malaysia due to certain reasons (business trips, treatments for ill health and social visits not exceeding 14 days ) are counted as part of the consecutive days provided the individual is in Malaysia before and after each temporary absence; or in Malaysia for 90 days or more during the year and, in any 3 of the 4 immediately preceding years, he was in Malaysia for at least 90 days or was resident in Malaysia; or resident for the year immediately following that year and for each of the 3 immediately preceding years.

Malaysian residing overseas with income in Malaysia

Such individuals whether Malaysian or not who do not qualify as residents will subject to tax at the 28 % flat tax rate on their passive income such as rental income or any share of partnership or business income.

Remittance of foreign sourced income to Malaysia

The issue of residence does not matter here for individuals as any income from a foreign source that is remitted into Malaysia is tax exempt. Therefore anyone, whether he is a tax resident or not, can bring his earned income and other passive income back to Malaysia without being subject to Malaysian taxation.

Short term employees

Any non-resident person exercising employment in Malaysia for less than 60 days is exempt from Malaysian tax.

Double tax treaty

There will be cases where an individual can become of a tax resident of two countries during the same tax period and in such situations, one needs to seek assistance from the treaty – firstly, to establish where his residence lies and secondly, which country has the right to tax the different classes of income to avoid double taxation.

Final advice for frequent travelers

If you are a frequent traveler, you need to watch your travel dates in and out Malaysia; even part of day will be regarded as present in Malaysia. If you inadvertently become a non-resident, the penal rate of 28% will kick in on all your Malaysian sourced income.

The writer is the managing director of Crowe Horwath Tax Sdn Bhd and a trustee of the Malaysian Tax Research Foundation.