Malaysia Global Payroll and Tax Information Guide
Malaysia is a federal constitutional monarchy and consists of 13 states and 3 federal territories, separated by the South China Sea into 2 similarly sized regions, Peninsular Malaysia and East Malaysia (Malaysian Borneo).
Kuala Lumpur is the national capital and largest city, while Putrajaya is the seat of the federal government. Malaysia is the world’s 44th most populous country with a multi-ethnic and multi-cultural population of over 30 million.
Malaysia is one of 17 megadiverse countries in the Tropics, with large numbers of endemic species.
The national language is the Malaysian language (Malaysian Malay). However, English remains an active second language. The official currency is the Malaysian ringgit (MYR).
After independence, the Malaysian GDP grew at an average of 6.5% per annum for almost 50 years. The economy has traditionally been fueled by its natural resources, but it has also expanded in the sectors of science, tourism, commerce and medical tourism. Malaysia is a relatively open state-oriented and has a newly industrialized market economy, ranked 4th-largest in Southeast Asia and 38th largest in the world.
The country is a founding member of the Association of Southeast Asian Nations (ASEAN), the East Asia Summit (EAS) and the Organization of Islamic Cooperation (OIC), and a member of the Asia-Pacific Economic Cooperation (APEC), the Commonwealth of Nations, and the Non-Aligned Movement (NAM).
Ease of doing business in Malaysia
The latest edition of the World Bank Group’s Doing Business 2019: Training for reform report shows that countries must sustain their best possible pace of reforms in order to stay competitive.
Malaysia has done just that with a record of six business reforms carried out in the past year. The country made a significant jump to a global rank of 15th in the ease of doing business global rankings.
- As the 3rd global performer in the dealing with construction permits indicator with only Hong Kong SAR, China and Taiwan, China ahead.
- 4th globally for the getting electricity indicator. As such, the cost for businesses to obtain a commercial electricity connection in Malaysia is only 26% of income per capita, whereas the regional average is 625%.
*Malaysia’s performance in the latest Doing Business report.
Despite of the great results, there are still some key challenges for the country to overcome:
- In the area of starting a business, it is still relatively cumbersome for local entrepreneurs to do so.
- Despite reforms in how businesses pay taxes in the earlier years, the total tax and contributions rate in Malaysia at 39.2%, which is higher than the regional average of 33.5%. Additionally, it takes on average 188 hours per year for businesses to prepare, file and pay taxes, which is still significantly longer than other regional comparators like Hong Kong SAR, China.
Malaysia Payroll – Basic Facts
Multinational companies starting business in Malaysia are required to register as an employer for tax, Employees’ Provident Funds (EPF), Social Security Funds and HRDF (Human Resources Development Fund), if applicable. Employers must register with the Social Security Organization (SOCSO or Perkeso) within 30-days when the new employee begins at the company. Employers must also make sure that they are compliant with all workplace compensation and benefits requirements.
Foreign workers in Malaysia are required to obtain government approval, visas, and employment passes in order to work legally there. Foreign workers are not covered by Malaysia’s social security system and nonresidents are charged income taxes at a flat rate. However, they are generally covered by all other labor provisions. The Employment Act 1955 is the main legislation on labour matters in Malaysia.
Payroll processing in Malaysia normally takes place on a monthly basis. There are currently no specific legal data protection requirements with regards to payroll data. For the time being, companies with a payroll function in Malaysia (in-house or outsourced) will have to rely on internal or external company policies to ensure data protection principles are upheld. Payroll calculations, payments and filings can all be outsourced to the payroll provider.
The Malaysian tax year is the same as the calendar year – January 1st through December 31st.
Tax and Social Security Considerations
Corporate Income Tax
The standard corporate tax rate is 24%, while the rate for resident small and medium-sized companies is 17% on the first MYR 50, 000, with the balance being taxed at the 24% rate.
For petroleum, oil products, banking and insurance industries, different rates apply.
*Alternative minimum tax- A Labuan company carrying on a Labuan business activity (Labuan trading activity) is taxed at 3% of audited accounting profit.
Personal Income Tax
Individuals are taxed on income derived from Malaysia. Foreign-source income is exempt in Malaysia.
As a tax resident is considered an individual who present 182 days or more in a calendar year in Malaysia. Alternatively, residence may be established by physical presence in Malaysia for a mere day, if it can be linked to a period of residence of at least 182 consecutive days in the adjoining year.
Income tax is imposed at progressive rates up to 28% for resident individuals. Nonresidents are taxed at a flat rate of 28%.
Income tax rates for residents – 2019:
Monthly tax deductions are governed by the STD mechanism, which reduces the need for employees to pay tax in a lump sum.
As of 1 April 2015, the Sales and Services Tax was replaced by a Goods and Services Tax (GST). The standard sales tax rates are 10% or 5%, and the goods and services tax in Malaysia is 6%. Goods that are exempt from sales tax generally include live animals, unprocessed food and vegetable, antibiotics, certain machinery, certain chemicals and raw materials for manufacture of goods.
- Dividends – No withholding tax applies to dividends.
- Interest – A withholding tax of 15% applies to interest paid to nonresidents, which may be reduced under a tax treaty.
- Royalties – A withholding tax of 10% applies to royalties and technical service fees, which may be reduced under a tax treaty.
- Technical service fees – A 10% withholding tax applies to service fees paid to a nonresident for services rendered onshore, unless reduced under a tax treaty. Fees paid to a nonresident for services rendered offshore are not subject to withholding tax.
- Rental or installation fee tax – A 10% withholding tax applies to income received by nonresidents from rental of movable property or installation fees from services rendered in Malaysia. These may be reduced under a tax treaty.
Both employers and employees make statutory social security contributions to the EPF retirement and SOCSO social security scheme. Employees may also be required to make PTPTN repayments (Malaysia’s student funding scheme) or Zakat donations (for Muslim employees only).
- Employee Social Security– Total social security rate for employees: 11.5%
The employee contributes 0.5% and an additional 11% payable to the EPF.
- Employer Social Security- Total social security rate for companies: 14.75%.
The employer contributes 1.75% of an employee’s remuneration to social security. In addition, the employer must contribute 13% to the national social security organization through an employee’s provident fund (EPF) scheme. The EPF provides retirement benefits to Malaysian employees.
- Capital tax – No capital duty is payable, but a local company is subject to an incorporation fee of MYR 1,000 and a foreign company is subject to an incorporation fee ranging from MYR 5,000 to MYR 70,000.
- Payroll tax – Tax on employment income is withheld by the employer under the pay-as-you-earn (PAYE) scheme.
- Real estate tax – Varying rates apply to real property taxes depending on state.
- Stamp duty – Levied between 1% and 4% of the value of property transfers, plus 0.3% on share transaction documents.
- Transfer tax – No, exempt for stamp duty
- Customs and excise duties – Most dutiable goods have import duties from 5% to 30%.
Compensation and Benefits
Minimum wage: From January 1st 2019, the minimum wage for all employees in Malaysia is MYR 1,100 per month.
Wage payment: Wages must be paid monthly. Payments must be made by the 7th of each month to an individual’s bank account using cash, cheques or credit. Payslips should be available monthly on website, PDF or paper.
Hours of work: The normal work day is 8 hours per day and 48 hours in a week.
Overtime: Overtime must be paid at 1.5 times normal wages on normal working days, 2 times normal wages on rest days and 3 times normal wages on holidays.
Holidays: There are 11 public paid holidays in Malaysia for 2019. Additional paid holidays are mandated by individual states. See the full list with holidays in Malaysia in 2019.
- Paid annual leave: An employee is entitled to paid annual leave of:
- Employed less than 2 years: Not less than 8 days per year.
- Employed between 2-5 years: Not less than 12 days per year.
- Employed for more than 5 years: Not less than 16 days per year.
- Medical/ sick leave: An employee is entitled to paid sick leave, where no hospitalization is necessary. Employers must provide paid sick leave as follows:
- Employed less than 2 years: 14 days per year.
- Employed between 2-5 years: 18 days per year.
- Employed for more than 5 years: 22 days per year.
If the employee needs a hospitalization, the law allows up to 60 days.
- Maternity leave: Every female employee is entitled to not less than 60 consecutive days of paid maternity leave if she has worked at least 90 days for her current employer within the 4 months leading up to her confinement period. During this period, the expecting mother is entitled to maternity allowance (which is basically her ordinary monthly salary) that must be paid no later than 7th day of the month.
Bonuses and spacial benefits: In Malaysia, the mandatory payroll benefits include paid annual leave, statutory holidays, maternity or medical leave, and benefits for termination or unemployment. The optional payroll benefits may include payment for Long Service, allowances for housing and transport, medical insurance schemes, commission and bonuses, and any retirement or pension schemes.
Termination of employment: Both employers and employees must give notice when terminating an employment relationship based on the employees’ length of service as follows:
- Employed less than 2 years: 4 weeks of notice.
- Employed between 2-5 years: 6 weeks of notice
- Employed for more than 5 years: 8 weeks of
Workers’ compensation: All employers must be insured against work related accidents and work-related diseases.
Record keeping: Tax documents generally should be kept for at least 7 years.
Foreign Workers in Malaysia:
Visas: The Malaysian Government issues 3 types of visas to foreign nationals:
- Single Entry Visa – This is issued to foreign nationals who require a visa to enter Malaysia mainly for a social visit. It is normally valid for a single entry and for a period of 3 months from the date of issue.
- Multiple Entry Visa – This is issued to foreign nationals who require a visa to enter Malaysia mainly for business or government-to-government matters. It is normally valid for a period within 3 to 12 months from the date of issue. Citizens of India and the People’s Republic of China who wish to enter Malaysia for the purpose of a Social Visit are eligible to apply for the Multiple Entry Visa. The validity of the Multiple Entry Visa is 1 year. Each entry is for 30 days only and the extension of stay is not allowed.
Conditions for the Multiple Entry Visa are:
- The applicant must show proof of sufficient funds for staying in Malaysia
- The applicant must possess a valid and confirmed return ticket
- Tour groups are not eligible to apply for Multiple Entry Visa
- The Multiple Entry Visa costs MYR 100 for Indian Citizens and MYR 30 for citizens of the People’s Republic of China.
- Transit Visa – Issued to foreign nationals who require a visa to enter Malaysia on transit to other countries. Foreign nationals on transit without leaving the airport premises and who continue their journey to the next destination with the same flight do not require a transit visa.
Taxes: Foreign workers in Malaysia treated as nonresidents are taxed at a flat rate of 28%. They are not eligible for any tax deductions, not eligible for SOCSO coverage and are exempt from SOCSO contributions. However, in all other tax matters, foreign workers are treated the same as the resident workers.
Malaysian citizens in the US: Malaysians must also meet general visa requirements and be certified to be employed in the US. General visa requirements for the US are included in the separate chapter “Requirements for Immigrant and Nonimmigrant Visas”.
For tax purposes, Malaysian citizens are subject to US employment-based taxation on income earned in the US, unless they work under specific visa types that exempt earnings from taxes. State and local taxation also can apply.
Malaysia has entered into 70 income tax treaties. The country signed the OECD MLI on 24th of January 2018. For more information on Malaysia’s tax treaty partners, visit the website of the Inland Revenue Board Of Malaysia.
Despite that Malaysia offers businesses opportunities across a range of key sectors and ranks 15th in the ease of doing business globally, there are specific rules for Malaysia’s payroll and tax regulations, depending upon whether your multinational company employs foreign nationals or local Malaysian employees.
Contact us today to learn more about the Malaysia’s payroll system and how a Global Payroll Software solution like Payslip can help your organization with your international expansion and meet the payroll requirements in Malaysia.
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- Wikipedia: “Malaysia”
- the World Bank Group’s Doing Business 2019: Training for reform report
- Doing Business 2019 report: Malaysia
- Deloitte: “International Tax, Malaysia Highlights 2019”, February 2019
- my: “Tax Rates For Year Of Assessment 2018 (Tax Filed In 2019)”
- Malaysia Minimum Wage, Labor Law, and Employment Data Sheet Malaysia Minimum Wage Rate 2019
- AskLegal: “5 types of leave in Malaysia (and if you will be paid when you take them)”
- Inland Revenue Board Of Malaysia: “Double Taxation Agreement”
- Immigration department of Malaysia: “Double Taxation Agreement”
- Global Payroll Association: “Understanding Payroll In Malaysia”
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