When an expatriate comes to Malaysia to work for more than 182 days, they will be eligible to be taxed under tax laws and when they leave Malaysia for more than 3 months, they will need to file for tax clearance.
Let’s take a closer look at what tax clearance is, how it works, and how to apply for it.
What is Tax Clearance in Malaysia?
Tax clearance certificate is a certificate given by the Inland Revenue of Malaysia to indicate any outstanding income tax by the employee, regardless if they are local, foreigner or expatriate.
When tax clearance is not done, the last salary or compensation of one upon resignation, termination of the contract, or retirement may be withheld by the Malaysian Inland Revenue Department (LHDN).
Any expatriate leaving Malaysia for more than three months need to do their tax clearance.
When to do the Tax Clearance in Malaysia?
Tax clearance in Malaysia is usually completed within 10 working days. Below are the responsibilities of the employer and an expat taxpayer to submit the necessary information to Malaysian Inland Revenue Department:
|Status of Employment||Action Required by Employer|
|Resignation, termination of the contract, or retirement or date of departure||To inform the Malaysian Inland Revenue Department of the intended termination of employee’s employment status 30 days before his/her resignation, termination of the contract, or retirement or date of departure|
|Death or Unforeseen eventualities before end of employment contract||Required to submit information within 30 days from the date of death of this employee|
|Leaving Malaysia before the due date||In the case that your income tax is deducted monthly (usually on the 30th of April), you don’t have to submit your income tax return.
However, if it is a month to 30th April, your previous years’ income tax returns need to be filed. Anyone whose income is not usually deducted monthly must submit their income tax for the past years and the particular year in which they are terminating their employment through resignation, end of the contract, or retirement.
Application Guide for Tax Clearance in Malaysia
When an employer receives the tax clearance certificate, he/she is to release your money which he/she withheld from you upon settling of your tax balance as shown in the tax clearance certificate.
An employer usually withholds your money, salary, or compensation, because he/she is mandated to do so by the Malaysian tax law until you clear your outstanding taxes and get the tax clearance certificate.
Otherwise, failure to do so, they will face the penalty charges. The submission of the duly filled clearance forms can be done manually by visiting the LDHN offices or online through the e-SPC and is to be done by the employer.
There are three different forms, depending on the employee’s employment status.
|Forms to be filled up||Employee’s Employment Status|
|1. CP21||If Employee is leaving the country|
|2. CP22A||For retirement, resignation, or termination of employment in private sector|
|3. CP22B||For retirement, resignation, or termination of employment in public sector|
In the case of retirement or leaving Malaysia, you will have their income tax file closed as they will no longer be receiving any taxable income. You are also required to declare any extra taxable payments like bonuses – this can be done through an agent or by yourself.
Taxation Rate for Malaysian Expatriates
Malaysian tax authorities imposed a progressive tax rate tax for residents. If you are an expatriate who has been working in Malaysia for longer than 182 days in a year, you are also eligible for tax deductions.
For expatriates staying less than 182 days in Malaysia within a calendar year will be considered a non-resident and will be subjected to a flat rate of 28% if your income is derived from employment, business, trade, dividends or rent.
Lastly, if an expat is employed in Malaysia for less than 60 days, they will not be taxable.
Tax Appeal in Malaysia
Any taxpayer who is not satisfied with his/her tax assessment makes an appeal within 30 days from the day he/she received the notice by submitting Form Q.
Should the time elapse before you file your tax assessment appeal, you are to send your application of appeal for a deadline extension to the office of the Director-General of the Inland Revenue (DGIR).
Penalties for Late Submission of Tax Clearance Forms
Delay of submission of tax clearance forms is a criminal offense in Malaysia. The penalties include:
- The employer will face either a fine of between MYR 200 and MYR 20,000;
- Imprisonment of up to six months;
- Or both as deemed appropriate by the Malaysian Inland Revenue laws
- The expatriate will be prevented from leaving Malaysia and flagged as a tax evader
If you are flagged as a tax evader, contact the relevant persons, and clear your arrears immediately to avoid inconveniences. You can do so via the internet and present proof of payment which will accord you a revocation order and permit you to proceed with your journey.
What is the worst thing that can happen to an expatriate when they are flagged for tax non-compliance?
The employee’s salary may be withheld by the former employer. When this happens, the expatriate may miss out on important dates like flight departure date, which in turn may inconvenience the next employment appointments, among other inconveniences.
Another thing is that the expatriate may cause their employer to face penalties, which may affect the relationship with the employer.
The expatriate may be prevented from leaving Malaysia.
To avoid these inconveniences, it is vital to file taxes and renew visas on time.
An expatriate may qualify for tax exemptions if his/her employment period is less than 60 days (about 2 months) or if he/she is not a tax resident in Malaysia.
As an expatriate, you are considered a tax resident if you are going to live or has lived in Malaysia for 182 days (about 6 months) or longer.
The income tax is the tax to be cleared. The Malaysian government mandates all who work in Malaysia whether local or expatriates to have their income taxed, even so, there are exemptions.
What should I do in regard to tax clearance if I am the beneficiary to a dead taxpayer who had not reached, retirement or the end of the contract?
As the beneficiary, you should inform the benefactor’s employer of this eventuality. The employer will then inform the Malaysian Inland Revenue Department which is the custodian of the taxpayer’s file.