Introduction

Understanding the derivation of employment income Malaysia is essential to determine whether income earned by an employee is taxable in Malaysia.
Under Section 13(2) of the Income Tax Act 1967 (ITA), employment income is deemed derived from Malaysia depending on where the employment duties are exercised — not where the employer is located or where the payment is made.

This guide explains the main categories, exemptions, and tax implications under Malaysian tax law.

1. Employment Income Derived from Malaysia

Under Section 13(2) of the ITA, employment income is considered derived from Malaysia in the following cases:

 (a) Section 13(2)(a) — Exercise or Discharge of Employment in Malaysia

Income is deemed derived from Malaysia if the employee performs duties or services within Malaysia.
This applies to all employment, regardless of whether the payment is made locally or overseas.

(b) Section 13(2)(b) — Leave Pay Related to Malaysian Employment

Any leave pay attributable to employment exercised in Malaysia is also considered Malaysian-sourced income.
For example, annual leave taken after working in Malaysia is taxable even if spent abroad, since it relates to work performed in Malaysia.

(c) Section 13(2)(c) — Overseas Duties Incidental to Malaysian Employment

Income derived from performing duties outside Malaysia is still deemed Malaysian-sourced if it is incidental to the exercise of employment in Malaysia.
This applies when the overseas duties are similar or connected to the employee’s main Malaysian role.

Example:
A Malaysian-based marketing executive travels overseas to attend a product launch — this trip is incidental to their Malaysian duties, so the income remains taxable in Malaysia.

2. Exemption for Short-Term Employment

Under Paragraph 21, Schedule 6 of the ITA, income is exempt from tax if:

• The employee is non-resident, and
• The employment is exercised in Malaysia for 60 days or less (not based on physical presence days).

However, this exemption does not apply to:

• Public entertainers, or
• Directors of resident companies.
  

💡 Tax planning note: Employers and employees should maintain clear records of the duration and nature of assignments to qualify for the exemption.

3. Income Deemed Derived Based on Employer’s Nature

Certain categories of income are deemed Malaysian-sourced based on the employer’s status.

(a) Section 13(2)(d) — Director’s Remuneration

Remuneration received by a director of a resident company is considered derived from Malaysia,
even if the director performs duties outside Malaysia.

(b) Section 13(2)(e) — Employees on Ships or Aircraft

Income from employment aboard a ship or aircraft operated by a resident company is deemed derived from Malaysia.

Exemption (Paragraph 34, Schedule 6):
If the ship is registered under the Merchant Shipping Ordinance 1952, used in a Malaysian business, and owned by a tax resident, the employee’s income may be exempt from tax.

4. Factors Not Relevant in Determining Derivation

The following do not affect whether income is derived from Malaysia:

• The place of receipt of income (whether paid in Malaysia or overseas)
• The location of the employer or company headquarters
• The source of funds used for payment
• The residence status of the employee

👉 What matters most is where the employment is exercised, as clarified under Malaysian tax principles.

Key Takeaways

• Employment income is derived from Malaysia when work is performed in Malaysia.
• Leave pay linked to Malaysian duties remains taxable.
• Short-term employment (≤60 days) may qualify for exemption.
• Director’s fees from resident companies are deemed Malaysian income.
• Irrelevant factors: place of payment, employer location, or employee residency.

ANC Group – Your Personal Tax Advisor

Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.

Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.

ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.

We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.

If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.