Introduction

Malaysia Foreign Source Income Tax governs how income earned abroad is taxed when remitted into Malaysia. Effective from 1 January 2022, all types of foreign income received in Malaysia by a resident person are generally subject to tax under the Income Tax Act 1967 (ITA) — unless specific exemptions apply.
This guide explains which income types are taxable, what exemptions are available until 31 December 2026, and the qualifying conditions every taxpayer should know.

Types of Foreign Source Income Subject to Tax

Under Section 4 of the ITA 1967, the following categories of foreign income are taxable when received in Malaysia:

• Business income
• Employment income
• Dividend, interest, or discounts
• Rent, royalty, or premium
• Pension, annuity, or periodic payments
• Other income not falling within the above categories

Foreign income that has already been taxed overseas (via withholding tax or income tax) may qualify for bilateral or unilateral tax credits under Sections 132 and 133 ITA.

To claim tax credits, residents must keep valid evidence showing foreign tax was imposed. Claims must be made within two (2) years after the end of the relevant Year of Assessment (YA).

👉 Reference: Public Ruling No. 11/2021 – Bilateral Credit and Unilateral Credit

Foreign Income Exemption (1 January 2022 – 31 December 2026)

Certain foreign income received in Malaysia is exempted from tax during this period, subject to qualifying conditions.

Understanding the Qualifying Conditions

1. Dividend Income Subjected to Tax in Country of Origin

Dividend income qualifies if:

• Tax has been imposed in the origin country, either through income tax or withholding tax; or
• The dividend arises from underlying tax on profits already taxed in that country.

If tax is not imposed, exemption can still apply if dividends were paid from profits that were:

• Offset by unabsorbed losses or capital allowances;
• Derived from capital gains;
• Enjoyed tax incentives in compliance with local requirements; or
• Covered by a tax consolidation regime in that country.

2. Headline Tax Rate of at Least 15%

The headline tax rate refers to the highest corporate tax rate in the source country:

• Applicable either in the year the dividend is subject to withholding tax, or when it is received in Malaysia.
• Must not be less than 15%, even if the actual effective rate is lower.

3. Economic Substance Requirement

A Company, LLP, or IIP is considered to have economic substance if it:

• Employs an adequate number of qualified employees in Malaysia; and
• Incurs sufficient operating expenditure to carry out its economic activities.

Factors considered include:

• Nature of business (capital- or labour-intensive)
• Full-time vs part-time employment
• Availability and adequacy of office premises

Specified economic activities include:

• For investment holding entities: holding and managing equity participation, making strategic decisions, managing and bearing principal risks.
• For trading or business entities: the actual business operations carried out in Malaysia.

📝 Note: Service directors employed under a contract of service count as employees. Non-service directors do not.

4. Outsourcing of Economic Activities

A company may outsource its specified activities if:

• The outsourced entity operates within Malaysia;
• Adequate monitoring and control are exercised;
• Fees charged comply with transfer pricing rules;
• The outsourced entity’s staff and expenditure align with the level of work performed; and
• If serving multiple clients, costs are apportioned fairly.

Tax Credits and Documentation

Residents claiming foreign tax credits must retain:

• Official tax payment receipts or certificates from foreign authorities
• Dividend vouchers or statements showing withholding tax
• Documentation of income remittance into Malaysia

Failure to provide evidence may result in disallowance of the tax credit claim.

Key Takeaways

•  From 1 Jan 2022, foreign income remitted to Malaysia is taxable unless exempted.
• Exemption applies to dividend income or income already taxed abroad (2022–2026).
• Companies must meet either participation exemption or economic substance requirements.
•  The headline tax rate in the source country must be ≥15%.
• Individuals enjoy broader exemption — provided income was taxed at source.

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.