Understanding the Derivation of Employment Income in Malaysia

1. Under what circumstances, the employment income would be taxed in Malaysia?

   – The employment income would only be taxed in Malaysia if the employment income is deemed derived from Malaysia under Section 13(2) and Section 13(3) of Income Tax Act 1967.

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2. What is Section 13(2) of the Income Tax Act 1967?Employee’s activities
   • Section13(2)(a)-Exercise employment in Malaysia
   • Section13(2)(b)-Leave pay attributable to the exercise of employment in Malaysia
   • Section13(2)(c)-The duties are performed oversea, and it is incidental to the
     exercise of employment in Malaysia (nature of work is same)

   Employer is a resident in Malaysia

   • Section13(2)(d)-Remuneration received by director of resident company in Malaysia
   • Section13(2)(e)-Employment income received by employee aboard a ship or aircraft
     **The exemption under paragraph 34, schedule 6 shall apply on the employment income of employee aboard a ship or aircraft if the following criteria are fulfilled:
     a) Exercising employment on board a ship.
     b) The ship is used in a business and owned by a tax resident.
     c) The ship registered under the Merchant Shipping Ordinance 1952 (excluding ferry, barge, tugboat, supply vessel, crew boat, lighter, dredger, fishing boat, or other similar vessels)

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   What is Section 13(3) of the Income Tax Act?
   
   An employee is a citizen and public service/statutory authority

   • Section13(3)(a)-Exercises employment outside Malaysia
   • Section13(3)(b)-Leave attributable to the exercises of employment outside Malaysia

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   What factors are irrelevant to determining the derivation of employment income?

   The irrelevant factors in determining the derivation of employment income include:
   – The place where the employment income is received (e.g. payment of salary made outside Malaysia)
   – The location of the employer (e.g. the employer is not in Malaysia)
   – The source of the employment income (e.g. the employment income is not received in Malaysia)
   – The residence status of the employee (e.g. the employee is a non-resident)

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   Under what circumstances, the employment income derived from Malaysia would not be taxed in Malaysia?

   – Employment income received is exempt under paragraph 21, schedule 6 if the employee is a non-resident and exercises employment for ≤60 days in a year in Malaysia.
   – This exemption is not applicable to public entertainers unless part of the income is paid out of the public funds of the government of a country outside Malaysia and directors of resident companies.

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