Foreigner vs Non-Resident in Malaysia: Income Tax & Payroll Guide

When working or setting up a company in Malaysia, many assume that “foreigner” and “non-resident” are interchangeable terms. In reality, the distinction is important as it affects foreign worker income tax in Malaysia and the applicable non-resident tax rates.

Employers who overlook these definitions risk payroll errors, penalties, and compliance issues. This article highlights the key differences, explains how each category is taxed, and outlines the documents and requirements involved. 

Whether you are hiring international staff or managing your own tax obligations, understanding these terms is essential for compliance, accurate contributions, and cost control.

How Malaysian Law Defines Foreigners and Non-Residents

Let us first look at the definitions through the lens of Malaysian law:

Foreigner 

A foreigner refers to a non-citizen in Immigration Malaysia’s standards, regardless of where they live, work, or their duration of stay in Malaysia. These include permanent residents, long-term expatriates, and temporary workers.

They can work in Malaysia legally by obtaining the following  foreigner work permits and visas:

• Employment Pass (EP)
• Professional Visit Pass (PVP)
• Residence Pass-Talent (RP-T)
• Malaysia Digital Nomad Visa (DE Rantau)
• Temporary Employment Pass (TEP) 
• Foreign Domestic Helper (FDH) Visa

Navigating these various permit categories can be complex. Learn more about the types of working permits in Malaysia that we can help secure for your foreign employees.

However, under Malaysian taxation law, being a foreigner does not automatically determine tax residency status. A foreigner can be either a tax resident or a non-resident depending on their physical presence in Malaysia during a calendar year.

• A foreigner working in Malaysia for more than 182 days becomes a tax resident.
• A foreigner on a short assignment (less than 182 days) would be both a foreigner and a non-resident.

Non-Resident 

An individual is regarded as a non-resident if they remain less than 183 days in Malaysia in a calendar year, regardless of their nationality or citizenship. This means both Malaysian citizens and foreigners can be classified as non-residents for tax purposes.

However, they may still be treated as a resident if any of these apply:

• Present in Malaysia for less than 183 days in the year; but for at least 183 consecutive days, bridging the previous or following year. 
  (Temporary absences allowed for work, illness, or short visits up to 14 days).
  
• Present for 90 days in the current year; and resident or present for 90 days in any three of the four previous years.
  
• A resident in the three preceding years and in the following year, even if not physically present during the current year.

A Malaysian citizen working overseas could be a non-resident for tax purposes.

Resident 

Those who stay in Malaysia for 183 days or more in a calendar year are considered residents, for tax purposes, regardless of whether they are Malaysian citizens or foreigners.

Why the Distinction Matters

Understanding the differences between these terms is important. It affects foreign worker income tax obligations and non-resident tax rates, including reliefs, benefits, and deductions. 

At Moore Bzi, our expertise helps businesses navigate these complex classifications to ensure proper compliance and cost optimisation:

Tax Implications and Rates

Malaysia operates on a territorial tax system. The rate differs between resident and non-resident taxpayers.

Tax Rate Comparison

• Non-residents: a flat rate of 30% on Malaysian-sourced income. 
• Residents: A progressive tax rate starting from 0% up to 30%. This is similar to Malaysian citizens. 

Progressive Tax Rate Table based on Salary Range 

Taxable Income for Foreigners and Non-Residents in Malaysia 

Foreign professionals and non-residents are subject to Malaysian income tax on income sourced within Malaysia. The main categories include:

• Employment Income
  Salaries, wages, bonuses, allowances, and benefits-in-kind received for services performed in Malaysia are taxable.

• Rental Income
  Income derived from renting out property in Malaysia is taxable. Non-residents cannot claim deductions on rental income, whereas residents can claim deductions for allowable expenses such as loan interest, repairs, and maintenance.

• Dividends, Interest, and Royalties
  Passive income streams, including dividends, interest, and royalties, may be subject to withholding tax when paid to non-residents. Applicable rates vary depending on Malaysia’s double taxation agreements (DTAs) with the taxpayer’s country of residence.

• Business or Professional Income
  Profits from trade, business operations, or professional services carried out in Malaysia are subject to taxation.

Tax Exemption

• Between January 1, 2022, and December 31, 2026, conditional tax exemptions apply to foreign income received by a tax resident in Malaysia, excluding income from partnership businesses in Malaysia.
• Non-residents are not taxed on specific categories of income, such as employment of less than 60 days, work on a Malaysian ship, pensions received after age 55, bank interest, and tax-exempt dividends.
  

Tax Incentives, Reliefs and Rebates

• Special Zones: Eligible knowledge workers in the Iskandar Malaysia and Johor-Singapore Special Economic Zone (JS-SEZ) are entitled to a flat tax rate of 15%. 
• Tax Residents: May claim personal tax reliefs and rebates for themselves and their spouse. Also includes deduction for children, medical expenses, and other categories.
• Non-residents: Not entitled to personal income tax reliefs and deductions.

As the Inland Revenue Board Malaysia (LHDN) reviews tax reliefs annually, employers and employees should always refer to the latest list. 

While residency determines individual tax rates, employers need to factor in corporate tax responsibilities when managing budgets for foreign hires. Read more on what businesses need to know about the 2025 Corporate Tax Rate in Malaysia. 

Statutory Contributions and Special Considerations

Statutory Contributions 

Statutory contributions refer to legally mandatory payments made by an individual or an organisation towards a fund or purpose. In the Malaysian Employment Law, this includes:

EPF (Employee Pension Fund)

Mandatory EPF Registration: From October 1, 2025, employers must register all non-Malaysian citizen employees with valid work passes (excluding domestic workers) and make EPF contributions on their behalf. This policy aims to improve the social security coverage of foreign hires in Malaysia.

SOCSO (Social Security Organisation)

Foreign employees are covered under SOCSO schemes, including the Employment Injury Scheme and the Invalidity Scheme.

Coverage applies to permanent residents and other foreign employees for work-related injuries and occupational diseases.

SOCSO Wage Ceiling Increase: From October 1, 2024, PERKESO has increased the wage ceiling for SOCSO contributions from RM5,000 to RM6,000 per month. This means employees earning above RM6,000 will have their SOCSO contributions calculated based on the RM6,000 ceiling.

EIS (Employment Insurance System)

Foreign employees are not eligible for the Employment Insurance System. EIS coverage is limited to Malaysian citizens and permanent residents aged 18 to 60.

Contribution Rates for Employers and Employees

Special Tax Considerations for Foreigners and Non-Residents 

Alexandra Khoroshykh for Unsplash

Foreign professionals working in Malaysia should be mindful of special tax provisions:

• Malaysia My Second Home (MM2H) Program: Participants enjoy tax exemptions on foreign income, subject to meeting investment and residency conditions.
• Double Taxation Avoidance Agreements (DTAA):  Malaysia has treaties with multiple countries to prevent double taxation. Foreigners should check whether their home country has a DTAA with Malaysia.
• Reporting Foreign Assets: Those with significant foreign income or assets must comply with reporting requirements when remitting funds to Malaysia.

Determining the correct tax treatment requires a careful analysis of Malaysian laws and the specific circumstances of each employee. Moore Bzi’s tax specialists ensure accurate income classification and compliant tax withholding for foreign staff.

Compliance Framework and Documentation

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1. Tax Residency Guidelines

Certificate of Residence Application

Individuals must apply for a Certificate of Residence via the e-Residence system.

This application is to confirm the taxpayer’s residence status, enabling them to claim tax benefits under the Double Taxation Avoidance Agreement (DTA) and to avoid double taxation on the same income. 

The 183-day Rule Day-counting Methodology 

 An individual is considered a tax resident if the total days physically present in Malaysia in a calendar year is 183 days or more than 183 days.

Where: 

• Arrival date and Departure date are both counted as full days.
• Days Outside Malaysia (such as holidays or overseas assignments) are excluded, unless they qualify as business trips related to Malaysian employment, medical treatment, or social visits connected to family in Malaysia.

Documentation Checklist for Classification 

To support tax residency classification, employers and employees should prepare and maintain the following:

• Passport copy (all relevant pages with entry and exit stamps)
• Copy of employment pass, work permit, or relevant visa
• Employment contract with start and end dates
• Travel records or itineraries 
• Payroll records for the assessment year
• Employer’s confirmation letter on assignment or posting
• Official correspondence with LHDN 

 2. Employer Legal Obligations

Employers in Malaysia must comply with statutory requirements when managing foreign professionals. 

Late or missed submissions may result in fines, penalties, or interest charges from the authorities. Our payroll outsourcing services ensure timely submissions and compliance with all statutory requirements.

Best Practices for Employers

To stay compliant with Malaysian tax and payroll requirements, employers should adopt structured processes and reliable systems.

Systematic Approach to Residency Tracking 

Use a clear framework to record entry and exit dates, visa details, and cumulative days spent in Malaysia. 

Digital trackers or Human Resources Information System (HRIS) tools can help HR and Finance teams apply the 183-day rule accurately and reduce miscalculation risks.

Automated Payroll Solutions for Compliance

Leverage automated payroll systems to calculate deductions in line with LHDN’s rules. 

Automation ensures timely updates when residency status changes and reduces administrative error. 

Compliance Monitoring Systems

Conduct regular checks, including monthly validations, quarterly audits, and year-end reconciliations. These processes safeguard against filing errors and ensure readiness for LHDN audits. Transparent reporting also builds employee confidence.

Risk Mitigation Strategies

Educate employees on residency rules, maintain audit-ready records, and seek expert guidance for complex cases like short-term postings or regional assignments. Clear internal policies help sustain compliance as operations grow.

Practical Implementation Steps

Employers can follow this process to implement compliance effectively:

1. Confirm registration with LHDN, EPF, SOCSO, and EIS.
2. Classify employees using the 183-day rule and supporting documentation.
3. Collect essential records such as passports, contracts, payroll data, and employer confirmation letters.
4. Align payroll systems with the correct classification to ensure accurate tax and contributions.
5. Track submission timelines for monthly and annual filings to avoid penalties.

For added assurance, engage with a payroll expert like Moore Bzi for end-to-end compliance and peace of mind when hiring foreign professionals in Malaysia.

Trusted Payroll and Tax Support with Moore Bzi

Managing tax regulations in Malaysia can be complex, particularly when dealing with foreign employees. Knowing the distinctions between foreign worker income tax and non-resident tax in Malaysia is essential to avoid penalties and ensure accurate payroll management.

With over two decades of experience in visas, work permits, and payroll matters, Moore Bzi provides the guidance needed for both employers and expatriates. Our expertise helps businesses remain compliant while allowing foreign professionals to work with peace of mind.

Contact Moore Bzi today for tailored advice on tax compliance and employment solutions in Malaysia.

FAQ

Can foreigners become tax residents? 

Yes, they can become tax residents if they fulfil specific criteria.

What happens if a foreign employee’s residency status changes during the tax year?

If an employee’s residency status changes during the year, employers must adjust tax withholdings accordingly, and the employee will file a return showing income under both statuses.

Are there any minimum salary requirements for foreign workers to qualify for specific tax treatments?

Yes, specific visa categories, such as Employment Pass, have minimum salary thresholds that can impact tax planning. Also, some tax incentives and reliefs may have income requirements. However, tax residency is determined solely by the 183-day rule, not salary.

Can a non-resident claim tax refunds if too much tax was withheld by their employer?

Yes, non-residents may file Form BE to claim refunds for excess tax withheld, but they cannot claim personal reliefs or deductions. Refunds usually apply only where withholding was incorrect or treaty benefits under DTAs are available.

How does remote work affect tax residency for foreign employees working partly from Malaysia and partly from other countries?

Only days physically in Malaysia count toward the 183-day rule; remote work abroad is excluded. Employers should keep detailed location records, as this affects both residency and income taxability.

What are the penalties for foreign employee tax documentation late submission to LHDN?

Late Monthly Tax Deductions (MTD/PCB) submissions incur a 10% penalty on the tax due. Annual return penalties start at RM200, increasing with continued non-compliance. Repeated offences may lead to fines up to RM20,000, prosecution, and potential licence issues.