From a Russian manuscript, “The Tax Collectors,” 16th century
Income tax is famously complex, even Einstein said it’s a nightmare. Malaysian tax rules used to be easy: earn here, pay here. Earn somewhere else? Nobody cared. None of our business. But since 2022, that’s over.
Bring your foreign cash back, and the Malaysia’s Inland Revenue Board or LHDN is waiting. Not full-on U.S. style worldwide tax, but enough to make you call your tax adviser or think twice about where you earn and where you dare to spend it.
Here are the three common misconceptions about Malaysia’s new Foreign-Sourced Income (FSI) rules:
1. The “Foreign Client Equal Foreign Income” Mistake
Many people assume that if the client is overseas, the income is foreign-sourced.
That is often wrong. Under Malaysian tax principles applied by LHDN Malaysia, the key question is: where are the services actually performed?
Example:
• Lawyer in Kuala Lumpur advising a client in Sydney.
• Consultant in Penang working online for a US company.
Even though the client is overseas, the work is performed in Malaysia, so the income is usually Malaysian-sourced and taxable in Malaysia.
2. The “Leave Your Money Overseas” Assumption
Some believe that if they leave the money in a foreign bank account, Malaysia cannot tax it but the issue is more nuanced.
If income is genuinely foreign-sourced, it may only be taxed when it is remitted into Malaysia under the post-2022, FSI rules.
However, if the income is actually Malaysian-sourced, then it is taxable regardless of where the money is kept. So, simply keeping funds in Singapore, Hong Kong, or Dubai, does not automatically make the income foreign-sourced.
3. The Repatriation Trap
Even when income is truly foreign-sourced, tax may arise when the money is received in Malaysia.
For example:
• Overseas Investment Profits
• Dividends from Foreign Companies
• Consulting Income earned while physically working overseas.
If the money is later transferred to Malaysia, this may trigger Malaysian tax depending on applicable exemptions and conditions. (More on this in our next post)
For Malaysian tax residents, it comes down to two questions:
Where did the income actually come from? Did you bring that foreign income into Malaysia?
Answer these, and you’ll know if the taxman is knocking.
kerkco.com 