Malaysia – 2025 Budget/Finance Bill Highlights: Tax Measures Affecting Individuals

• One of the key highlights in this year’s budget is the 2-percent dividend tax to be imposed on individuals.  Since dividend tax is also applicable to nonresident individuals, they would need to be aware of how this measure would impact their dividend income received from their investments in Malaysian companies. 
• The proposal for mandatory contributions from non-Malaysian citizen employees to EPF will have a major impact on expatriate employees working in Malaysia as this measure will affect their net disposable income.  Moreover, companies may also be affected as there will be an increase in assignment-related costs as both employers and employees are required to contribute.  Hence, international assignment cost projections and budgeting should reflect this change once it comes into effect.  This change will also add to the administrative burdens tied to international assignments as employers will have collection and remittance responsibilities and should prepare for the appropriate systems and procedures adjustments to meet their compliance obligations, especially for expatriate employees whose remuneration is paid in their home country.
• The measures on the respective reliefs as announced in the budget focus on supporting families caringfor the elderly while encouraging financial planning and savings.  For taxpayers who claim the reliefs noted in this GMS Flash Alert, they may find their tax burdens lightened to a certain degree.

The proposal could lead to a reduction of shareholders’ disposable income.  When dividends are taxed, shareholders receive a reduced net amount compared to the gross dividend declared by the company.  For individuals with a diversified investment portfolio, it can be challenging to track and accurately report all taxable dividend income in their individual income tax returns.

In general, the dividend tax should only impact a small pool of taxpayers as only individuals who have total annual dividend income exceeding MYR 100,000 would be subject to this new dividend tax.  The budget release or Finance Bill doesn’t yet make clear the administrative aspects of this new tax on the individuals.  Since the dividend tax is also applicable to nonresident individuals, it is unclear how the tax authorities would collect taxes from nonresident individuals holding shares in Malaysian companies as these individuals do not file tax returns in Malaysia unless they have other Malaysian-source income to report. 

The proposed tax measures, as mentioned above, could benefit a number of resident taxpayers as the foreign-source income remitted into Malaysia is exempt from tax for the next 10 years provided that the same income has been taxed in the country of origin.  To that point, taxpayers should be able to support that this income has been taxed in the country of origin, and they would be required to retain documentary evidence.

Although FSI remitted into Malaysia is exempt, the taxpayer is required to report this income in the tax return under the tax-exempt income portion.

The proposed tax measure will not impact expatriates working in Malaysia as only Malaysian citizens and residents are entitled to the relief.

The tax measures, as mentioned above, could benefit assignees in Malaysia if they qualify as tax residents in Malaysia, although the tax saving may not be significant.  To qualify as tax residents in Malaysia, the assignees should consider their patterns of stay in Malaysia. 

To support their claims for relief, taxpayers are reminded to retain documentary evidence.  In the event of a tax audit, failure to produce the documentary evidence could result in a disallowance of the reliefs and attract penalties of up to 100 percent of the tax under-paid. 

In order to claim the tax exemption, the intention of providing the allowance must be clearly stated in the company’s handbook or any written instruction.  The proposed tax measure is expected to ease the financial burdens of employees who are caring for elderly parents or grandparents.

The proposal as mentioned above would have significant impact on expatriate employees working in Malaysia. 

From a mobility perspective, given that Malaysia currently does not have a totalisation agreement with any other country, there would be an additional cost to the employer since the employer would also be required to make contributions.  It is currently yet to be determined what the employer rate of contribution will be when EPF becomes mandatory for non-citizen employees.  The contribution rate could remain at MYR 5, or might be set at 12 percent, which is the same rate for Malaysian citizens and permanent residents.

For expatriate employees who are on assignment to Malaysia, they may have to contribute to home- and host-country social security funds, which will have the effect of reducing their take home pay. 

From the perspective of relief, the expatriate employee who qualifies as a tax resident can claim a relief of MYR 4,000 (maximum) in his/her tax return for the contribution to EPF.  

There would be an added administrative procedure for the expatriate employee when he or she applies for withdrawal of the contribution before he or she departs Malaysia permanently.  The employer’s portion of EPF would not be taxable to the expatriate employee.

This is a policy change which requires a specific amendment to the EPF Act 1991.

The impact of the changes announced in the budget to the taxation of inbound assignees in Malaysia who are subject to Malaysian tax, and outbound assignees who are still subject to Malaysian tax, will depend on each taxpayer’s particular set of circumstances.

It is essential to get in front of the changes described in this newsletter and to communicate quickly and clearly with key stakeholders, so that they can properly plan, budget, and make any necessary adjustments once the changes come into effect.