Is Foreign Income Taxed in Malaysia? The Territorial Rule and the 182-Day Test

If you are moving to Malaysia or running a business from here, you have probably been told that Malaysia runs a territorial tax system. In theory it sounds like a dream: you pay tax on what you earn inside Malaysia, and everything you earn from the rest of the world is yours to keep.

The reality is more nuanced, and the nuance has moved twice in four years. Here is how it actually works for a foreigner today — including which of the alarming headlines are about companies rather than about you.

The basic rule: stay local, pay local

Section 3 of the Income Tax Act 1967 charges tax on income accruing in or derived from Malaysia, or received in Malaysia from outside Malaysia. So if you have a job in Kuala Lumpur or a shop in Penang, LHDN will want its share. Nobody argues with that half.

The second half — received in Malaysia from outside Malaysia — is the part that unsettles people. On its face it says that money you earn in London and wire to your Malaysian account could be taxed. Whether it actually is depends on one thing, and that thing is not your visa.

How you become a tax resident: the 182-day test, and the three others

Malaysian tax residency is a day count. Section 7(1) of the Act gives four routes in, and you only need to fall through one of them:

1. You are in Malaysia for 182 days or more in the basis year. The days do not have to be consecutive — they are simply added up.
2. You are here for fewer than 182 days, but that period is linked to a run of 182 or more consecutive days spanning the year immediately before or immediately after. Short absences for business, holidays or treatment do not break the link.
3. You are here for 90 days or more, and in at least three of the four preceding years you were either resident or present for 90 days or more.
4. You were resident in the three preceding years and are resident in the following year — even if you did not set foot in Malaysia during the year in question.

Non-residents: your foreign income is safe

If you are a non-resident, the honest answer is short. Under Paragraph 28 of Schedule 6, foreign-sourced income received in Malaysia by a non-resident is exempt from tax.

That paragraph used to cover residents as well. The Finance Act 2021 narrowed it to non-residents with effect from 1 January 2022, and that is the change that started the panic. For a digital nomad or a frequent traveller who has not crossed the residency line, nothing changed at all: foreign savings can be brought into a Malaysian account without the taxman taking an interest.

Residents: the rule changed in 2022 — and individuals are still exempt

For residents the statutory position genuinely did move. Once Paragraph 28 stopped applying to you, the Act's plain words made remitted foreign income taxable.

It was then switched straight back off. The Income Tax (Exemption) (No. 5) Order 2022 — P.U.(A) 234/2022 — exempts a resident individual from tax on foreign-sourced income received in Malaysia, across all classes of income. It was due to expire on 31 December 2026. It will not: P.U.(A) 451/2024 extended it by ten years, to 31 December 2036.

Two conditions ride with it, and both matter. The exemption does not cover income received through a partnership business in Malaysia. And the income must already have been subjected to tax of a similar character in the country where it arose — this is relief from double taxation, not a route to no taxation at all.

The statute allows the tax. The exemption order switches it off. For a resident individual, the practical answer through 2036 is that remitted foreign income is not taxed.

The “deemed derived” trap: Section 15C is a corporate rule

This is where the territorial idea gets stretched, and where most of the frightening commentary comes from. Section 15C treats certain foreign transactions as though they had happened here. If shares in a controlled company incorporated outside Malaysia are disposed of — a Singapore holding company, say — and Malaysian real property plus shares in Malaysian property companies make up 75% or more of its total tangible assets, the gain is deemed derived from Malaysia. The sale happened abroad, between foreign entities, and Malaysia taxes it anyway, because the value underneath it is Malaysian land.

The caveat the headlines skip: Section 15C sits inside the capital gains tax regime that took effect on 1 January 2024, and that regime reaches companies, limited liability partnerships, trust bodies and co-operative societies — not individuals. Hold those shares personally and it does not reach you. It starts to matter the moment you hold Malaysian property through a foreign corporate or trust structure, which plenty of people do without ever thinking of themselves as a company.

What if I am taxed twice?

If income is taxed abroad and then taxed again in Malaysia, you can usually claim relief rather than wear both.

• Bilateral credit (s.132) — where Malaysia has a tax treaty with the source country, you get a credit for the foreign tax already paid, capped at the Malaysian tax on that same income.
• Unilateral credit (s.133) — where there is no treaty, Malaysia still allows a partial credit: the lower of the treaty-style proportion or half the foreign tax paid.

The honest summary

• Non-residents: your foreign income is yours, even when you bring it into Malaysia. Paragraph 28 still covers you.
• Resident individuals: the statute stopped being purely territorial in 2022, but the exemption order keeps remitted foreign income tax-free to 31 December 2036 — partnership income aside, and provided it was taxed where it arose. Declare it, and keep the proof.
• Companies and trusts: a different conversation entirely. Section 15C looks through a foreign structure holding Malaysian land and taxes the gain as if it were local.

Malaysia remains a genuinely low-tax place for individual foreign income. The territorial walls have grown a few windows and doors — but they were cut for companies, and for individuals the door stays open through 2036.

Tax residency is a day count — but the pass that lets you spend those days here is a separate decision, and the wrong one is expensive. Which Malaysia visa actually fits your income?