Tax Residence Status for Individual

The American recession may be officially over after 18 months, but the response to this announcement, already echoing through blogosphere, is that, hey it doesn't feel like recession is over! (R.A.: (2010, Sept 20) It's Over, The Economist) The truth in this statement could be witnessed back home in Malaysia as many foreigners (in particular, Americans and Europeans) are seen to be residing in Malaysia under the Malaysia My Second Home (MM2H) programme.

Needless to say, one issue that troubles many residents under MM2H programme is the individual tax residence status. The concept of 'resident' is important in the Income Tax Act 1967. An individual who is a tax resident in Malaysia would be given an overall preferential tax treatment as compared to a non-resident individual. Generally, a non-resident individual is taxed at a flat rate of 27% without any personal deductions. Income of a non-resident in respect of technical advice or administration of any scientific, industrial or commercial undertaking is taxed at 10% on gross income. Note that only income derived from Malaysia is subject to Malaysia income tax each year. Income from sources outside of Malaysia is exempted from tax, e.g. pension and dividend. Well, residents of Malaysia, on the other hand, enjoy a scaled individual tax rate ranging from 0% - 27%.

So, how can foreigners obtain the tax residence status? Residence status is not determined by nationality but by the length of stay in Malaysia. The status is determined for each calendar year. For e.g., an individual will be considered as a resident if he or she stays in Malaysia for 182 days or more. What if one stays for less than 182 days for year 1 but the period is linked to another period of more than 182 days consecutively? What if for the past 3 consecutive years, one is qualified as a resident for tax purposes but in the 4th year, one fail to stay for 182 days? An elaborate answer is available in the official homepage of MM2H: http://www.mm2h.gov.my/pdf/mm2h15.pdf

The author advises readers to double check their information and understanding with a tax consultant. Please note that there could be updates that the author is not aware of.