Malaysia Tax Residency Explained: Rules, Residence Status & Tax Treatment Under the Income Tax Act 1967

Determining whether you are a tax resident in Malaysia is one of the first steps in understanding your income tax obligations. Contrary to what many people assume, Malaysian tax residency is not determined by your nationality, passport, or citizenship. Instead, it depends primarily on your physical presence in Malaysia during a particular year of assessment.

The rules governing tax residency are set out under Section 7 of the Income Tax Act 1967 (ITA 1967). Your residency status affects how your income is taxed, the tax rates applicable to you, and whether you are entitled to certain tax reliefs and rebates.

This guide explains the four tax residency tests under Section 7, practical examples of how they work, tax treatment for residents and non-residents, and situations where employment income may qualify for tax exemption.

What Is Tax Residency in Malaysia?

Tax residency refers to an individual’s status for Malaysian income tax purposes. It determines how employment income is assessed and which tax rates and reliefs apply during a particular Year of Assessment (YA).

Under Section 7 of the Income Tax Act 1967, residency is determined by an individual’s physical presence in Malaysia during the basis year. The legislation does not consider nationality, citizenship, permanent residency status or the type of employment pass held.

This means:

• A Malaysian citizen can be treated as a non-resident for tax purposes.
• A foreign employee can qualify as a Malaysian tax resident.
• Residency must be assessed separately for every Year of Assessment.

Since an individual’s travel patterns and employment arrangements may change from year to year, residency status should never be assumed based solely on previous years.

The Four Tax Residency Tests Under Section 7 ITA 1967

An individual is considered a Malaysian tax resident if they satisfy any one of the following conditions.

Let’s look at how each rule applies in practice.

Section 7(1)(a): Staying in Malaysia for 182 Days or More

This is the most straightforward residency test. If an individual is physically present in Malaysia for 182 days or more during a basis year, they are regarded as a Malaysian tax resident for that year.

Example

Josephine, a self-employed computer programmer from the United States, came to Malaysia to perform contract work for a multinational company.

Result: Josephine is considered a resident for the basis year 2026 because her total physical presence in Malaysia exceeded 182 days.

Section 7(1)(b): Less Than 182 Days but Linked to a Continuous Period

An individual may still qualify as a resident even when their stay in the basis year is less than 182 days, provided that period is linked to another period of 182 or more consecutive days immediately before or after.

Certain temporary absences are treated as part of the continuous period.

Temporary absences that qualify include:

• Official duties or work-related travel
• Ill health affecting the individual or an immediate family member
• Social visits not exceeding 14 days

Example

Marshall, a medical doctor, worked in Malaysia under a contract with a private hospital.

Year 2025

Year 2026

Marshall spent only 118 days in Malaysia during 2025.

However, because this period is linked to a continuous stay exceeding 182 consecutive days, and both overseas social visits lasted no more than 14 days, the temporary absences are treated as part of the continuous period.

Result: Marshall is regarded as a resident for the Year of Assessment (YA) 2025 under Section 7(1)(b).

Section 7(1)(c): The 90-Day Rule with Previous Residency

An individual qualifies as a resident if:

• they are physically present in Malaysia for at least 90 days in the current basis year; and
• they were residents for three out of the four immediately preceding basis years.

Example

Jeanette, an advertising director from Singapore, had the following periods of stay:

Although Jeanette stayed only 112 days in Malaysia during 2024, she had already qualified as a resident in 2020, 2022 and 2023.

Result: She is considered a resident for YA 2024 under Section 7(1)(c).

Section 7(1)(d): Residency Based on Previous and Following Years

This rule applies when an individual:

• becomes a resident in the following basis year; and
• was already a resident in each of the three immediately preceding basis years.

Example

Rasputin, a lecturer from Russia, had the following stays:

Although Rasputin was physically present in Malaysia for only 4 days during 2023, he:

• became a resident in 2024; and
• had already been a resident in 2020, 2021 and 2022.

Result: He is treated as a resident for YA 2023 under Section 7(1)(d).

Why Does Residence Status Matter?

For Malaysian income tax purposes:

• Residence status is one of the main factors that determines an individual’s income tax liability.
• Tax liability is determined separately for each Year of Assessment (YA).

In other words, a person may be a tax resident in one year but a non-resident in another if their circumstances change.

Situations Where You May Not Be Taxable

Under the information provided, an individual may not be subject to Malaysian income tax if they fall within the following situations:

• Employed in Malaysia for less than 60 days.
• Employed on board a Malaysian ship.
• Aged 55 or above and receiving a pension arising from Malaysian employment.
• Receiving interest from banks.
• Receiving tax-exempt dividends.

If an individual is taxable as a non-resident, they are generally required to submit Form M.

How Tax Residency Affects Monthly Tax Deduction (MTD / PCB)

An employee’s Monthly Tax Deduction (MTD), also known as Potongan Cukai Bulanan (PCB), is determined partly by their residency status under Section 7 of the Income Tax Act.

As a result, correctly determining an employee’s residency status is important for accurate payroll tax calculations.

Employment Income Exemption for Short-Term Employment

Paragraph 21, Schedule 6 of the Income Tax Act 1967 provides an exemption for certain employment income earned in Malaysia.

The exemption may apply where employment in Malaysia:

• does not exceed 60 days in the basis year;
• consists of one continuous period not exceeding 60 days that overlaps two successive basis years; or
• consists of a continuous period (not exceeding 60 days) together with other periods, where the total does not exceed 60 days.

However, under Paragraph 22, Schedule 6, the exemption does not apply where:

• employment exceeds 60 days in the basis year; or
• the individual is a public entertainer, including professional entertainers, artistes, athletes, or other individuals performing for profit, unless the income is paid out of the public funds of a government outside Malaysia.

Conclusion

Understanding your tax residency status is essential for ensuring accurate tax reporting, payroll compliance, and proper Monthly Tax Deduction (MTD/PCB) calculations in Malaysia. Since residency is determined based on the rules set out under Section 7 of the Income Tax Act 1967, individuals and employers should carefully assess each tax year based on the applicable residency tests. A clear understanding of these rules can help minimise compliance risks, avoid incorrect tax treatment, and ensure that employees are taxed appropriately according to their residency status.

At MYWave, we help businesses navigate the complexities of Malaysian payroll and statutory compliance with confidence. Our experienced HR and payroll specialists stay up to date with the latest tax regulations, ensuring employee residency status, MTD calculations, payroll processing, and statutory submissions are handled accurately and in accordance with Malaysian laws. Whether you’re managing local employees, expatriates, or a workforce with varying residency statuses, MYWave’s payroll outsourcing services and cloud HR solutions simplify compliance while reducing administrative burden, allowing you to focus on growing your business.

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