Foreign-Sourced Income (FSI): Tax Exemption & Conditions

Basis of charge: s.3 ACP 1967

Income tax is charged on the income of any person that accrues in or derives from Malaysia or is received in Malaysia from outside Malaysia — under section 3 of the Income Tax Act 1967 (ACP 1967).

Source: Income Tax Act 1967, s.3 (see Official sources section).

Regime change from 1 January 2022

From 1 January 2022, generally all types of foreign-sourced income received in Malaysia by residents are subject to tax. This change was made by amending Paragraph 28 of Schedule 6 of the ACP via the Finance Act 2021.

This means: foreign-sourced income (FSI) is not automatically exempt — exemption depends on the category of person and specific conditions.

Source: HASiL — Guidelines on the Tax Treatment of FSI (June 2024 amendment), §1.1, §5.1.1 (see Official sources section).

Exemption for resident individuals

For resident individuals, all FSI except income from partnership businesses in Malaysia is exempt from tax provided the income has been subject to tax in the country of origin.

• Original exemption period: 1 January 2022 to 31 December 2026.
• This period has been extended to 31 December 2036 via P.U.(A) 451/2024 (effective 1 January 2027; gazetted 24 December 2024).

Source: HASiL — Guidelines on the Tax Treatment of FSI, §5.2.2; MOF/LHDNM — Joint Memorandum Budget 2022; Gazette P.U.(A) 451/2024 (see Official sources section).

Dividend exemption for companies/LLPs/partnerships

For companies, LLPs and individual partners (in respect of partnership businesses in Malaysia), foreign dividends received in Malaysia are exempt subject to one of two conditions:

1. Participation exemption condition: the dividend has been taxed in the country of origin AND the origin country's headline tax rate is not less than 15%; or
2. Economic substance condition.

• Original exemption period: 1 January 2022 to 31 December 2026.
• P.U.(A) 157/2024 expanded the "qualifying persons" (including Labuan entities that elect to be taxed under the ACP) and restated the qualifying conditions as alternative conditions (deemed effective from YA 2022).
• The dividend exemption does not apply to residents carrying on banking, insurance or sea/air transport businesses.

Source: HASiL — Guidelines on the Tax Treatment of FSI, §5.2.1, §1.5; Gazette P.U.(A) 235/2022; Gazette P.U.(A) 157/2024 (see Official sources section).

Situations where tax is not charged in the country of origin

There are situations where tax is not charged in the country of origin but the FSI is still eligible for exemption, for example:

• Individual income below the origin country's tax threshold;
• Dividends paid out of underlying profits enjoying incentives/losses/capital allowances;
• Tax consolidation regimes.

Source: HASiL — Guidelines on the Tax Treatment of FSI, §5.2.1.4, §5.2.2.2 (see Official sources section).

Expenses relating to exempt FSI are disregarded

Expenses or deductions relating to exempt FSI must be disregarded in determining chargeable income.

Source: HASiL — Guidelines on the Tax Treatment of FSI, §5.2.3 (see Official sources section).

Records and declaration in BNCP

Taxpayers must:

• Keep supporting documents — dividend vouchers, notices of assessment, and other documents in accordance with s.82/82A ACP;
• Declare FSI details in the BNCP (Income Tax Return Form) — type & amount, country of origin, headline tax rate, amount of foreign tax, and so on.

Source: HASiL — Guidelines on the Tax Treatment of FSI, §5.2.4 (see Official sources section).

Foreign tax credit when FSI is not exempt

If FSI is not exempt, foreign tax can be claimed as a double-sided (s.132) or unilateral (s.133) tax credit under the ACP, subject to limits; excess credit is disregarded.

Source: Income Tax Act 1967, s.132/133; Explanatory Notes for Form B (reference HK-8/HK-9) (see Official sources section).

Non-resident individuals

Non-resident individuals are taxed on income derived from Malaysia only — not on foreign-sourced income.

Source: HASiL — Frequently Asked Questions (Individuals), Q15 (see Official sources section).

Time-sensitive: re-verify before publication

Time-sensitive area: FSI exemption status changes through gazetted orders. The following must be re-verified before publication:

Remember

• Basis: s.3 ACP — income accruing/deriving in Malaysia OR received in Malaysia from outside Malaysia.
• From 1.1.2022, resident FSI is generally subject to tax — exemption depends on conditions.
• Resident individuals: all FSI except Malaysian partnership income is exempt provided it has been taxed in the country of origin; extended to 31 December 2036 (P.U.(A) 451/2024).
• Companies/LLPs/partnerships: foreign dividends exempt subject to participation exemption (rate ≥15%) OR economic substance; the current YA 2026 period remains under P.U.(A) 235/2022 & 157/2024.
• Do not claim "all FSI is exempt" without the "taxed in the country of origin" condition (individuals) or the participation exemption/economic substance conditions (entities).
• Expenses relating to exempt FSI are disregarded.
• Declaration in BNCP is compulsory even when exempt.
• Keep supporting documents (s.82/82A).
• If FSI is not exempt: foreign tax credit s.132/133 (limited).

Frequently Asked Questions (FAQ)

Q. I work abroad and send money to Malaysia. Is it taxable? A. Foreign employment income is generally taxed in the country where the service is performed. For resident individuals, FSI received in Malaysia is exempt provided it was subject to tax in the country of origin — verify your situation.

Q. Dividends from a foreign company — exempt? A. For resident individuals, yes (provided taxed in the country of origin). For companies/LLPs/partnerships, subject to the participation exemption or economic substance conditions.

Q. Do I still need to declare exempt FSI? A. Yes — HASiL insists on declaration in the BNCP even when exempt.

Q. If the country of origin does not impose tax, do I lose the exemption? A. Not necessarily — there are certain situations (e.g. income below the origin country's tax threshold, dividends from profits enjoying incentives) where FSI is still eligible for exemption. Verify with HASiL or a tax advisor.

Q. I am a non-resident — is my FSI taxable in Malaysia? A. Non-resident individuals are taxed only on income derived from Malaysia.

Glossary

• FSI — foreign-sourced income; income received in Malaysia from outside Malaysia.
• Resident — tax residence status under s.7 ACP.
• BNCP — Income Tax Return Form.
• Participation exemption — dividend exemption condition (taxed in the country of origin and headline tax rate ≥15%).
• Headline tax — the main tax rate of the country of origin.
• YA — Year of Assessment.