What is the 182 Days Rule in Malaysia? Tax Residency Explained

As an employer in Malaysia, hiring foreign employees comes with several tax-related responsibilities.

One of the most important things to understand is the 182 days rule in Malaysia.

This rule determines whether a foreign employee is considered a tax resident or a non-resident, which directly affects tax rates, payroll, and compliance with tax laws.

Misclassifying an employee’s tax residency status can lead to incorrect tax filings, financial penalties, and unnecessary complications.

To help you manage your workforce better, let's break down the 182 days rule in Malaysia, why it matters, and how you can track your employees’ tax residency status.

What is the 182 Days Rule in Malaysia?

The 182 days rule in Malaysia is used to determine whether an individual is a tax resident or a non-resident for a given year.

It applies to both Malaysian citizens and foreign employees working in the country.

Tax Residency Criteria

If an employee stays in Malaysia for 182 days or more within a calendar year, they are classified as a tax resident.

If they stay for less than 182 days, they are considered a non-resident.

How Days are Counted

The calculation of these 182 days is based on the actual number of days an individual is physically present in Malaysia.

These days can be continuous or accumulated, meaning they do not have to be consecutive. However, specific conditions apply:

Public holidays, sick leave, and temporary absences (such as a short business trip outside Malaysia) may still be counted as part of the 182 days.
If an employee leaves Malaysia for a short period and returns within the same tax year, those absent days might still be counted.
However, if an employee leaves Malaysia before completing 182 days and does not return in the same tax year, their tax residency status will be non-resident.

Why the 182-Day Rule Matters for Employers

The 182 days rule in Malaysia can impact business operations, payroll, and tax responsibilities.

Hiring foreign employees means you must classify their tax status correctly. The wrong classification could result in financial losses or legal complications.

Employees who qualify as tax residents benefit from lower tax rates and tax reliefs, while non-residents are taxed at a flat rate with fewer benefits.

Understanding this distinction can help employers plan salary packages more effectively and manage costs.

Tax Implications for Employers

The tax rates for foreign employees depend on whether they are tax residents or non-residents.

Tax Residents (182 days or more in Malaysia)

Tax residents pay progressive tax rates, meaning they are taxed based on their income level.

They are also eligible for tax deductions and reliefs, reducing their overall taxable income.

Non-Residents (Less than 182 days in Malaysia)

Non-residents are taxed at a flat rate on income earned in Malaysia. These rates have changed over the years:

26% (2010 - 2014)
25% (2015)
28% (2016)
30% (2020 onwards)

Non-residents are not eligible for tax reliefs, which means they pay more in taxes compared to tax residents.

Withholding Tax Requirements

If an employer hires a non-resident, specific withholding tax obligations may apply, depending on the nature of the employee’s work and income.

For example, services related to technical advice, property use, and royalties may require employers to withhold tax before making payments.

Payroll and Tax Filing

The 182 days rule in Malaysia affects how employers process payroll.

If an employee starts the year as a non-resident but later qualifies as a tax resident, their tax rate changes mid-year.

Employers need to keep track of this transition to adjust payroll deductions accordingly.

How to Track Employee Tax Residency Status

Keeping accurate records of an employee’s stay in Malaysia is crucial.

Employers should establish a proper tracking system to determine if an employee meets the 182 days rule. Here’s what you can do:

1. Maintain Detailed Employee Records

Employers should record every entry and exit date of foreign employees. This can be done using company records, work permits, and immigration stamps.

2. Use Payroll and Immigration Data

Payroll software and immigration records can help verify how many days an employee has stayed in Malaysia.

Many payroll systems allow tax classification adjustments based on an employee’s residency status.

3. Consult LHDN (Inland Revenue Board of Malaysia)

If there is any doubt about an employee’s tax residency status, employers can consult LHDN Malaysia to confirm classification and avoid misreporting.

FAQ

What happens if an employee stays in Malaysia for less than 182 days?

If an employee stays for less than 182 days, they will be classified as a non-resident and taxed at a flat rate of 30%. They will also not be eligible for tax reliefs.

Can employees regain tax resident status after a temporary absence?

Yes, in some cases, if an employee was previously a tax resident and returns within the same assessment year, their previous days in Malaysia may still be counted towards the 182-day requirement.

How does the 182-day rule affect payroll processing?

Employers must track employees' days in Malaysia to apply the correct tax rates. If an employee qualifies for tax residency mid-year, payroll calculations should be adjusted accordingly.

What penalties apply for incorrect tax classification?

If an employer misclassified an employee’s tax residency and underpaid taxes, they may face penalties or fines from LHDN. Proper documentation and accurate tracking can help prevent these issues.

What is 182 days as per the Income Tax Act?

The 182-day rule is part of Malaysia’s Income Tax Act, which defines tax residency based on physical presence in Malaysia within a calendar year.

What is the 90-day rule in Malaysia?

The 90-day rule is another tax regulation that applies in specific scenarios. It allows individuals to be classified as tax residents if they have been present in Malaysia for at least 90 days in a year and were a tax resident in any three of the previous four years. This rule provides additional flexibility in determining tax residency.

Understanding the 182 days rule in Malaysia is essential for employers who hire foreign employees.

Staying informed about tax residency classifications helps businesses manage payroll correctly and comply with tax regulations.

To avoid misclassification and potential penalties, employers should keep detailed records, track employee stay durations, and consult LHDN when needed.

Taking proactive steps now can prevent costly mistakes in the future.

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