What is Cukai Ditanggung oleh Majikan?

When your company hires an executive or expatriate, tax payments are also included in the negotiations or work passes. This happens specifically when your company agrees to pay income tax on behalf of your employee. This practice is known as “cukai ditanggung oleh majikan” (employer-borne tax), and it has recently been updated by LHDN for YA 2024.

Many companies offer this as part of a competitive package, especially for senior hires. But while it might look simple on the surface, there are serious implications for your payroll, HR reporting, and compliance if you’re not careful.

Understanding “Cukai Ditanggung oleh Majikan”

Cukai ditanggung oleh majikan refers to when a company decides to pay an employee’s personal income tax. It’s common in roles where attracting and retaining top talent matters, like C-level executives, highly skilled professionals, or expatriates who expect tax equalisation benefits.

From a tax perspective, this payment is treated as a benefit-in-kind (BIK). That means the value of the tax paid becomes part of the employee’s taxable income and must be reported to LHDN correctly. It’s not a hidden benefit, but it’s visible, taxable, and trackable.

Latest LHDN Guideline (Effective YA 2024)

Starting YA 2024, there are new rules from LHDN that employers must follow:

Employer-paid tax is now considered gross income. This means it is counted as part of the employee’s total income.
The tax must be “grossed-up.” You need to calculate how much tax should be paid on the tax you’re paying. This creates a circular calculation that increases the final tax figure.
You must declare this amount clearly in both Form EA (for the employee) and Form E (company’s annual declaration).

The key thing to remember: covering your employee’s tax no longer stops at writing a cheque to LHDN. It changes the structure of their total income and affects how much tax they owe next year, too.

Impact on Employers and HR

When your company decides to cover employee tax, you need to fully aware of these impacts:

Higher Payroll Costs

The total cost to the company increases significantly. You’re paying not only the employee’s income tax but also the additional tax generated from grossing up the initial tax amount.

Higher Risk of Mistakes

Because of the new gross-up requirement, any small error in calculation or reporting can lead to underpayment, overpayment, or even penalties. It also complicates tax reconciliations when employees resign or leave the country.

HR Contracts Need Clarity and Transparency

Contracts, offer letters, and even verbal agreements must state clearly whether tax is covered, fully or partially. Ambiguity leads to disputes and reporting errors.

When Employers Typically Cover Employee Taxes

Not all employees get their taxes paid by the company. This practice is usually limited to certain situations:

Expatriate hires: Many expats expect a tax-equalised salary, so their take-home pay remains consistent no matter which country they work in.
Top management or board-level roles: To make total compensation more attractive without inflating the base salary.
Special incentive packages: Sometimes offered as a once-off tax-paid bonus, retention allowance, or when transferring employees between subsidiaries in different tax jurisdictions.

Best Practices for Employers

If you decide to offer this benefit, do it with full awareness and strong documentation. You can follow these best practices below:

Review and rewrite contracts to specify if tax is covered, and whether it's full or partial.
Use the correct gross-up formula. Many employers collaborate and consult with tax professionals to avoid errors.
Update payroll systems to record tax-borne benefits accurately and declare them.
Educate your employees. Ensure they understand how this benefit affects their income and tax filing, especially if they are leaving Malaysia soon.

FAQs

What should employers know before deciding to cover their employees’ income tax?

They must know it increases the employee’s gross income and triggers higher payroll cost due to gross-up. It also affects tax filing in future years.

How should HR report employer-paid tax in Form EA and E?

It must be declared as part of the employee’s gross income under Section 13(1)(a) of the Income Tax Act. You also need to reflect the full value after gross-up.

Can employer-covered taxes be offered only to certain employee levels?

Yes. There’s no rule that it must apply to all. It is often used as a selective benefit for high-value roles, expats, or retention strategies. Just make sure it’s written clearly in the employment agreement

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