Malaysia | Employment Tax | Budget 2025

Employment Tax

Malaysia | Budget 2025

Summary

Against a backdrop of positive economic confidence, Prime Minister Datuk Seri Anwar Ibrahim unveiled Budget 2025 on 18 October 2024, a transformative plan aimed at propelling Malaysia towards sustainable economic growth and inclusivity. At MYR 421 billion, the Budget 2025 is Malaysia’s largest budget to date. Prioritising three (3) key sectors—education, healthcare and security, it demonstrates the Government’s continued commitment in building a resilient and inclusive economy for the people under the Madani economic framework.

Some key takeaways from the individual perspective are:

• The welfare of the rakyat remains a principal focus in the Budget 2025 proposals, with personal tax reliefs extended or enhanced supporting families on healthcare and education.
• A new 2% tax introduced on dividend income exceeding MYR100,000 received by individuals.
• Resident individuals will continue to be exempted on foreign-sourced income received in Malaysia up to 31 December 2036.
• A phased implementation proposed to make Employees Provident Fund (EPF) contributions by non-Malaysian employees compulsory.
• A New Investment Incentive Framework announced that focuses on high value activities and economic spillover to the country and is expected to streamline approving authorities for workforce management.

The Government can be seen as taking clear but cautious steps to broaden the country’s revenue base while balancing these with ensuring fiscal responsibility, maintaining competitive edge, and boosting productivity and wealth. A changing fiscal and workforce landscape calls for careful planning of international talents and managing mobility, including, in the light of Budget 2025 announcements, tax and social security compliance and equalisation, international compensation reporting and effective tax relief and mitigation planning.

Individual Tax

Personal Tax Reliefs

Personal Tax Relief	Proposed change	Effective
Reinstated
Interest payment on housing loan	Individual income tax relief to be given on the interest payments for the first residential home loan (individually or jointly owned), as follows: House Price Tax Relief Per Year Up to MYR500,000 MYR7,000 Above MYR500,000 up to MYR750,000 MYR5,000 Individual income tax relief on the interest payment is subject to the following conditions: residential home must not be used to generate any income; sales and purchase agreement must be executed from 1 January 2025 until 31 December 2027; amount of individual income tax relief on allowable interest payments is applicable for 3 consecutive years of assessment, commencing from the first year the housing loan interest is paid; and two or more individuals are eligible to claim tax relief on housing loan interest for the same residential home based on the apportionment of the interest payment.	For sales and purchase agreement of first residential home executed from 1 January 2025 until 31 December 2027.
Expanded
Sports equipment and activities	To be expanded to include parents.	From Year of Assessment (Y/A) 2025
Expenses on charging facilities for Electric Vehicle	To be expanded to include the purchase of food waste composting machines for household use, which can be claimed once within 3 Ys/A.	Effective from Y/A 2025 to Y/A 2027
Reinstated
Medical treatment, special needs and carer expenses for parents	Complete medical examination for parents—to be expanded to include vaccination. Scope of tax relief—to be expanded to include grandparents, as follows: Medical treatment at clinics and hospitals; Treatment and homecare nursing, day care centres and residential care centres; Dental treatment not including cosmetic dental treatment; and Complete medical examination and vaccination, limited to MYR1,000.	From Y/A 2025
Expanded & Increased
Medical treatment expenses for self, spouse or child (limited to MYR10,000): i. serious illness for self, spouse or child; ii. fertility treatment for self or spouse; iii. Vaccination for self, spouse or child (limited to MYR1,000) iv. dental examination and treatment expenses for self, spouse or child (limited to MYR1,000) v. full medical check up, mental health check up or consultation and COVID-19 detection test inclusive of the purchase of self-test kit for self, spouse or child (limited to MYR1,000) vi. assessment and diagnosis, early intervention programme and rehabilitation treatment for children aged below 18 years with learning disability such as autism, attention deficit hyperactivity disorder (ADHD), global development delay (GDD), intellectual disability, down syndrome and specific learning disabilities (limited to MYR4,000)	The scope of category (v) is to be expanded to include: purchase of self-test kit for influenza purchase of self-testing medical devices such as glucometer, pulse oximeter, blood pressure monitor and thermometer; and fees for disease detection examination conducted at clinic or hospital, such as blood test, ultrasound, mammogram and pap smear. The limit for category (vi) is to be increased from MYR4,000 to MYR6,000.	From Y/A 2025
Increased
Insurance premium for medical/ education benefit for self, spouse and child	To be increased from MYR3,000 to MYR4,000	From Y/A 2025
Disabled person	Self: To be increased from MYR6,000 to MYR7,000 Spouse: To be increased from MYR5,000 to MYR6,000 Unmarried child: To be increased from MYR6,000 to MYR8,000	From Y/A 2025
Extended
Deferred Annuity and Private Retirement Scheme	To be extended for 5 years	Extended to Y/A 2030
Net deposit in Skim Simpanan Pendidikan Nasional (SSPN)	To be extended for 3 years, subject to additional conditions: Only one parent can claim the tax relief for SSPN savings, with a maximum limit of MYR8,000; and Withdrawals from the SSPN fund made to cover education expenses for further studies will not be included in the net savings calculation for that year, and will not affect the eligible amount for tax relief	Extended to Y/A 2027
Child care fees to a registered child care centre / kindergarten	To be extended for 3 years.	Extended to Y/A 2027

With the extensive list of personal tax reliefs available now, taxpayers are required to diligently retain supporting documents and categorise expenses incurred into the correct tax relief buckets to ensure compliance and maximising tax relief eligibility. Evidence to support the reliefs claimed in the tax return is required to be produced during routine tax audits. Employers will need to ensure that their payroll system is configured and updated with the latest reliefs and amounts to ensure accuracy in the monthly tax deduction (MTD) calculation given that Malaysia adopts “MTD as final tax”. Additionally, to capture these reliefs in the MTD calculation, Form TP 1 needs to be updated when proposed changes come into effect. Employers have to allow employees to submit Form TP 1 twice a year to the employer for purposes of adjusting MTD deducted and remitted to the Malaysian Inland Revenue Board.

Tax Exemptions

Types of Exemption	Proposed change	Effective
Child care allowance received by employees or paid directly by employers to centres	Individual income tax exemption of up to MYR3,000 per year given on child care allowance received by employees or paid directly by employers to centres to be expanded to include elderly care (parents/ grandparents)	From Y/A 2025
Tax exemption for Foreign-Sourced Income (FSI) received in Malaysia by resident individuals	To be extended for a further 10 years	Up to 31 December 2036
Tax exemption on prize money received by athlete from the government	Scope of tax exemption to be expanded to cash rewards provided to individual athletes and teams under the Sports Victory Prize Scheme (SHAKAM) by the National Sports Council (NSC).	To be announced

With the proposed extension of tax exemption for FSI until 31 December 2036, resident individuals will only be affected by the taxation on remittance of foreign-sourced income in Malaysia from the Y/A 2037. However, from an annual tax return reporting perspective, tax residents are still required to declare any foreign-sourced income remitted into Malaysia and the foreign taxes that have been paid on it.

Dividend Tax

Effective from Y/A 2025, it is proposed that a Dividend Tax will be introduced on dividend income exceeding MYR100,000 received by individual shareholders for dividends paid, credited or distributed from company profits.

Taxable person

Individual shareholders:

• Resident individuals
• Non-resident individuals
• Individuals who hold shares through nominees

Tax rate

2% imposed on chargeable dividend income after taking into account allowances and deductions.

Exemption from Dividend Tax

• dividend income from abroad;
• dividend income distributed from the profits of companies that received pioneer status and reinvestment allowances;
• dividend income paid, credited or distributed from the profits of shipping companies that is exempted from tax;
• dividend income distributed by cooperatives;
• dividend income declared by closed-end funds;
• dividend income received by residents from Labuan entities; and
• any exemption given on dividend income at shareholder level.

Non-applicability

Dividend Tax is not applicable on profit distributions made to contributors and depositors by:

• Kumpulan Wang Simpanan Pekerja (KWSP);
• Lembaga Tabung Angkatan Tentera (LTAT);
• Amanah Saham Nasional Bumiputera (ASNB); or
• any unit trust.

Since non-resident individuals and pensioners will also be within the scope of this new tax (and they typically do not file Malaysian tax returns or pay taxes in Malaysia if they do not derive any other income from Malaysia), we will need to wait for further announcements to see how the tax will be collected from such individuals. Dividend vouchers and receipts on allowable deductions/ allowances need to be retained in records to arrive at chargeable dividend income.

Employee Provident Fund (EPF)

EPF contributions be mandated for all foreign employees and workers

It has been proposed that EPF contributions be mandated for all foreign employees and workers with the implementation to be made in stages.

As Malaysia does not have any totalisation agreement on social security coverage with any country, an assignee working in Malaysia may be required to contribute to both the social security scheme in the home country and EPF in Malaysia respectively. This may increase the overall assignment cost to the employer. In addition, employers will need to consider how EPF contributions will impact areas such as compensation package, tax equalisation policy, compensation planning, and etc. Contribution rate and implementation date has not been announced as of now.

i-Saraan—Increased in matching incentive

Matching incentive to be increased from 15% to 20% (maximum MYR500 p.a./ MYR5,000 lifetime or when the member reaches age 60, whichever is earlier).

This will encourage self-employed individuals and gig economy workers without fixed income to contribute and retain more savings in EPF instead of conventional bank savings accounts. Under Section 27 of the EPF Act, 1991, the EPF is required to provide a guaranteed dividend of at least 2.5% a year, but has consistently managed to deliver significantly higher rates in the last decade ranging between 5-6% per annum. The returns are more attractive compared to interest income earned from bank deposits. In addition, the self-employed individuals and gig economy workers could take advantage of additional personal tax relief benefits.

Workforce

Increase of minimum wage

Effective 1 February 2025, the minimum wage is to be increased from MYR1,500 to MYR1,700 a month, with 6 months deferred implementation for employers with less than 5 employees.

Immigration

MIDA as the approving authority for Employment Passes for foreign graduates from local universities

As part of the Government’s efforts in encouraging meaningful investments, the Government will introduce a New Investment Incentive Framework that focuses on high-value economic activities. To remain competitive and facilitate strategic investors, the Malaysian Investment Development Authority (MIDA), as the principal investment promotion agency, will be the approving authority for Employment Passes involving foreign graduates from local universities to meet human capital needs in the New Industrial Master Plan (NIMP) sectors.

Securities Commission as the approving authority for the granting of Resident Passes and Employment Passes to the Founding Family Investors and related Family Office investment professionals

In similar vein, in order to enhance the investor base in Malaysia and create skilled employment opportunities through the establishment of family offices in Malaysia under the Single Family Office Scheme for the Forest City Special Financial Zone in Johor, it was announced that the Securities Commission will act as the approving authority for the granting of Resident Passes and Employment Passes for Founding Family Investors and Family Office investment professionals.

This is a continuous and positive effort by the Government in encouraging optimisation of workforce management and growth for local organisations, especially in filling skill gaps in targeted sectors that will contribute to national development in the near future. The strong collaboration by the local approving authorities will ensure that investors are well supported to uncover investment opportunities and experience an overall smooth investment and residency process in Malaysia. It is anticipated that these announcements will encourage strategic investments in Malaysia and it will have a ripple effect on the workforce through the facilitation of relevant immigration passes by specific approving authority.

How we can help

While we await the draft Finance Bill 2024 for any other amendments the Budget may bring, please join us for our Mobility Roundup webinar on 5 November 2024 (register here) as we discuss the Budget announcement measures that impact employers and employees in Malaysia.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Hidlda Liow                                                                         
Partner

Sasha Reddy
Partner

Phing Phing Lim                                                                      
Partner

Lay Har Wee
Director

Further information on Vialto Partners can be found here: www.vialtopartners.com

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