Understanding Payroll in Malaysia: What Global Companies Need to Know About Malaysia's Payroll System
Malaysia is a fast-developing country that has become a popular destination within south-east Asia for international business. Its population of around 31 million people enjoy strong links with both East and West: China is its major trading partner, while the country is also a member of the Commonwealth where English is widely spoken. Its economy has stagnated in recent years (largely in line with China), but it may be poised for an upturn as it was relatively unaffected by the initial outbreak of COVID-19.
Malaysia has a high-tech infrastructure, produces many raw materials including tin, rubber and palm oil, and has relatively open visa regulations that encourage foreign investment. This guide covers the basics of doing business in Malaysia from a payroll perspective, including the key factors in getting up and running.
Foreign companies setting up in Malaysia can register either as a locally-owned company or as a foreign-owned one. In either case, private limited companies or representative offices are the most popular options (different rules apply for companies setting up in Malaysia’s tax haven territory of Labuan).
There are a number of registrations and processes to go through in the set-up process, each with their own, relatively affordable, fees in Malaysian ringgits (MYR):
- Company name reservation with the Companies Commission of Malaysia: RM30 (approximately £5.50; $7.30; €6.10)
- Submission of incorporation documents for company registration, a process that usually takes 1-3 days
- Payment of a registration fee, variable depending on size of share capital, ranging from RM1000 (approx. £185; $245; €205) for share capital under RM400,000 (approx. £74,000; $97,000; €82,000), to RM70,000 (approx. £13,000; $17,000; €14,500) for share capital over RM100 million (approx. £18.5million; $24.5million; €20.5million).
- Minor payments for stamp fees and post-incorporation package fees, totalling RM275 (approx. £50; $65; €55)
- Online registration fee of RM10 (approx. £1.85; $2.45; $2.05)
After their initial business name reservation, companies have three months to complete their filings. Then they must register (free) for Goods and Services Tax, income tax, PAYE, Employees Provident Fund and the Social Security Organisation.
Most key employment and labor regulations in Malaysia are set out in the Employment Act 1955. With respect to the Act, employees are defined as anyone who earns less than RM2000 (approx. £370; $490; €410) per month or who conducts manual work at any rate of pay. Additionally, the Occupational Safety and Health Act 1994 and the Factories and Machinery Act 1967 outline employee rights for general safety and safety in factories, respectively.
Malaysia’s maximum working time is 48 hours per week, spread over six eight-hour days. Under-16s can be employed, but special restrictions apply (with physical work generally banned for those under 14). Overtime is paid at a minimum of 150% of hourly rate, but employees cannot work for more than 12 hours on any given day, and no employee can work more than 104 hours of overtime in a month. Overtime is paid at a minimum of 200% hourly rate on rest days and 300% on public holidays.
All foreign workers must obtain a work permit from the government before being allowed to work in the country.
Compensation, Bonuses and Severance
Minimum wage levels in Malaysia were only introduced in 2013 and vary between different and municipality councils. In February 2020, the rate was raised for 56 areas, including the capital Kuala Lumpur, to RM1200 per month (approx. £220; $290; €245) or RM5.77 per hour (approx. £1.10; $1.40; €1.20). Awarding of the ‘13th-month bonus’, which is popular in many Asian countries, is fairly commonplace but is not required by law.
Notice periods for termination are four weeks for employees with less than two years’ service, rising to six weeks at two years and eight weeks at five years. Severance pay rates are ten, 15 or 20 days per year of service, applied across the same three bands of service length. Severance pay should be pro-rated to the nearest month of service, however.
Tax Requirements, Collection & Withholding
Companies in Malaysia should withhold income tax payments at source from employees under a Pay-As-You-Earn (PAYE) system, although employees are still required to complete self-assessments each year. Malaysia has 12 progressively increasing bands of income tax rates. Only the first RM5000 (approx. £920; $1200; €1020) made each year is fully exempt, although the next three bands above this are only 1%, 3% and 8%. The highest band of 30% is applied to all earnings in excess of RM2 million (approx. £370,000; $490,000; €410,000). The general corporate income tax rate is 24%.
Social security contributions are made in two areas. The first is for SOSCO, which covers employment injury and invalidity insurance, with the employer contributing 1.75% of salary and the employee 0.5%. The second is the Employment Provident Fund (EPF), which covers retirement insurance, with contributions of 12% from the employer and 11% from the employee. Importantly, contributions to both these schemes stop when an employee reaches the age of 55.
Holidays and Leave
Malaysian workers are paid for 11 days of public holidays each year. Five are the main official ones: Malaysia Day, National Day, Federal Territory Day, Workers’ Day and Birthday of the Yang Dipertuan Agong. Employers can choose which other six national or state-level holidays their employees can have paid time off for.
Initial paid leave entitlement is eight days per year, rising to 12 days after two years of service and 16 days after five years. The same three lengths of service are used as the bandings for paid sick leave, with 14, 18 and 22 days permitted per year for each band respectively. In any case requiring hospitalization, the paid entitlement increases to 60 days.
Paid maternity leave entitlement is set to increase from 60 days to 90 as of January 1 2021. This can start at any time from 22 weeks into the pregnancy through to the day after the birth. There is no legal requirement to provide paternity leave, although many companies voluntarily provide a few days’ leave to new fathers. Furthermore, the possibility of a legal entitlement has been discussed publicly in Malaysia, and so may be introduced in years to come.
Malaysia is an excellent location for international business, wherever the incoming investment is coming from. However, there are many hoops that foreign companies must jump through in order to set up properly and remain compliant throughout their operations there. For that reason, it’s worth considering a partnership with a global payroll partner who can provide vital expertise and solutions to steer through the complexity and maximize the chances of success.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.