Malaysia introduces Digital Nomad Pass

The DE Rantau Nomad Pass is available for foreign nationals earning more than USD 24,000 annually (or its equivalent in a different currency) in the fields of information technology (“IT”), digital marketing, digital creative content and digital content development. 
 

Qualified applicants include digital freelancers and independent contractors holding contracts that are valid for more than 3 months with one or more Malaysian or foreign clients at the time of filing their application; or full time or parttime remote workers who have been employed with a non-Malaysian company for more than 3 months at the time of filing their application. 
 

Malaysia’s introduction of this DE Rantau Nomad Pass is a welcome innovation as it will promote digital professional mobility in Malaysia. The introduction of the DE Rantau Nomad Pass also comes timely, as Thailand recently introduced its Long-Term Resident Program (“LTR”) and Indonesia continues to mull its own implementation of a Digital Nomad Visa. 
 

In addition to a 10 year renewable visa, the Thai LTR also grants a preferential personal income tax rate of 17 percent for highskilled professionals. In contrast, Malaysia’s DE Rantau Nomad Pass is currently only valid for a maximum of 2 years, and does not accord employers and employees any preferential tax treatment. It remains to be seen whether the Malaysian Government will announce any tax benefits for holders of the DE Rantau Nomad Pass in the near future. The introduction of tax benefits would surely increase the attractiveness of this pass for Digital Nomads. 

Remote work is here to stay, and the introduction of the DE Rantau Nomad Pass puts Malaysia in the forefront of attracting skilled foreign digital workers. However, whilst digital nomadism becomes increasingly popular with the trend not being likely to change in the near future, the benefits of such work flexibility should be considered in conjunction with the potential tax pitfalls for both, the individual and the foreign entity.
 

It is important to assess if the work carried out by the remote worker (i.e., the Digital Nomad) creates a tax liability for the individual in Malaysia. Under Malaysian tax rules, an employee is taxed on employment income for work performed in Malaysia, regardless of where the payment is made. As such, Digital Nomads in Malaysia may likely be subject to tax on their income for work performed whilst in Malaysia. This can potentially be mitigated if there is a Double Tax Treaty between Malaysia and the country of residence of the employer. 
 
In addition, from the employer’s perspective, the employee’s presence in the host country (e.g., Malaysia) could give rise to an increased risk of a taxable presence for the employer entity, and result in the company being subject to Corporate Income Tax on the profits attributable to the Permanent Establishment. There are several factors to determine if a Permanent Establishment (“PE”) is triggered in Malaysia by virtue of an employee’s presence in Malaysia. These include but are not limited to whether the foreign entity has a fixed place of business at its disposal through which it partially or wholly carries on its business (i.e., Fixed Place PE); or if the employee habitually plays the principle role leading to the conclusion of contracts in the name of the enterprise (i.e., Dependent Agent PE).
  

In general, the use of a home office should in itself not trigger a Fixed Place PE if the employer does not require the employee to work in the host country, does not offer an office for the employee, and does not rent and maintain a home office/co-working space for the employee. For a Fixed Place PE to arise, there must be a degree of permanence and it needs to be at the disposal of the foreign entity. 
 

With regard to a Dependent Agent PE, it is important to ensure that the activities and functions carried out by the employee does not include contract negotiation and conclusions. It is important that the activities of the employee be carefully monitored so as to not risk a Dependent Agent PE.