Malaysia My Second Home Tax: Considerations for Declaring Hong Kong Passive Income

The Malaysia My Second Home (MM2H) programme has undergone a significant restructuring under the revised criteria announced by the Malaysian Ministry of Tourism, Arts and Culture (MOTAC) in late 2024, with the new tiered categories (Silver, Gold, and Platinum) taking full effect for applications processed from January 2025. This overhaul, which raised the minimum fixed deposit requirements for the standard tier to RM500,000 and introduced a Platinum tier requiring RM5 million in fixed deposits, has created a more complex tax nexus for Hong Kong residents. For the Hong Kong-based applicant who intends to maintain their Hong Kong tax residency while spending more than 182 days per year in Malaysia under the MM2H programme, the central question is no longer simply about obtaining a visa, but about how their Hong Kong-sourced passive income—dividends, interest, and rental income from Hong Kong property—will be treated under Malaysian tax law. The Inland Revenue Board of Malaysia (LHDN) has historically taken a strong position on the residence tie-breaker rule, and the 2025 MM2H changes have sharpened the focus on the distinction between income sourced in Malaysia and income derived from Hong Kong, particularly for participants who hold their primary assets and income-generating activities in Hong Kong.

The MM2H Tax Residence Trigger: The 182-Day Rule and Its Application to Hong Kong Residents

The operative tax position under Malaysian law is that an individual who is present in Malaysia for 182 days or more in a calendar year is deemed a tax resident under Section 7(1)(b) of the Income Tax Act 1967 (ITA). For the Hong Kong MM2H participant who splits their time between Hong Kong and Malaysia, this threshold is the single most critical determinant of their tax liability on worldwide income versus income sourced only in Malaysia.

The Distinction Between Physical Presence and Domicile

The 182-day rule is a physical presence test, not a domicile or habitual residence test. A Hong Kong resident holding a valid MM2H visa who spends 183 days in Malaysia in 2025 will be treated as a Malaysian tax resident for that year of assessment, regardless of whether they maintain a Hong Kong identity card, a Hong Kong address, or a Hong Kong bank account. The LHDN does not recognise the Hong Kong Inland Revenue Department’s (IRD) territorial source principle as a basis for exemption. Once the 182-day threshold is crossed, the ITA § 7(1)(b) deems the individual resident, and the individual’s worldwide income becomes prima facie chargeable to Malaysian income tax.

For the Hong Kong resident who intends to remain within the 182-day limit to preserve their non-resident status in Malaysia, the practical challenge is that the MM2H visa typically requires a minimum physical stay of 90 days per year (under the standard Silver tier). The gap between 90 days and 182 days provides a buffer, but the participant must maintain meticulous travel records. The LHDN has the authority under ITA § 82 to request an entry and exit record from the Malaysian Immigration Department, and the burden of proof that the participant was present for fewer than 182 days falls on the taxpayer.

The Double Taxation Agreement Between Malaysia and Hong Kong

The Agreement between the Government of Malaysia and the Government of the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Malaysia-HK DTA), which entered into force on 1 January 2013, contains a residence tie-breaker provision in Article 4. This article provides that where an individual is a resident of both contracting parties under their respective domestic laws, the individual’s residence shall be determined by a hierarchy of tests: permanent home, centre of vital interests, habitual abode, and nationality.

For the Hong Kong MM2H participant who maintains a permanent home in Hong Kong (e.g., a self-owned flat in Mid-Levels) and a rented or owned home in Kuala Lumpur or Penang, the first test under Article 4(2)(a) is whether the individual has a permanent home available to them in both states. If the answer is yes, the tie-breaker moves to the centre of vital interests—the state with which the individual’s personal and economic relations are closer. This is where the Hong Kong participant has a strong argument: if the individual’s employment, business, family, and substantial assets remain in Hong Kong, the centre of vital interests is Hong Kong, and the individual is deemed a Hong Kong resident for DTA purposes, even if they spend 183 days in Malaysia.

However, this argument weakens if the participant relocates their family to Malaysia, registers a Malaysian company, or sells their Hong Kong property. The LHDN has been known to apply the tie-breaker test strictly; in the 2022 LHDN Public Ruling No. 1/2022 on Residence Status, the LHDN stated that the centre of vital interests is determined by the totality of facts, not by a single factor.

Taxation of Hong Kong Passive Income Under Malaysian Domestic Law

Assuming the MM2H participant is deemed a Malaysian tax resident under ITA § 7(1)(b) and the tie-breaker test does not save them, the next question is how Hong Kong-sourced passive income is classified and taxed.

Dividends from Hong Kong-Listed Companies

Hong Kong does not impose withholding tax on dividends paid by Hong Kong-incorporated companies to non-resident shareholders. Under Malaysian tax law, dividends received by a Malaysian resident individual from a foreign company are generally taxable as foreign-sourced income. However, the Malaysian government introduced a significant change in the 2022 Budget: effective from 1 January 2022, foreign-sourced dividend income received in Malaysia by a Malaysian resident individual is exempt from tax, subject to the condition that the income is received in Malaysia.

This exemption is found in Paragraph 28, Schedule 6 of the ITA, which was amended by the Finance Act 2021. The key phrase is “received in Malaysia.” For the Hong Kong MM2H participant who holds shares in a Hong Kong-listed company and receives dividends into a Hong Kong bank account, the question is whether the dividend is “received in Malaysia” when the Hong Kong bank account is not remitted to Malaysia. The LHDN’s position, as clarified in the 2022 guidelines, is that the dividend is received in Malaysia only when the funds are brought into Malaysia or credited to a Malaysian bank account. If the dividend remains in a Hong Kong account and is not repatriated, it is not subject to Malaysian tax.

This creates a planning opportunity: the Hong Kong MM2H participant can maintain their Hong Kong dividend income in a Hong Kong bank account and only remit funds to Malaysia as needed, ensuring that the remitted amounts are below the annual threshold for reporting or that the funds are treated as capital rather than income.

Interest Income from Hong Kong Bank Accounts

Interest earned on Hong Kong bank accounts is sourced in Hong Kong under the territorial source principle. Under Malaysian tax law, foreign-sourced interest income received by a Malaysian resident individual is also exempt from tax under the same Paragraph 28, Schedule 6 exemption, provided it is not received in Malaysia.

The practical issue arises when the participant uses a Hong Kong bank account to pay for Malaysian living expenses via credit card or online transfer. The LHDN may argue that the interest income is constructively received in Malaysia if the Hong Kong account is used as the primary funding source for Malaysian expenditure. The participant should maintain a separate Hong Kong account that is not used for Malaysian transactions, and should fund a Malaysian bank account from a separate source.

Rental Income from Hong Kong Property

Rental income from a property located in Hong Kong is sourced in Hong Kong under the Hong Kong Inland Revenue Ordinance (Cap. 112) § 14, which taxes profits arising in or derived from Hong Kong. Under Malaysian tax law, rental income from foreign property is classified as foreign-sourced business income or passive income, depending on whether the rental activity constitutes a business.

If the participant merely owns a single Hong Kong property and leases it to a tenant, the rental income is passive income. Under the Paragraph 28 exemption, it is exempt from Malaysian tax if not received in Malaysia. However, if the participant owns multiple Hong Kong properties and engages in active management—such as advertising, tenant selection, and maintenance—the LHDN may reclassify the rental income as business income. Business income from a foreign source is taxable in Malaysia under ITA § 4(a) if it is derived from a business carried on in Malaysia. The LHDN’s 2022 guidelines state that the mere receipt of rental income from foreign property does not constitute carrying on a business in Malaysia, but the participant should avoid having a Malaysian agent or office that handles the Hong Kong property.

The MM2H Platinum Tier and the Exit Tax Risk

The Platinum tier of the MM2H programme, introduced in the 2024 revision, requires a fixed deposit of RM5 million and allows the participant to work, invest, and conduct business in Malaysia without separate permits. For Hong Kong high-net-worth individuals, this tier carries a specific tax risk: the potential for the LHDN to treat the participant as having a permanent establishment (PE) in Malaysia.

The Permanent Establishment Risk for Active Business Owners

Under the Malaysia-HK DTA Article 5, a PE includes a place of management, a branch, an office, or a factory. If the Platinum tier participant sets up a family office or a management company in Kuala Lumpur to oversee their Hong Kong and global investments, that office could be deemed a PE. Once a PE exists, the profits attributable to that PE are taxable in Malaysia.

The Hong Kong participant who holds a Platinum MM2H visa and operates a Hong Kong trading company should ensure that the company’s board meetings, management decisions, and key contracts are executed in Hong Kong, not in Malaysia. The LHDN has the authority under ITA § 140 to disregard any arrangement that has the effect of avoiding tax, and the 2023 LHDN Transfer Pricing Guidelines specifically address the attribution of profits to PEs.

The Exit Tax for US Citizens and Green Card Holders

For the Hong Kong-based US citizen or Green Card holder who is considering the MM2H programme, the US exit tax under IRC § 877A must be considered. If the individual intends to relinquish their US citizenship or Green Card after establishing Malaysian residence, the MM2H programme does not provide a safe harbour. The US exit tax applies to individuals with a net worth exceeding USD 2 million or an average net income tax liability exceeding USD 201,000 (2024 threshold, adjusted annually for inflation) for the five years preceding expatriation.

The interaction between the US exit tax and the Malaysian MM2H programme is that the individual may be deemed to have realised all their worldwide assets upon expatriation, including their Hong Kong property, Hong Kong-listed shares, and US securities. The Malaysian tax treatment of this deemed realisation is unclear, as Malaysia does not have a specific exit tax regime. The individual should structure their asset holding to minimise the US exit tax liability before applying for the MM2H visa.

Practical Compliance for the Hong Kong MM2H Participant

The compliance burden for the Hong Kong MM2H participant who is deemed a Malaysian tax resident is significant, but manageable with proper planning.

Filing Obligations and the Statute of Limitations

A Malaysian tax resident must file an annual tax return (Form B for individuals with business income, Form BE for those without) by 30 April of the following year (for manual filing) or 15 May (for e-filing). The LHDN has a statute of limitations of six years from the end of the year of assessment to issue an assessment or additional assessment, under ITA § 91. This means that a participant who under-declares their Hong Kong passive income in 2025 could face an audit until 2031.

The participant should maintain a clear record of their days of physical presence in Malaysia, supported by flight itineraries, hotel receipts, and immigration stamps. The LHDN’s 2022 Public Ruling on Residence Status states that the burden of proving the number of days present lies with the taxpayer.

The Role of the Hong Kong IRD in Information Exchange

Under the Malaysia-HK DTA Article 26, the competent authorities of both jurisdictions may exchange information that is foreseeably relevant to the administration of their respective tax laws. This means that if the LHDN suspects that a Hong Kong MM2H participant has under-declared their Hong Kong-sourced income, the LHDN can request information from the Hong Kong IRD.

The Hong Kong IRD, under the Inland Revenue Ordinance (Cap. 112) § 51(4A), has the power to require a taxpayer to provide information about their foreign assets and income. For the Hong Kong MM2H participant who maintains Hong Kong bank accounts and Hong Kong property, the IRD may be asked to provide account statements and property records to the LHDN. This information exchange is not automatic, but it is a real risk for participants who engage in aggressive tax planning.

Actionable Takeaways

1. Track your physical presence in Malaysia rigorously: Maintain a daily log of your entry and exit dates, supported by immigration records and travel receipts, to ensure you do not inadvertently cross the 182-day threshold that triggers Malaysian tax residence.
2. Keep your Hong Kong passive income in Hong Kong: Do not remit dividends, interest, or rental income from Hong Kong to a Malaysian bank account unless you are prepared to pay Malaysian tax on the remitted amount.
3. Establish your centre of vital interests in Hong Kong: Maintain your permanent home, family residence, and primary bank accounts in Hong Kong, and ensure that your business and investment decisions are made in Hong Kong, not in Malaysia.
4. For Platinum tier participants, avoid creating a permanent establishment: Do not set up a management office or family company in Malaysia that could be deemed a PE, and ensure that your Hong Kong company’s board meetings and key contracts are executed in Hong Kong.
5. Review your US exit tax exposure before applying: If you are a US citizen or Green Card holder, calculate your net worth and average tax liability to determine whether you are subject to IRC § 877A, and consider deferring your MM2H application until you have addressed any exit tax liability.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。
This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.