Thanks Stephen

I have played with Copilot and it came up with the conclusion below. Is it hallucinating or is it true that the MM2H tax exemption supercedes the LHDN authority?

🇲🇾 General Rule for Foreign-Source Income (2022–2026)

According to the LHDN Guidelines on Foreign Income Received in Malaysia:

• Foreign income received in Malaysia by a resident individual is taxable, unless exempted.
• Exemption applies only if the foreign income has been subjected to tax in the country of origin (e.g., UK)
  

This means:
If your UK SIPP pension has not been taxed in the UK, it would not qualify for exemption under the general foreign income exemption rules.

🇲🇾 MM2H-Specific Exemption

However, MM2H participants enjoy a separate and broader exemption:

• MM2H guidelines explicitly state that foreign-source income, including pensions, is exempt from Malaysian tax, regardless of whether it was taxed abroad
  .
• This exemption is not governed by the general foreign income exemption rules under the Income Tax Act 1967, but rather by policy decisions specific to MM2H.

So:
MM2H exemption supersedes the general foreign income exemption, meaning your UK SIPP pension is not taxable in Malaysia, even if it is not taxed in the UK.

✅ Summary

Scenario Taxable in Malaysia?
Foreign pension taxed in UK - Exempt under general rules
Foreign pension not taxed in UK - Taxable under general rules
MM2H holder receiving UK pension (taxed or not) - Exempt under MM2H policy

Previously this point was used mostly by MM2H agents and promoters, there wasn't any official statement about it. It used to be easy as foreign income was not taxed in Malaysia. However with the introduction of tax on foreign source income this changed, while many continued to claim that it didn't apply to MM2H.
In the new MM2H guidelines it does say "Tax exemption on incoming funds such as FD".
This is not reflected anywhere in the tax laws, and it might be that the tourism department that has written this has understood the laws this ways. This guideline is not a law and I wouldn't agree with Copilot that this would supercede the actual tax laws.
However, it could say something about how it works in real life.
They use FD (fixed deposit) in this example, and it might mean that they're referring to the funds required to place in the FD to obtain the FD, and might not include recurring monthly income.
https://www.motac.gov.my/images/Term..._Home_MM2H.pdf

So, it doesn't really prove anything. But check with PWC etc, their experts might have a more qualified understanding on how to interpret this.

My recommendation: don't trust Copilot, or any other AI for that matter. They get their information from the same internet as you do. It would be nice if Copilot tells you the source where it gets its information from, then you can verify how reliable and trustworthy that source is. It wouldn't surprise me if this bit of info came off of some obscure Facebook page, not an official government source.

For sure, anything from AI needs to be verified carefully.

I have run similar questions on GPT-5 and it comes up with the reply that MM2H does not override the tax laws, which is what we broadly agree. However, it comes up with an interesting idea which works as follows:

1. Don't apply for the NT code once becoming Malaysian tax resident. If HMRC issues one after receiving the P85, write to them to ask for a reversal as there is no claim for the UK-Malaysia double tax relief.

2. Draw the SIPP just over the personal allowance with the tax code of 1257L or 1257L M1, thus incurring a UK income tax liability on the remitted SIPP to Malaysia.

3. Claim the exemption under P.U. (A) 451/2024 for the remitted SIPP as UK tax has been paid for it. The presumption is that domestic tax laws take precedent over the double tax agreement. Even though the DTA gives the taxing right to Malaysia, Malaysia does not have the obligations to exercise the rights over its domestic tax laws.

4. If LHDN argues that they can tax the SIPP, regardless of whether UK tax has been paid, the counter argument would be that Malaysia’s domestic tax law (as modified by the foreign-source income rules and gazetted exemptions) overrides the mere existence of a taxing right on the following grounds:

1. DTA ≠automatic tax


o A DTA only allocates taxing rights; it does not force a country to tax.
o If Malaysia chooses to exempt certain foreign income under domestic law, the DTA does not override that choice.
o Article 24 (Elimination of Double Taxation) supports this — it applies “where income is subject to tax in both countries” and allows Malaysia to give a credit or exemption.

2. Domestic exemption for foreign income

o Under the Income Tax (Exemption) (No. 5) Order 2022 [P.U. (A) 234/2022] — later extended/amended — foreign-source income received by Malaysian residents is exempt if it is already taxed in the source country.
o This includes pensions, because the law does not carve them out.

3. “Subject to tax” test

o LHDN’s own guidance interprets “subject to tax” to mean that the income falls within the charge to tax under the foreign country’s laws — it doesn’t have to be taxed at a high rate.
o This means that even if your UK SIPP withdrawal is partially or fully covered by the UK personal allowance, it is still taxable income under UK law.

4. UK tax evidence

o By retaining UK PAYE deductions (via BR or 1257L with some tax paid), you create clear evidence that the UK exercised its taxing rights.
o This satisfies the domestic exemption condition and sidesteps Malaysia’s DTA primary right in practice.

Could someone please help shed some light as to how the basics of the tax system work in Malaysia (for those going via the MM2H route)? Just trying to get the gist of the system and what to expect.

1. Does everyone who becomes resident have to register as a taxpayer, or is that only necessary once you have income that should be taxed in Malaysia?

2. Do all remitted funds (into Malaysia) need to be declared, even those not subject to tax? As in do you have to declare a transfer of savings (or capital gains profits that are not subject to tax under current legislation) from abroad into Malaysia and then declare it as not subject to local tax, or is that not necessary and only funds actually subject to tax need to be declared?

3. Is it a viable solution from a tax perspective (and of course if your financial situation allows it) to remit and spend savings (not subject to tax) in your daily life but keep any (possibly taxable if remitted?) profits gained from outside Malaysia outside the country without remitting them in order for them not to be subject to local tax?

1. You don't have to register just by becoming a resident
2. No need. However you're supposed to declare foreign source income that's covered by the exemption and then claim the exemption
3. Yes

Many thanks. I take it it's mainly foreign income that would be taxed locally... unless it has already been taxed elsewhere... that needs to be declared with an exemption claimed?

But income that isn't taxed in the first place, such as capital gains, doesn't even need to be declared?

Yes, and in real life even the foreign source income exemption is misunderstood and seems not applying to MM2H. I don't know anyone on MM2H who files a tax return.

Thank you, that's good to know as I'll be starting the MM2H application process in the coming months.

Is a local Malaysian tax ID number automatically assigned to every new resident just as it is in Singapore (FIN number) for instance? Or maybe it is required when finally purchasing a local property?

After relocating I would prefer to have a tax ID number so that I can change my banking details for any non-Malaysian accounts and one of the first things they'll want is not just a local address but tax ID too.

Not automatically, but required when buying property.