LHDN TREATMENT OF SALARIES PAID TO FOREIGN WORKERS
LHDN will DISALLOW salary expenses for foreign workers under these 4 strict conditions
The different circumstances in which a company may employ a foreign worker and where the expense is disallowed by LHDN:
a) Where the worker possesses a work permit, but the permit is in the name of a third party company.
b) Where the worker possesses a work permit, but the permit is for work in another sector (not the sector in which the company is involved).
c) Where a worker does not have a work permit.
d) Where a worker possesses a student visa.
LHDN POSITION
During a tax audit, LHDN will closely scrutinize all foreign worker expenses by cross-checking your payroll records against immigration documents, Form E submissions, and Monthly Tax Deduction (MTD/PCB) reports.
LHDN will treat all four categories above (a, b, c and d) as non-compliant and undocumented/unauthorized labour costs. They will flag these transactions, add the disallowed amounts back to the company’s chargeable income, and issue an Additional Assessment along with substantial tax penalties (which can range from 15% to 45% under Section 113(2) of the ITA for submitting an incorrect return).
Classifying the payments as “part-time wages” will not change the outcome. LHDN will still disallow the expenses and maintain the exact same strict treatment. Attempting to recharacterize these costs as casual labour or part-time wages does not bypass the core legal requirements.
LHDN operates on the principle of “Substance Over Form”. Changing the description in your general ledger from “Salaries” to “Part-Time Wages” or “Casual Labor” does not alter the fact that the individuals performing the work are non-compliant foreign nationals.
Under the Immigration Act 1959/63, it is fundamentally illegal to employ a foreign worker whether full-time, part-time, or on a casual daily rate unless they hold a valid work pass issued specifically under your company’s name and for the approved sector.
A Student Pass allows for legal part-time employment in Malaysia under highly specific conditions. LHDN will dismantle a “Student Pass” justification based on three uncompromising rules:
1. Sector Violation The Malaysian Immigration Department strictly limits international student employment to only four approved sectors:
- Hotels
- Petrol stations
- Mini markets
- Restaurants
2. Immigration Endorsement An international student cannot simply pick up a part-time job. To work legally, the student must apply through their educational institution (UA/IPTS), obtain a letter of support, and attend an interview with the Immigration Department.
3. Violations of Timing Rules (The 20-Hour Rule) Under current 2026 guidelines, students are strictly limited to working a maximum of 20 hours per week, and only during semester breaks or holiday periods exceeding 7 days. They are legally prohibited from working off campus during active academic semesters.