Termination of Service: Tax Clearance in Malaysia

The information in this article is current as at 17th April 2023 and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its related bodies corporate (Employment Hero). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional employment or legal advice. Any reference to government policies, regulations, or guidance is for informational purposes only and should not be considered official government advice. The information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and seek professional advice before making any decisions or relying on the information in this article.

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Tax clearance letter

As outlined by the Income Tax Act 1967, employers are responsible for reporting an employee’s retirement, death, departure from Malaysia (for more than 3 months), or cessation of employment to the Inland Revenue Board (IRBM/LHDN).

The tax clearance letter, also known as Surat Penyelesaian Cukai (SPC), is a letter that notifies the employer of a retiring, resigning, or deceased employee’s tax liability. This allows employers to make the necessary calculations and complete the final payment of salary, gratuity or compensation to the relevant employee.

It applies to both Malaysians and expatriates or foreign employees.

Employer responsibilities

Employers are required to notify LHDN and apply for the SPC in the following circumstances:

• No later than 30 days before the expiration of the employee’s work contract; date of resignation or termination of employment; or the date of the employee’s departure from Malaysia.
• In the case of death, within 30 days after the death.

Employers are required to retain any money that is due to be paid to the employee, for 90 days after the LHDN has confirmed that they have been notified and received the relevant form.

Once the tax clearance letter or SPC is issued by the LHDN, employers are then required to comply with it and release the money withheld to the employee.

Employers do not need to provide notice of an employee’s cessation of employment under the following circumstances:

• The employee’s income is subject to monthly tax deductions (MTD), and the deduction has been made by the employer;
• The employee’s monthly income is below the minimum amount subject to the MTD; and
• The former employee is to be employed somewhere else in Malaysia.

Employers will be liable to a fine of RM200 to RM20,000 or imprisonment for a term not exceeding 6 months or both, for failure to comply with these responsibilities without any reasonable excuse.

Employers will also be liable to pay the full amount of tax due from the employee. The amount shall be a debt due to the Malaysian government, and may be recovered by way of civil proceedings.

Employers do not need to submit any forms to Employees Provident Fund (EPF) or Social Security Organization (SOCSO) in the case of an employee ceasing employment.

SPC application process

Employers can apply for the SPC in two ways:

1. Make the SPC application online via e-SPC on ezHASiL; or
2. Make the application manually by submitting the relevant form at an LHDN branch that handles the employee’s income tax file.

There are three different types of forms to be submitted—employers will have to submit the applicable one to LHDN as follows:

Form	Purpose	Download link
CP21	For employers in the private and government sector: to inform LHDN of any employees who will be leaving Malaysia (for more than 3 months or permanently)	Click here
CP22A	For private sector employers: to inform LHDN of any employee’s cessation, retirement or death	Click here
CP22B	For government sector employers: to inform LHDN of any employee’s cessation, retirement or death	Click here

Employee responsibilities

Employees who are retiring, leaving the country, or ceasing employment must ensure that all their income tax forms for the prior years are complete and accurate.

Employees who fulfil the criteria of ‘Monthly Tax Deductions as Final Tax’ may elect to not furnish a tax return to the LHDN.

Conditions to be fulfilled for Monthly Tax Deductions (MTD) as Final Tax: 

• Employee has income only from one employment, other than gains or profits in respect of the use or enjoyment of benefits provided by his employer;
• MTD have been made by the employer;
• Employee has been working for twelve months with the same employer;
• Taxes are not borne by their employers; and
• The employee has not opted for joint/combined assessment with their spouse.

If the employee who is about to cease employment or retire is:

• Eligible for MTD as a final tax: The employee will not need to submit an income tax return form (ITRF) for the current year of assessment. Instead, they will need to submit the ITRF for the year of cessation or retirement in the following year.

• Ineligible for MTD as a final tax: The employee must submit the ITRF for the current year of assessment, and the ITRF for the year of cessation or retirement must be submitted in the following year.

In summary, employees must submit their tax return if:

• They’ve worked for more than one employer or change employers during the year;
• Worked for less than twelve months during the year;
• Tax is borne by the employer;
• Opted for joint assessment with their spouse;
• Has non-employment income such as business income, rental income, etc during the year; and
• They wish to claim refunds or deductions/rebates etc.

For more information, check out our guide to the basics of payroll in Malaysia.

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Relevant legislation

• Income Tax Act 1967
• Employment Act (Updated copy as at 1 Jan 2023)