(TAX UPDATE) E-Invoice Treatment for Foreign Employee

From 1 August 2024 onwards, Malaysian employers must adapt to the e-invoicing framework introduced by the Inland Revenue Board of Malaysia (LHDN). This includes payments made to foreign workers, whether they are employees, freelancers, or supplied by an agency.

The correct e-invoice treatment depends on the nature of the working arrangement. Misclassification can lead to penalties, non-compliance issues, and unnecessary disputes with LHDN.

Below is a practical guide for employers.

Scenario 1: Employee under full-time employment

If the foreign worker is your full-time employee, no e-invoice is required. This is because employment income is already covered under your payroll system and reported in Form E and EA/EC.

The definition of “full-time employment” generally includes workers who have an employment contract, fixed salary, and follow your working hours and policies.

Your action:

Continue to process wages through payroll
Ensure proper reporting in Form E and EA/EC

Scenario 2: Freelancer as an individual

If you engage a foreign worker as a freelancer (without a registered business), you must issue a self-billed e-invoice.

This is because the freelancer is not registered for e-invoicing in Malaysia and cannot issue one to you. A self-billed e-invoice ensures the payment is properly recorded for tax compliance.

Your action:

Prepare and submit a self-billed e-invoice to LHDN via MyInvois portal or API
Keep proper supporting documents for the payment

Scenario 3: Freelancer with a company incorporated in Malaysia

If the foreign worker operates through a locally incorporated company, the company is responsible for issuing the e-invoice to you.

Your action:

Request the e-invoice from the company before making payment
Ensure the e-invoice is valid in the MyInvois system

Scenario 4: Freelancer with a company incorporated overseas

If the freelancer operates through an overseas company, you must issue a self-billed e-invoice.

This is because foreign companies are outside the Malaysian e-invoicing system and cannot issue e-invoices.

Your action:

Issue and submit a self-billed e-invoice
Maintain documentation to support the payment and service provided

Scenario 5: Worker provided by a third party (such as an agency)

If the worker is provided by a manpower agency, your contractual relationship is with the agency, not the worker. In this case, you must request the e-invoice from the agency.

Your action:

Obtain the e-invoice from the agency before payment
Do not issue e-invoices to the worker directly

Scenario 6: Individual casual workers

Casual workers are individuals who perform work for short periods but are required to follow your instructions and schedule.

You may treat them under Scenario 1 (full-time employment) or Scenario 2 (freelancer as an individual), depending on your chosen approach.

If you choose Scenario 1, you must include their wages in Form E reporting. LHDN generally presumes that casual workers who follow your instructions have an employment relationship with you.

If you choose Scenario 2, you must issue a self-billed e-invoice.

Your action:

Decide on the treatment and be consistent in reporting
Keep proper contracts or agreements as proof

Key Takeaways for Employers

Always identify the working arrangement before deciding on the e-invoice treatment.
Keep complete records including contracts, payment details, and proof of services.
Where self-billed e-invoices are required, submit them promptly through MyInvois.
When in doubt, follow the LHDN guideline to avoid non-compliance risk.

E-invoicing is not just a system change. It affects payroll, procurement, and compliance processes. By understanding these scenarios, you can avoid mistakes, protect your company from penalties, and maintain good standing with LHDN.

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