Malaysia

Tax-deferred employer plans

The Employees Provident Fund (EPF, known locally as KWSP) is Malaysia's mandatory retirement savings scheme. Employers contribute 12%–13% and employees contribute 11% of monthly wages to individual accounts. The EPF holds segregated assets and declares annual dividends (historically 5%–7%). The exemption is available only to an ‘eligible individual’ under §5.02: someone who is compliant (or comes into compliance) with U.S. income-tax filing and has reported the plan’s contributions, earnings, and distributions as income to the extent U.S. law requires; a participant who never reported plan earnings cannot rely on it until they do.

Under Treas. Reg. §301.7701-7, the EPF is likely a foreign trust: the analysis mirrors Singapore's CPF. Form 3520-A and Form 3520 must be filed annually for the part your own contributions fund, once your own contributions exceed the employer’s, counted as the note at the end of this section explains (Treas. Reg. §1.402(b)-1(b)(6)), or for any part you otherwise own, if treated as a foreign trust.

Rev. Proc. 2020-17 does not require a treaty, so the absence of a U.S.–Malaysia income tax treaty does not by itself disqualify the EPF. EPF is tax-favored in Malaysia, reports to the Malaysian authorities, and limits mandatory contributions to a percentage of wages. Akaun Sejahtera withdrawals for housing (purchase, construction, loan reduction) and education fall within, or are closely analogous to, the carve-out in Section 5.03(5) for primary-residence and educational withdrawals; medical withdrawals are closely analogous to the hardship carve-out. The difficulty is the Akaun Fleksibel introduced in May 2024, which EPF describes as accessible ‘at any time’ for emergencies and immediate needs with no stated purpose test, and the full withdrawal permitted on permanent departure from Malaysia. Neither is a permitted early-withdrawal reason, and whether a defect in one sub-account disqualifies the whole EPF trust is unresolved. No IRS guidance addresses EPF. Without the exemption, the EPF is reported as an employer plan’s trust (see the note at the end of this section). EPF dividends aren’t taxed in the year credited. Contributions, the member’s mandatory share taken from pay included, are taxed when they vest (§402(b)(1)), and dividends when paid out, under §72 (§402(b)(2)). The exceptions are a part the member owns (voluntary contributions above the employer’s) and a highly compensated employee in a plan that fails the U.S. coverage tests (§402(b)(4)(A)).

The EPF has multiple accounts (Akaun Persaraan for retirement, Akaun Sejahtera for pre-retirement withdrawals, and the newer Akaun Fleksibel). For 3520-A purposes, report the total across all accounts. Withdrawals from any account go on Form 3520, Part III, unless reported as compensation income (see the note at the end of this section).

For a plan an employer contributes to, a trust holding it is generally a nonexempt employees’ trust described in §402(b). §6048(a)(3)(B)(ii) excepts transfers to §402(b), §404(a)(4), and §404A trusts from Part I, the participant’s own contributions included, and §679 does not make the participant the owner (see the Reporting Guide’s employer-plan section). Payouts the participant reports as compensation income are excepted from Part III. If the participant’s own contributions ever exceed the employer’s, the participant is treated as the owner of the part those contributions fund (Treas. Reg. §1.402(b)-1(b)(6)), reports it on Part II and Form 3520-A each year it is owned, and is taxed on its income each year. In that count, what the participant chose to put in, salary sacrifice included, is the participant’s, and anything the plan’s rules required taken from pay is the employer’s, as the IRS chief counsel read a national retirement fund in 1997. The rest is taxed when it vests and, after that, when paid out (§402(b)(1), (2)).

Tax-deferred individual plans

Private Retirement Schemes (PRS) are voluntary, individual retirement savings vehicles launched in 2012. PRS funds are managed by licensed fund managers and hold segregated assets in trust. Under Treas. Reg. §301.7701-7, PRS accounts are likely foreign trusts.

Rev. Proc. 2020-17 does not require a treaty. PRS accounts are individual plans; §5.03(6) (the employer-plan nondiscrimination condition) does not apply. Whether they meet §5.03(1)–(5) requires plan-specific analysis.

If classified as foreign trusts, Form 3520-A and Form 3520 must be filed. PRS funds invest in a mix of equities, bonds, and money market instruments; PFIC rules may apply to the underlying funds, and we do not determine PFIC status or whether Form 8621 is due.

Gifts and inheritances

If a U.S. person receives more than $100,000 in gifts or bequests in a year from one nonresident alien individual or foreign estate in Malaysia (adding together gifts from donors related to each other), Form 3520 Part IV reporting is required. Gifts from foreign corporations or foreign partnerships exceeding $20,573 (for 2026, indexed for inflation) are also reportable.

Malaysia does not impose gift tax or inheritance tax (estate duty was abolished in 1991). The U.S. obligation is purely informational.

Common scenarios include gifts from parents or family members in Malaysia, inheritance of Malaysian property (noting that certain states restrict foreign ownership of some property types), and inheritance of EPF balances (EPF nominations allow members to designate beneficiaries).

Penalties and practical notes

Failure to file Forms 3520/3520-A carries penalties under §6677: the greater of $10,000 or 35% of the gross reportable amount for certain Form 3520 failures (§6677(a)); 5% or $10,000 for Part II and 3520-A (§6677(b)).

The Malaysian tax year is the calendar year, aligning with the U.S. No fiscal year conversion is needed.

EPF provides annual statements through the i-Akaun online portal showing contributions, dividends, withdrawals, and balances. This information can be used to prepare the 3520-A.

Convert Malaysian ringgit at the rate prevailing when each amount is received, paid, or accrued; the IRS has no official exchange rate and generally accepts any posted rate used consistently, so its published yearly average rate is a common choice for amounts arising evenly across the year.

U.S. persons leaving Malaysia permanently may be eligible to withdraw their full EPF balance. This withdrawal goes on Form 3520 Part III unless reported as compensation income (see the employer-plan note above), and is taxable in the U.S.

EPF dividends are declared annually (typically in February for the prior year). For 3520-A purposes, report the dividend in the year it is credited to the account.