Witholding Tax in Malaysia

In Malaysia, who is required to pay withholding tax? And what exactly is withholding tax? What are the specific tax rates levied on payees and payers? This question will stay in our minds when we first hear the term withholding tax, and some may not know that it falls within the withholding tax that we must pay to the IRB.

According to KPMG beginning January 1, 2022, Section 107D requires businesses to withhold 2% of monetary payments made to authorised agents, dealers, and distributors (ADDs) arising from sales, transactions, or schemes carried out by them. The withholding tax applies only when ADDs are resident individuals who received more than RM100,000 in payments (in monetary form or otherwise) from the same company in the preceding basis year for an assessment year.

What is witholding tax? 

Withholding tax is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the Inland Revenue Board of Malaysia. 

A person or entity other than an individual conducting business in Malaysia is referred to as a "payer." He is required to deduct tax from any payments made to a non-resident payee for services given, technical advice, rental, or any payments made under an agreement for the use of any moveable property. 

Those who receive the aforementioned payments who are not Malaysian citizens are referred to as "payees." 

PAYMENT TYPES SUBJECT TO WITHHOLDING TAX

1. Contract payments

Contract payments is the deduction of WHT applies to any payment made to a non-resident contractor or his agent or any other person acting on his behalf in respect of services under a contract.

For purposes of Section 107A:

  • Services under a contract that are performed or rendered in Malaysia in conjunction with any contract project. Any endeavour project or programme carried out or done in Malaysia is considered a contract project. Any advising, consultative, technical, industrial, commercial, or scientific service is considered professional services.
  • A further 3% withholding tax is to be deducted where the non-resident has employees stationed in Malaysia who are involved in the contract. This 3% is to account for any tax that the employees may be required to pay in Malaysia in connection with the contract. The 3% withholding tax will apply regardless of any arrangements for monthly deductions from the relevant employees' salaries.
  • Section 107A withholding tax is not a final tax. As a result, upon submission of the relevant returns to the DGIR, the non-resident or his agent in Malaysia may claim a refund of any withholding tax overpayments.
2. Interest payments


Interest payments are a premium or compensation paid to the lender for the use of a quantity of money or property or for the settlement of debts. It includes loan interest as well as interest on past-due trade payments.

Deemed derived from Malaysia Section 15:

1. Responsibility for the payment lies with the Government, a State Government or a local authority or

2. Responsibility for the payment lies with a person who is a resident and in respect of

  • Money borrowed and employed in/laid out on assets used in/held for the production of any gross income or
  • Is secured by any property/asset situated in Malaysia

3. Interest is charged as an outgoing or expose against any income accruing in or derived from Malaysia.

However, there is late payment penalty paid to a non-resident ascertained whether that late payment penalty is considered an interest income under DTA.

1. Not regarded as interest income under DTA

  • Not subject to WT
  • Regarded as penalty and not tax deductible to payer

2. Not mentioned in DTA

  • Section 4(f) income to NR withholding tax under Section 109F

3. Royalty payments

According to Section 109(1) of the ITA, withholding tax must be deducted from royalty payments derived in Malaysia and payable to a non-resident. For royalty payments, the tax rate is 10% of the gross amount.

"Royalty" is defined in Section 2(1) of the ITA and includes -

  • The use of, or the right to use in respect of, any copyrights, software, artistic or scientific works, patents, designs or models, plans, secret processes or formulate, trademarks or other like property or rights;
  • The use of, or the right to use, tapes for radio or television broadcasting, motion picture films, films or video tapes or other means of reproduction where such films or tapes have been or are to be used or reproduced in Malaysia, or other like property or rights;
  • The use of, or the right to use, know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

Exemptions from withholding tax on royalty payments under statutory orders

  1. Royalties received from an offshore company by a non-resident person or another offshore company.
  2. Royalties received by a non-resident franchisor from private institutions of higher learning for franchised education schemes approved by the Ministry of Education.
  3. Royalties received from a qualifying activity carried out in a Refinery and Petrochemical Integrated Development Complex.
  4. Royalties received from a developer or Iskandar Development Region (IDR) status company.
  5. Royalties received from a resident end user who purchases software or any right to use software for personal usage.
  6. Licensing fees in relation to technology development received from an approved MSC status company.

4. Special classes of income

Section 4A of the ITA specifies the types of income that are subject to taxation. Section 4A, when read in conjunction with Section 109B of the ITA, states that payments of certain types of income to non-residents are subject to a 10% withholding tax.

The three categories of non-resident income covered by Section 4A are as follows:

(i) amounts paid in consideration of services rendered by the person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any plant, machinery or other apparatus purchased from, such person;

(ii) amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;

(iii) rent or other payments made under any agreement or arrangement for the use of any moveable property.

Section 4A income must be derived from Malaysia in order to be subject to withholding tax. Section 15A of the ITA states that Section 4A revenue is judged to be obtained from Malaysia if:

(a) the responsibility for the payment lies with the Government, a State Government or local authority;

(b) the responsibility for payment lies with a person who is resident in Malaysia for that basis year; or

(c) the payment is charged as an outgoing or expense in the accounts of a business carried on in Malaysia.

Section 15A, however, shall apply exclusively to the amount attributable to services done in Malaysia in respect of revenue under Section 4A(i) and (ii).

Advance Payments and Deposits

  1. Refundable deposit - Deposits paid upon the signing of an agreement for technical services, which are refundable upon completion of the service do not form part of the gross income of a contract
  2. Advance payments and non-refundable deposits

    • Paid for services performed in and outside Malaysia are deemed derived from Malaysia.
    • Chargeable to tax under paragraph 4A(ii) of the ITA even though the services are yet to be performed.

Remittance of 2% witholding tax under the new Section 107D of the ITA

The 2% witholding tax on monetary payments shall apply if the total sum of payments (whether monetary or otherwise) received by that resident individual from the company in immediate preceding year of assessment exceeds RM100,000.


The company shall deduct and remit the witholding tax to the IRBM within 30 days after paying or crediting such payments in monetary form to that resident individual.

DOUBLE TAXATION AGREEMENTS

A double taxation agreement ("DTA") is an agreement signed between two countries with the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. It provides certainty as to when and how tax is imposed in a country which are:

  • Income producing activity is derived (country of source), or
  • Recipient of income is resident (country of residence)

Relief from double taxation may be total or partial

  • Technical Fees/Fees For Technical Services Article

The DTA may provide for preferential rates of withholding tax on fees for technical services in Technical Fees/Fees For Technical Services Article:

a. Eligible for the preferential rate
b. A certificate of resident confirming the resident status of the payee has to be submitted together with the CP37D
  • Other income/Income Not Expressly Mentioned Article

If DTA does not have a Technical Fees/Fees For Technical Services Article.

a. the Royalty Article (where applicable) as in the DTA with Spain
b. the Other income/Income Not Expressly Mentioned Article as in the DTA with China, Thailand , Canada would be applicable.
Payment Type
WHT Rate
Forms
Payment TypeWHT RateForms
i. Interest15%CP37
ii. Royalty10%CP37
iii. Public Entertainer15%Payment memo/Form 154
iv. Special classes of income under Section 4(A) of ITA, 196710%CP37D
v. Gains or profit under Section 4(f) of ITA 196710%CP37F
vi. Contract payment10% + 3%CP37A
vii. ADDs Individual Residents from company under Section 107D2%

Source: hasil.gov.my and Income Tax Act 1967 'ITA'

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