fbpx
guide to withholding tax (2)

The Ultimate Guide To Withholding Tax In Malaysia (2024)

Certain types of income earned by non-residents in Malaysia are subject to withholding tax, to be deducted by the payer before it is paid to the non-resident recipient.

Whether you’re a resident business owner in Malaysia dealing with overseas parties, or you’re the overseas party owed payment by a Malaysian business, it’s important to understand how the nature of your transactions affect withholding tax owed to LHDN.

lilartsy vDR2n8vCKnA unsplash
They are always watching.

This post provides a comprehensive overview of withholding tax in Malaysia for all relevant parties, including types, specific rates, procedures, and how Double Tax Agreements affect it.

We’ll also include hyperlinks to relevant official sources wherever relevant and possible.

Let’s begin.

Payments subject to withholding tax

There are several types of payments to non-residents, each of which has a different withholding tax rate.

Contract payments

This refers to payments for services provided by non-resident individuals or companies under a contract with a resident in Malaysia.

Here’s a table showing withholding tax rates for different types of contracts.

CategoryRate
Construction, installation or assembly project and related services3%
Advertising services, technical advice, assistance, or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme10%
All other types of contract payments not mentioned above8%

Interest

This includes all interest (except exempt interest) paid by approved financial institutions. The rates for non-resident persons vary depending on the specific type of payment made, including interest.

Type of InterestWithholding Tax Rate
Interest (except exempt interest) paid by approved financial institutions15%
Interest under Section 4(f) ITA 196710% or treaty rate

Royalties

LHDN recognises ‘royalties’ to include the following:

  • intellectual property such as trademarks, copyrights, patents
  • know-how concerning technical knowledge, experience, or skill
  • income derived from alienation of any property, know-how or information
Type of Royalty PaymentWithholding Tax Rate (%)
Royalties derived from or paid in respect to copyrights, patents, designs, models, plans, secret processes or formulae, trade marks and other similar property rights except those mentioned above(a) and 2(b) below-10
Royalties paid as consideration for the use of or right to use scientific, technical industrial or commercial knowledge and information-10/15/20*

Technical fees, services & movable property

This refers to income from technical services, payments for services, and rent/payment for movable property in Malaysia. The rates for these special classes of income are determined by various factors including the residency status of the payee and type of service provided.

Income TypeWithholding Tax Rate
Technical Fees10%
Payment for Services3-5%
Rent/Payment for Use of Movable Property10%

Interest paid by approved financial institutions

Income generated as ‘interest (except exempt interest) paid by approved financial institutions’ is subject to withholding tax in Malaysia.

Duration of Loan/DepositType of Non-Resident Individual/CorporationWithholding Tax Rate (%)
Up to and including 1 yearIndividuals15
Corporations20
More than 1 year but not exceeding 5 yearsIndividuals10
Corporations15
⚠️ NOTE: Tax exemption is given for profits derived from transactions conducted within Labuan under the Labuan Financial Services Authority Act. Labuan is a tax haven after all!

Real Estate Investment Trust (REIT)

REITs are entities that own and manage real estate properties, distributing the rental income among their investors in the form of dividends.

Type of PaymentWithholding Tax Rate
Income distribution from property rental10%
Income distributed from business trust units10%
Interest income received by the REIT entity15%

Family Fund / Takaful Family Fund / Dana Am

Family Fund / Takaful Family Fund / Dana Am falls under the ‘special classes of income’ category, and a specified percentage of withholding tax is levied on every payment made.

Types of PaymentWithholding Tax Rate
Family Fund/Takaful Family Fund/Dana Am8%

Income under Section 4 ITA 1967

This income refers to specific areas including salaries, pensions, and other segments earned by non-residents as mentioned in the Income Tax Act 1967.

Type of IncomeRate of Withholding Tax
Income from technical fees, payment for services, rent/payment for use of movable property10%
Royalty10%
Interest (except exempt interest) paid by approved financial institutions15%

Procedure for withholding tax payments

The payer must, within one month of the date of payment to the non-resident payee, remit the withholding tax to the Inland Revenue Board Malaysia. Late payments will have a 10% penalty imposed.

When it comes to making payments, there are just three steps to mind:

  1. The required form(s)
  2. The necessary support documentation
  3. Obtaining a tax reference number for the payee

For convenience, let’s combine forms and support documents.

Forms and Support Documentation

The following table shows the forms and support documentation required for payment of withholding tax in Malaysia by type:

Type of PaymentForm NumberRequired Documents
Contract PaymentsCP8DCopy of contract / agreement
InterestMNE 2Form MNR 1
RoyaltiesMNE 4BIntellectual property agreement or other contractual evidence
Technical FeesMTD/MTD (P)Any proof supporting the nature of the expenditure
Rent/Payment for Use Of Movable PropertyMTD/MTD (P)Agreement or correspondence

You can visit LHDN’s portal for a full list of forms related to withholding tax.

As mentioned, you’ll also need to request a tax reference number for the payee by filing an application with supporting documents.

This means registering the payee with LHDN, the payer must provide relevant information such as the payee’s full name, date of birth, passport or identity card number, and the nature of the transaction. Payers must keep a record of the tax reference number obtained from the payee and the date when it was requested.

How Double Tax Agreements affect withholding tax rates

Malaysia has about 74 effective Double Taxation Agreements (DTA). For information on the varying rates of withholding tax on interest, royalty and technical fees, see DTA Agreement Rates.

For tax refunds from DTA reduced rates, the payee must forward the application for refund to LHDN’s Non-Resident Branch Director together with the following details:

  1. Tax resident certificate of the payee from the tax authority of the country where the payee is resident.
  2. Evidence to prove that the conditions stipulated in the DTA are met.
  3. Proof of payment of withholding tax.

Let MISHU solve your withholding tax needs!

CTA for Malay site Ayu min

Instead of constantly worrying and trying to navigate the complexities of withholding tax on your own, why not consider the assistance of a qualified tax consultant?

FAQs about Withholding Tax in Malaysia:

  • What is withholding tax in Malaysia?
    💡Withholding tax is a tax on payments made to non-resident persons.

  • Who is considered a non-resident payee?
    💡A non-resident payee is any non-resident person who receives payment from a Malaysian payer.

  • What is the prescribed rate for withholding tax?
    💡The prescribed rate for withholding tax varies depending on the type of payment. For instance, the rate for royalties is 10% while the rate for interest is 15%.

  • Is there any exemption on withholding tax for non-resident public entertainers?
    💡No, the present practice is for the sponsor of the non-resident public entertainer to pay withholding tax at 15 % before an entry permit for the non-resident public entertainer can be obtained from the Immigration Department

  • What is a Double Tax Agreement and what is it’s relationship to withholding tax?
    💡Double tax agreements specify the rules for taxation between two countries, including reduced withholding tax rates.

  • Which countries does Malaysia have a Double Tax Agreement with?
    💡Malaysia has concluded about 74 effective Double Taxation Agreements. For information on the varying rates of withholding tax on interest, royalty and technical fees, see LHDN’s DTA Agreement Rates.

Key Takeaways:

  • Withholding tax is imposed on payments made to non-resident persons, and is applicable to contract payments, interest, royalty, special classes of income, and more.

  • The withholding tax rates vary based on the type of payment, with different rates for contract payments, interest, royalty, special classes of income, and more.

  • Proper documentation is required for withholding tax payments, and the payee must obtain a tax reference number before payment can be made.

Leave a Reply

Your email address will not be published. Required fields are marked *

Scroll to top
Hide WhatsApp Form

Hello, I am Maya, your AI assistant. I have been trained to answer any questions about our services to make things easier and faster for you. Feel free to ask me anything! Dont worry, for peace of mind, a human colleague will follow up after our chat to confirm important details and offer further assistance. Let's get started. How can I help you today?