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.
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.
| Category | Rate |
| Construction, installation or assembly project and related services | 3% |
| 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 scheme | 10% |
| All other types of contract payments not mentioned above | 8% |
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 Interest | Withholding Tax Rate |
|---|---|
| Interest (except exempt interest) paid by approved financial institutions | 15% |
| Interest under Section 4(f) ITA 1967 | 10% 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 Payment | Withholding 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 Type | Withholding Tax Rate |
|---|---|
| Technical Fees | 10% |
| Payment for Services | 3-5% |
| Rent/Payment for Use of Movable Property | 10% |
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/Deposit | Type of Non-Resident Individual/Corporation | Withholding Tax Rate (%) |
| Up to and including 1 year | Individuals | 15 |
| Corporations | 20 | |
| More than 1 year but not exceeding 5 years | Individuals | 10 |
| Corporations | 15 |
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 Payment | Withholding Tax Rate |
|---|---|
| Income distribution from property rental | 10% |
| Income distributed from business trust units | 10% |
| Interest income received by the REIT entity | 15% |
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 Payment | Withholding Tax Rate |
|---|---|
| Family Fund/Takaful Family Fund/Dana Am | 8% |
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 Income | Rate of Withholding Tax |
|---|---|
| Income from technical fees, payment for services, rent/payment for use of movable property | 10% |
| Royalty | 10% |
| Interest (except exempt interest) paid by approved financial institutions | 15% |
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:
- The required form(s)
- The necessary support documentation
- 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 Payment | Form Number | Required Documents |
|---|---|---|
| Contract Payments | CP8D | Copy of contract / agreement |
| Interest | MNE 2 | Form MNR 1 |
| Royalties | MNE 4B | Intellectual property agreement or other contractual evidence |
| Technical Fees | MTD/MTD (P) | Any proof supporting the nature of the expenditure |
| Rent/Payment for Use Of Movable Property | MTD/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:
- Tax resident certificate of the payee from the tax authority of the country where the payee is resident.
- Evidence to prove that the conditions stipulated in the DTA are met.
- Proof of payment of withholding tax.
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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.