Everything You Need to Know About Withholding Tax in Malaysia

What is withholding tax in Malaysia?

Quoting directly from the Inland Revenue Board of Malaysia’s official website, withholding tax is an amount that is withheld by the party making payment (payer) on income earned by a non-resident (payee), and paid to the Inland Revenue Board of Malaysia (IRBM).  

Income is deemed derived from Malaysia if:

• Responsibility for payment lies with the Government or a State Government.
• Responsibility for payment lies with a resident of Malaysia.
• Income is charged as an outgoing or expense against any income accruing in or derived from Malaysia, or in the accounts of a business in Malaysia.

A payer refers to an individual or body other than the individual carrying on a business in Malaysia. The payer is required to withhold tax on payments for services rendered, technical advice, rental, or other payments made under any agreement for the use of any movable property and paid to a non-resident (NR) employee.

A payee refers to a NR individual or body other than an individual in Malaysia who receives the above payments.

All withholding taxes are required to be remitted by the payer to the Inland Revenue Board of Malaysia within a month from the date of payment or crediting to the NR payee.

Withholding tax deduction

Based on provisions under the Income Tax Act 1967, a payer who is liable to make payments to a NR payee (except income of NR public entertainers) is required to deduct a specified amount from the payment, based on the prescribed withholding tax rate as tabulated below. As withholding tax rate differs for different payment types, payers are advised to always ensure deduction is done according to the right payment type, and payees should check on the deducted amount to prevent any calculation error, payment issue, and non-compliance.

A list of payment types and the respective withholding tax deduction to be applied is provided below:

Payment Type	Income Tax Act 1967	Withholding Tax Rate	Payment Form
Contract payment	Sections 107A (1)(a) and 107A (1)(b)	10%, 3%	CP37A
Interest	Section 109	15%	CP37
Royalty	Section 109	10%	CP37
Special classes of income	Section 109B	10%	CP37D
Income of NR public entertainers	Section 109A	15%	Payment memo issued by Assessment Branch
Real Estate Investment Trust (REIT) (i) Other than a resident company (ii) NR company (iii) Foreign investment institution	Section 109D	10% 25% 10%	CP37E
Family Fund / Family Re-Takaful Fund / General Fund (i) Individual and other (ii) NR Company	Section 109E	8% 25%	CP37E(T)
Income under Section 4(f) ITA 1967	Section 109F	10%	CP37F

Source: Official website of the Inland Revenue Board of Malaysia (IRBM)

All withholding tax payments (other than those of NR public entertainers) must be made with the relevant forms as indicated in the table above, together with a copy of the invoices issued by the NR payee and copy of payment documents as proof of payment or crediting to the NR payee.

Types and Rates of Withholding Tax Payment

This section explains the payment types, their definition and withholding tax applied.

Contract payments to NR contractors

Any work or professional service performed or rendered in Malaysia in connection with or in relation to any undertaking, project or scheme carried on in Malaysia are deemed to be “services under contract”.

Contract payments that are made to NR contractors in respect of the above services are subject to the withholding tax of:

• 10% on the service portion of the contract payments on account of tax payable by the NR payee
• 3% on the service portion of the contract payments on account of tax payable by employees of the NR payee

Interest paid to NR payee

Interest that are not subject to withholding tax are:

• Interest paid to a NR payee on an approved loan
• Interest paid to a NR payee by a licensed bank or licensed finance company in Malaysia other than:
  • Interest accruing to a place of business in Malaysia of the NR payee
  • Interest on funds required for maintaining net working funds prescribed by Bank Negara

Interest paid to a NR payee is subject to 15% withholding tax, or any other rate as prescribed under the Double Taxation Agreement between Malaysia and the country where the NR payee is a tax resident. This is a final tax.

Royalty paid to NR Payee

Royalty includes any sums that are paid as consideration for or derived from:

• 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 formulae, 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.
• The reception of, or the right to receive, visual images or sounds, or both, transmitted to the public by:
  • satellite; or
  • cable, fibre optic or similar technology.
• The use of, or the right to use, visual images or sounds, or both, in connection with television broadcasting or radio broadcasting, transmitted by:
  • satellite; or
  • cable, fibre optic or similar technology.
• The use of, or the right to use, some or all of the part of the radio frequency spectrum specified in a relevant licence.
• A total or partial forbearance in respect of:
  • the use of, or the granting of the right to use, any such property or right as is mentioned in paragraph (a) or (b) or any such knowledge, experience or skill as is mentioned in paragraph (c).
  • the reception of, or the granting of the right to receive, any such visual images or sounds as are mentioned in paragraph (d).
  • the use of, or the granting of the right to use, any such visual images or sounds as are mentioned in paragraph (e)
  • the use of, or the granting of the right to use, some or all such part of the spectrum specified in a spectrum licence as is mentioned in paragraph (f).
• The alienation of any property, know-how or information mentioned in paragraph (a), (b) or (c) of this definition.

Similar to interest payments, the gross amount of royalty paid to a NR payee is subject to a 10% withholding tax, or any other rate as prescribed under the Double Taxation Agreement between the Malaysia and the country where the NR payee is a tax resident. This is a final tax.

Special classes of income paid to NR payee

Special classes of income include:

• Payments for services rendered by the NR payee or his employee in connection with the use of property or rights belonging to or the installation or operation of any plant, machinery or apparatus purchased from the NR payee.
• Payments for advice given, or assistance or services rendered in connection with the management or administration of any scientific or commercial undertaking, venture, project or scheme.
• Rents or other payments made under any agreement or arrangement for the use of any moveable property.

Payments that are made to NR payee in respect of the above are subject to the withholding tax of 10%.

Income of NR public entertainers

“Public Entertainer” is defined as a stage, radio or television artiste, a musician, athlete or an individual exercising any profession, vocation or employment of a similar nature.

Remuneration or other income in respect of services performed or rendered in Malaysia by a NR public entertainer is subject to withholding tax of 15% on the gross payment.

Sponsor of the NR public entertainer is required to pay withholding tax of 15% before an entry permit for the NR public entertainer can be obtained from the Immigration Department.

Real Estate Investment Trust (REIT) paid to NR payee

This payment type applies to income that is distributed by a REIT (payer) to a NR unit holder (payee).

Income distributed to NR payee are subject to the withholding tax of:

• 10% on the income distributed to a participant other than a resident company
  • 25% on the income distributed to a NR company
  • 10% on the income distributed to a foreign investment institution

Family Fund / Family Re-Takaful Fund / General Fund paid to NR payee

This payment type applies to profits distributed or credited out of family fund, family re-takaful fund or general fund under section 60AA where such profits have been claimed as a deduction under subparagraph 3(b)(ii), 4(b)(ii), 5(b)(ii) or 7(b)(ii) of that section, by a takaful or fund operator (payer) to a NR individual or company.

Profits distributed to NR payee are subject to the withholding tax of:

• 8% on the profits distributed to NR individual
• 25% on the profits distributed to NR company

Income under Section 4(f) ITA 1967

Income falling under Section 4(f) of the Income Tax Act 1967 (ITA 1967) includes any other income that is not obtained from business, employment, dividends, interests, discounts, rents, royalties, premiums, pensions, or annuities.

Payments that are made to NR payee in respect of the above income are subject to the withholding tax of 10%. 

Double Taxation Agreement and Protocols

The gross amount of interest, royalty and special income paid by the payer to a NR payee are subject to the respective withholding tax rates of 15%, 10%, and 10%, or any other rate as prescribed under the Double Taxation Agreement between Malaysia and the country where the NR payee is a tax resident.

Information on the varying rates between countries can be found here. Should there be a difference in rates, the lower rate applies.

How to calculate withholding tax?

Melissa (the payer), a Malaysian resident, paid RM40,000 commission to Michael (the NR payee), a non-resident of Malaysia, for successfully closing a property deal in Malaysia where Michael was only acting on his own, as a middle person.

Since this payment is not a business, employment or rental income for Michael, it is deemed as income falling under Section 4(f) of ITA 1967 and is subject to a 10% withholding tax. The amount of withholding tax that Melissa has to pay is calculated as follows:

Commission to be paid to Michael : RM40,000
Less
Withholding tax (RM40,000 x 10%) : RM4,000
Amount to be paid to Michael : RM36,000

Withholding tax amount of RM4,000 is to be remitted by Melissa to the Inland Revenue Board of Malaysia within one month after payment is made or credited to Michael. 

Enforcement and Penalty  

The following constitutes non-compliance:

1. The payer fails to pay withholding tax at the prescribed rate.
2. The payer fails to pay withholding tax within a month after date of payment or crediting to the NR payee.
3. The payer fails to pay increased tax imposed for late payment of withholding tax or failure to pay withholding tax.

When a payer fails to pay within a month after date of payment or crediting to the NR payee, a sum equal to 10% of the amount failed to be paid is added onto the initial tax amount. This penalty is only imposed on the payer. 

Going back to the scenario between Melissa and Michael in the above section, should Melissa make a late payment, the new amount to be paid will be:

Withholding tax owed : RM4,000
Add
Penalty (RM4,000 x 10%) : RM400
Revised amount : RM4,400