If you’re attempting to understand further the basics and scope of the Malaysian withholding tax, our guide below might help you out.
WHAT IS MALAYSIAN WITHHOLDING TAX?
In Malaysia, withholding tax is an amount withheld by a payer on income obtained by a payee. This sum must be paid to LHDN.
If you pay overseas suppliers, you must withhold a set percentage of the invoiced amount and send it to LHDN as a kind of tax, with the remaining balance going to the foreign vendor.
Malaysian withholding tax is not a new concept; it has been in place since the Income Tax Act of 1967 (ITA) and applies to payments such as below.
- Contract payment
- Special classes of income (Technical fees, payment for services, rent/payment for the use of moveable property)
- Interest (except exempt interest) paid by approved financial institutions
- Income of non-resident public entertainers
Each payment type will have a different withholding tax rate and may benefit from a favorable tax rate if Malaysia and the jurisdiction where the non-resident (foreign party) is a tax resident have a double taxable agreement. The table below lists the forms required for various types of withholding tax payments in Malaysia.
|Type of Payment||Income Tax Act (ITA) 1967||Rate of Withholding Tax||Payment Form|
|Contract Payment||Sections 107A (1)(a) and 107A (1)(b)||10%, 3%||CP37A|
|Special classes of income||Section 109B||10%||CP37D|
|Interest paid by approved institutions||Section 109B||5%||CP37C|
|Income of non-resident public entertainers||Section 109A||15%||Payment memo issued by assessment branch|
Is Malaysia’s Withholding Tax Applicable To Services Supplied Outside The Country?
The short answer is yes. LHDN’s scope has been expanded to include services delivered outside of Malaysia effective from 2017.
This instantly impacted several services offered by foreign suppliers, such as Facebook, Google Ads, Stripe, and others, as well as the fees paid to foreign service providers.
According to the LHDN, royalty is any money paid as compensation for the use of or the right to use as below.
- Copyrights, artistic or scientific works, patents, designs or models, plans, secret processes or formulae, trademarks or 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 will be used or reproduced in Malaysia, or other similar property or rights
- Technical, industrial, commercial, or scientific knowledge, expertise, talent, or
- Income earned by the alienation of any of the property, know-how, or knowledge described in the preceding paragraph of this term.
According to the LHDN’s guidelines on the taxation of electronic commerce transactions, published on May 13, 2019, payments paid to Facebook and Google are treated as payment for the use and right to use the platform.
Special classes of income
According to the Malaysia tax authorities, a non-resident’s income from the following special classes is liable to tax in Malaysia if generated from Malaysia:
- Amounts paid in exchange for services performed by the non-resident person or his employee in connection with:
- Use of his property or rights
- Installation or operation of any plant, machinery, or other device obtained from him.
- Amounts paid to a non-resident in exchange for advice, assistance, or services supplied in connection with the management or administration of any scientific, industrial, or commercial enterprise, venture, project, or plan.
- Rent or other payments paid to a non-resident person under any agreement or arrangement for the use of the movable property.
This is prevalent when you hire non-resident contractors to do work for you, such as software development, or when you hire an overseas marketing firm to handle your social media marketing accounts.
Why Is It Vital To Distinguish Royalty Income Vs Special Classes Of Income?
This is due to differing preferential withholding tax rates that may be offered under Double Taxation Agreements with different nations for different types of payments. As an example:
Assuming the foreign service provider is headquartered in Singapore, if the service falls under Special Classes of Income (such as technical fees), it will be withheld at 5% rather than 8% (% withheld if it falls under “Royalty”).
Payments to non-residents under special classes of income
With effect from 6th September 2017, there is an exemption order given on payments made regarding special classes of income where a non-resident shall be excused from the payment of income tax on the fees if the non-resident outside Malaysia does the services. In other words, the Malaysian withholding tax is waived if the services are conducted outside of Malaysia.
How Do You Compute Withholding Tax In Malaysia?
Effective 2018, withholding tax would be calculated on the gross amount paid to a non-resident. As an example,
|The fee charged by a foreign service provider||RM100,000|
|Withholding Tax||Withholding Tax 10%|
|Withholding Tax Due||RM100,000*0.1 = RM10,000|
How Do You Pay Withholding Tax In Malaysia, And What Is The Penalty If You Don’t?
The payer shall remit the withholding tax to LHDN within one month of the date of payment to the non-resident. If you do not do so, you may be exposed to the consequences of:
- 10% late withholding tax penalty
- At least a 45% penalty for tax evasion, according to the income tax act.
When should I pay withholding tax in Malaysia?
You must remit the withholding tax payment to LHDN within one month of the date of payment to the non-resident.
Is withholding tax deductible in Malaysia?
In general, all withholding tax will be treated as an advance tax and be deducted in arriving at the “balance of tax to be paid,” upon submission of the income tax return form annually.
What is the withholding tax in Malaysia?
In Malaysia, withholding tax refers to the amount withheld by the payer on income generated by a non-resident (payee). This should be paid to LHDN.
What are the 6 types of payments covered by the withholding tax in Malaysia?
- Contract payment
- Special classes of income
- Interest paid by approved financial institutions
- Income of non-resident public entertainers
Are services rendered outside of Malaysia subjected to withholding tax in Malaysia?
With effect from the 17th of January 2017, services supplied outside of Malaysia are subject to withholding tax.