Withholding Tax

Definition
Tax imposed on income received by a non resident payee in Malaysia
(regardless of whether the payee is individual or body) other than individual
in Malaysia who receive the payments for services rendered/ technical
advice/ rental or other payment made under any agreement for the use of any
moveable property.
Relevant Statutes
Income Tax Act 1967
Who is responsible to pay?
Individual or body which conducts a business in Malaysia and is a resident in
Malaysia for tax purposes. The payer is required to withhold tax on payments
paid to a non resident payee for the aforesaid services, rental and advice.
The payer is liable to make payment for the income of non resident payee as
listed below (other than income of non-resident public entertainers) to a nonresident payee by deducting withholding tax at the prescribed rate from such
payment and (whether such tax has been deducted or not) pay that tax to the
Director General of Inland Revenue within one month after such payment has
been paid or credited to the non-resident payee.

Types of income which are subject to withholding tax

(i)

Contract Payments to Non-Resident Contractors (Payee)- Section 107A

Contract payments made to non-resident contractors are subject to
withholding tax of 10 % withholding tax to be deducted from all
payments in respect of services under a contract. If the non-resident
payee has stationed employees in Malaysia who are involved in the
contract, a further 3 % withholding tax to be deducted.
The payer must, within one month after the date of payment / crediting
the contract payment, remit the withholding tax (whether deducted or
not) to the Inland Revenue Board, Malaysia.

(ii)

Interest Paid to Non-Resident Persons (Payee) Section 109

Interest derived from Malaysia and payable to a non-resident payee is
subject to withholding tax at 15% (or any other rate as prescribed
under the Double Taxation Agreement between Malaysia and the
country where the NON-RESIDENT payee is tax resident).
Interest is deemed derived from Malaysia if:
a.
b.
c.

Responsibility for payment lies with the Government or a State

Government;
Responsibility for payment lies with a resident of Malaysia;
Interest is charged as an outgoing or expense against any income
accruing in or derived from Malaysia.

EXEMPTION - Interest not subject to withholding tax if:a.

b.
c.

Interest attributed to business carried on by the non-resident payee

in Malaysia;
Interest arising from an approved loan in Malaysia;
Interest derived from Malaysia and paid by a banking institution in
Malaysia to a non-resident person or banking institution which
does not have a permanent establishment in Malaysia.

However, interest paid on funds required for the purposes of

maintaining net working funds as prescribed by Bank Negara Malaysia
does not fall under the above exemptions.
(iii)

Royalty paid to Non-Residents Payee- Section 109

Royalty is defined as:
Any sums paid as consideration for the use of or the right to use:
1. 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 are to be used or reproduced in Malaysia or other like property
or rights.
2. Know-how or information concerning technical, industrial,
commercial or scientific knowledge, experience or skill.

3. Income derived from the alienation of any property, know-how or

information mentioned in above paragraph of this definition.
The gross amount of royalty paid to a non-resident payee is subject to
withholding tax at 10% (or any other rate as prescribed under the
Double Taxation Agreement between Malaysia and the country where
the non-resident payee is tax resident).
Royalty deemed derived from Malaysia if:
1.
2.
3.

(iv)

Responsibility for payment lies with the Government or a State

Government;
Responsibility for payment lies with a resident of Malaysia;
The royalty is charged as an outgoing or expense against any
income accruing in or derived from Malaysia.

Special Classes of Income Paid to Non-resident Persons- Section 4A

Special classes of income include:
a. payments for services rendered by the non-resident 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 non-resident payee.
b. payments for technical advice, assistance or services rendered in
connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project or
scheme or
c. rents or other payments (made under any agreement or arrangement)
for the use of any moveable property.
In respect of item (a) and (b) above, the payment are restricted to the
amount attributable to services which are performed in Malaysia.
Payment is deemed derived from Malaysia if:
a. Responsibility for payment lies with the Government or a State
Government.
b. Responsibility for payment lies with a resident of Malaysia.
c. Payment is charged as an outgoing or expense in the accounts of a
business carried on in Malaysia.

The gross amount of "Special Classes of Income" paid for the above services
rendered by a non-resident payee is subject to withholding tax at 10% (or any
other rate as prescribed in the Double Taxation Agreement between Malaysia
and the country in which the NON-RESIDENT payee is tax resident).

What constitutes non-compliance?

a. The payer fails to pay withholding tax at the prescribed rate (whether
deducted or not).
b. The payer pays withholding tax after the period of one month from the
date of payment / crediting to the non-resident payee.
c. The payer fails to pay increase in tax imposed on him for late payment
of withholding tax or for failure to pay withholding tax.