Withholding tax services

Interest paid to a non-resident recipient is subject to a withholding tax of 15% (or any rate specified in a double taxation agreement between Malaysia and the country in which the non-resident recipient is a tax resident).

Interest will be deemed to be sourced from Malaysia if the following conditions are met

a. the liability to pay is borne by the Federal Government or a state government

b. the liability to pay is borne by a resident of Malaysia

c. the interest is paid as an expense against any income arising in or derived from Malaysia.

Interest not subject to withholding tax:

a. Interest paid to a non-resident payee through an approved loan

b. Interest paid to a non-resident payee by a licensed bank or licensed financial company in Malaysia, except where
i. the interest accrues to the non-resident payee’s place of business in Malaysia
ii. interest on funds required to maintain a network fund as prescribed by Bank Negara

The payer must pay the withholding tax (whether deducted or not) to the Inland Revenue Department (IRD) within one month of the payment

Royalties are defined as:

Royalty is defined as any payment made to acquire the right to use the following items

a. copyrights, artistic or scientific works, patents, designs or models, plans, secret processes or formulas, trademarks or sound recordings for radio/television broadcasting, cinematograph films, films/videotapes/other means of reproduction which have been or are about to be used or reproduced in Malaysia, or other similar property/rights

b. know-how or information regarding technical, industrial, commercial or scientific knowledge, experience or skill.

c. income derived from the transfer of any of the property, knowledge or information referred to above

With the coming into force of the Finance Act 2016, “royalty” has been redefined as any payment made for acquiring the right to use the following items:

a. copyright, software, artistic or scientific works, patents, designs or models, plans, secret processes or formulas, trademarks or other similar property/rights

b. audio cassettes for radio or television broadcasting, cinematograph films, movies/video cassettes/other means of reproduction that have been or will be used or reproduced in Malaysia, or other similar property/rights

c. know-how or information relating to technical, industrial, commercial or scientific knowledge, experience or skill

d. reception of images, sound or both, for broadcast to the public by means of

i. satellite; or
ii. cable, optical fiber or similar technology

e. the broadcasting of images, sounds, or both, in connection with radio or television broadcasting, by means of

i. satellite; or
ii. cable, optical fiber or similar technology;

f. part or all of the radio frequency spectrum specified in the relevant license;

g. tolerate, in whole or in part, the following

i. any property or right referred to in paragraph (a) or (b), or any knowledge, experience or skill referred to in paragraph (c)
ii. the reception of any image or sound referred to in paragraph (d);
iii. any of the images or sounds referred to in paragraph (e)
iv. some or all of the spectrum specified in the spectrum license referred to in paragraph (f); or

h. the transfer of any property, expertise or information referred to in paragraph (a), (b) or (c).

Royalties paid to non-resident recipients are subject to a withholding tax of 10% (or any rate specified in a double taxation avoidance agreement entered into between Malaysia and the country in which the non-resident recipient is a tax resident).

The royalties will be deemed to be sourced from Malaysia if the following conditions are met

a. the liability to pay is borne by the federal or state government

b. the liability to pay is borne by a resident of Malaysia

c. the royalties are paid as an expenditure on any income generated in or from Malaysia

The payer must pay the withholding tax (whether deducted or not) to the Inland Revenue Department within one month of the payment

Special categories of income include:

a. payments for the purchase of plant, machinery or equipment from a non-resident payee, installation/operating services provided by a non-resident payee or his/her employees, or for the use of property/rights

b. payments for technical advice, assistance or services relating to technical management or any scientific management, industrial or commercial, enterprise, project or program; or

c. rentals or other payments in respect of any movable property (made under any agreement or arrangement)

*For the purposes of paragraphs (a) and (b), this provision applies to payments for services rendered in Malaysia (deleted after the commencement of the Finance Act 2016)

Note* : After the commencement of the Finance Act 2016, non-resident income referred to in section 4A(i) and (ii) of the Income Tax Act 1967 and deemed to be derived from Malaysia is subject to withholding tax, irrespective of whether the services are rendered within or outside Malaysia.

Note** : The Act is amended as follows: 

Payments made in consideration of any advice given, or assistance or services rendered, in respect of any scientific, industrial or commercial enterprise, venture, project or scheme; Either. (In force since the commencement of the Finance Act, 2018)

Exemption from withholding tax in respect of income referred to in section 4A(i) and (ii) of the Income Tax Act, 1967

The Income Tax (Exemption) (No. 9) Direction 2017 [P.U. (A) 323] was gazetted on October 24, 2017 and provides for the exemption of non-residents of Malaysia from withholding tax. The Directive provides for the exemption of non-Malaysian residents from income tax in respect of income referred to in section 4A(i) and (ii) of the Income Tax Act 1967 (provision of services outside Malaysia) Pursuant to Section 3 of the Directive, Section 109B of the Income Tax Act 1967 does not apply to the income exempted under the Directive

The Directive has come into effect on 6/9/2017

Payments will be deemed to be sourced from Malaysia if the following conditions are met

a. the liability for the payment is borne by the Federal Government or a state government;

b. the liability for the payment is borne by a resident of Malaysia

c. the payment is made as an expense to the account of a business operating in Malaysia

Special categories of income paid to non-resident recipients are subject to a withholding tax of 10% (or any rate specified in a double taxation avoidance agreement between Malaysia and the country in which the non-resident recipient is a tax resident)

The withholding tax (whether deducted or not) must be paid by the payer to the Inland Revenue Department within one month of the payment

Contract payments made to non-residents for services under a contract are subject to the following withholding taxes:

a. The tax payable by the non-resident payee is 10% of the contract payment;

b. 3% of the contractual payment is payable by an employee of the non-resident payee.

“Services under contract” means any work or professional services performed or rendered in Malaysia in connection with works, projects or programs carried out in Malaysia.

Withholding tax (whether deducted or not) must be paid by the payer to the Inland Revenue Department within one month of the payment

“Entertainer” means a stage, radio or television entertainer, musician, sportsman or an individual engaged in work of a similar nature.

Upon the commencement of the Finance Act, 2016, “entertainer” is redefined as follows:

a. a presenter, model, circus performer, lecturer, orator, sportsman, entertainer or an individual engaged in work of a similar nature; or

b. an individual who utilizes his/her intellectual, artistic, musical, personal, or physical skills/attributes; or

c. by means of live, printed, electronic, satellite, cable, fiber optic or other medium, cinema or videotape, radio or television, as the case may be, in connection with any purpose.

Non-resident entertainers are subject to a 15% withholding tax on remuneration or other income received for services rendered in Malaysia.

Currently, the authorities maintain the practice whereby sponsors of non-resident entertainers are required to pay a 15% withholding tax before the Immigration Department will issue an entry permit for the entertainer.

With effect from January 1, 2009, the authorities will impose a withholding tax of 10 per cent on other types of income of non-residents under section 4(f) of the Income Tax Ordinance, 1967. The income referred to in section 4(f) means income and profits not covered under sections 4(a) to 4(e) of the Act. According to the definition of the Inland Revenue Department, the income referred to in section 4 (f) includes commissions, deposits and referral fees, which are not business income of the recipient.

If the payer fails to deduct the withholding tax at the time of payment of income to a non-resident and pay the withholding tax to the Inland Revenue Department within one month of the payment, the following consequences will be faced:

• The Inland Revenue may impose an additional 10% of the unpaid tax as a late tax penalty

• The expenditure is not deductible for tax purposes and no capital allowances may be made for capital expenditure paid to non-residents; and

• The Inland Revenue may recover unpaid withholding taxes and penalties from the payer.

With effect from January 1, 2011 (year of assessment 2011), in addition to the above late payment penalties, the Inland Revenue Department is empowered to invoke section 113(2) of the Income Tax Act, 1967 to impose penalties in the event that

i. the withholding tax is deducted and paid after the closing of the tax return for the assessment year to which the payment in question belongs, and

ii. the amount of tax withheld in respect of the payment is set out by the payer in the income tax return filed with the Inland Revenue Department for the purpose of adjusting the income [incidental to section 39(1)(j) of the Income Tax Ordinance, 1967].