Introduction of Withholding Tax
Withholding tax is an amount withheld by a party making payment (also known as the payer) on the income earned by a non-resident (also known as the payee) and pay the amount withheld to the Inland Revenue Board of Malaysia.
As Malaysia is taxed on territorial basis, any income derived from Malaysia should be subjected to Malaysian Tax. Malaysian resident companies declared their yearly taxes by filing the income tax return forms. However, non-resident companies do not have a business presence in Malaysia but merely renders their services to their Malaysian customers from their home country. In order to ensure an efficient tax collection, the payer is responsible to withhold a sum of taxes from the non-residents and pay to the tax authorities. The amount withheld by the payer from the payee is known as “Withholding tax”
5 Types of Payments will Subject to Withholding Tax in Malaysia
- Royalty and interest
- Royalty refer to payment made for right to use specific patent, trademark, copyright, know how, information and skills, renew software license and any IT service subscription.
- Interest is charged on money borrowed or compensation for delayed payment.
- Public entertainers
- The sponsor of the non-resident public entertainer is required to pay withholding tax before an entry permit can be obtained from the Immigration Department.
- Special class of income
- First, payment for use of property or installation or operation of any plant, machinery or other apparatus;
- Second, payment for technical or non-technical services, advise in connection with the Company’s management or administration; and
- Third, rental of movable property such as ship, motor vehicle and machinery
- In relation to the first and second special classes of income, withholding tax only applies if such service is performed in Malaysia.
- Other income
- This section is introduced as a netting provision to capture income received by a non-resident which do not fall under Section 4(a) to 4(e) and Section 4(a) of the Act. Examples are commission and referral fees.
- Contract payment
- Contract payments made to non-resident contractors in respect of services rendered are subject to withholding tax
Withholding Tax Rate
- Public entertainers and interest is 15%
- Royalty, special classes of income and other income under S4(f)of the ITA is 10%
- Contract payment is 10% + 3%. The 3% is withheld in respect of the tax of the non-resident companies’ employees.
Do note that the withholding tax rate may vary if Malaysia have signed a Double Tax Agreement with another country.
Double Taxation Agreement
An individual who is a resident in one of the countries for a basis year may also be a resident of that other country for purposes of a double tax agreement. Where an individual is a resident of both countries, the avoidance of double tax agreements (DTA) generally contain certain tie breaker test to establish residence solely in one of the countries for the purposes of the agreement.
Article 4 of the Malaysian DTA states the test for residence and the tie breaker for the aforesaid dual residences. The terms of the relevant DTA should be referred to when determining tax liability.
All in all, these are the overview for withholding tax in Malaysia and double taxation agreement. If you have any inquiry of the above, kindly email us at [email protected] or contact us at 011-1217 8183.