Introduction
Withholding tax Malaysia is a tax mechanism requiring Malaysian payers to withhold a portion of payments made to non-residents and remit it to the Inland Revenue Board of Malaysia (IRBM). This ensures tax collection from foreign income earned within Malaysia’s borders.
Background of Withholding Tax in Malaysia
Under the Income Tax Act 1967, any person making payment to a non-resident for services or other specified income must withhold tax at prescribed rates and remit it to IRBM within one month after payment.
Because many foreign service providers such as Facebook and Google do not maintain a Malaysian presence, local companies are obligated to bear the withholding responsibility. However, this tax is not deductible as an expense for the Malaysian payer.
Payment Obligation and Late Payment Penalty
According to the Act, payers must remit withholding tax within one month after the payment date or crediting of income to the non-resident.
🕐 Example:
If payment is made on 28 February, withholding tax must reach IRBM by 28 March.
If the payer fails to remit on time, a 10% late payment penalty will be imposed.
💡 Note: IRBM allows a concession for small-value payments below RM500.
Penalties for Non-Compliance
Failing to comply with withholding tax provisions leads to serious tax implications:
| Situation | Tax Implication |
|---|---|
| Tax paid on behalf | Not tax deductible |
| Failure to remit | Expense disallowed for tax purposes under s.39(i) & s.39(j) ITA 1967 |
| Late payment | Additional 10% penalty |
| Incorrect return under s113(2) | Penalty up to 100% of tax underpaid |
Scope of Withholding Tax in Malaysia
Withholding tax applies only to services, not to physical goods. The table below summarises the main income types and applicable sections under the Income Tax Act 1967:
| No | Type of Income | Section | Rate | Derived from Malaysia If… |
|---|---|---|---|---|
| 1 | Contract Payment | 107A | 10%, 3% | Construction project performed in Malaysia |
| 2 | Interest | 109 | 15% | Payer is resident; loan produces Malaysia-derived income; or secured by Malaysian assets |
| 3 | Royalty | 109 | 10% | Payer is resident |
| 4 | Special Classes of Income (Technical fees, rent, movable property) | 109B | 10% | Payer is resident; service performed in Malaysia |
| 5 | Public Entertainer | 109A | 15% | Employment exercised in Malaysia |
| 6 | Other income under s.4(f) (e.g. agent fees) | 109F | 10% | Payer is resident |
Contract Payments: Key Details
For non-resident contractors, withholding tax consists of:
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10% on the service portion for the contractor’s tax liability
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3% on the employee’s portion
Refunds are available if:
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The non-resident has no tax liability in Malaysia (10% refundable)
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The non-resident employee can prove 3% tax was paid
Conditions Where Withholding Tax Applies
Withholding tax applies only when all the following are met:
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The recipient of income is non-resident
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The income is within the scope of withholding tax
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The income is deemed derived from Malaysia
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The income is not exempted under any law
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The income is not attributable to a business carried out by the non-resident in Malaysia (otherwise taxed at 24%)
📌 Exception: Contract payments and special classes of income are always subject to withholding tax.
Responsibilities of the Payer
Malaysian payers must:
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Deduct the withholding tax amount before payment to the non-resident
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Remit the tax to IRBM within one month after payment/crediting
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Bear in mind: if the payer decides to absorb the withholding tax, it cannot be claimed as a deductible expense.
Consequences of Late or Incorrect Submission
If withholding tax is not remitted within one month:
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10% penalty applies
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Gross expense is disallowed as deduction under s.39 until tax + penalty are settled
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Penalty remains non-deductible
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Cannot include in Qualifying Project Expenditure (QPE) or Qualifying Business Expenditure (QBE)
If an incorrect return is submitted before settling the debt, s.113(2) applies — up to 100% penalty on the understated tax.
Key Takeaways
- Withholding tax applies to non-resident income derived from Malaysia
- Rates vary by income type — 10%, 15%, or 3%
- Payer is responsible for deduction and remittance
- Late payment incurs 10% penalty and expense disallowance
- Always comply under Income Tax Act 1967 to avoid penalties
ANC Group – Your Personal Tax Advisor
Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.
Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.
ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.
We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.
If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.
