You may have heard of this term, but what exactly is withholding tax, and how does it affect you. Withholding tax is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee), that is payable to the Inland Revenue Board of Malaysia (IRB).
'Payer' refers to an individual/body other than individual carrying on a business in Malaysia. The payer is required to withhold tax on payments for services rendered/technical advice/rental or other payments made under any agreement for the use of any moveable property and paid to a non-resident payee.
'Payee' refers to a non-resident individual/body other than individual in Malaysia who receives the above payments.
The Income Tax Act, 1967 (The Act) provides that where a payer is liable to make payment as listed below (other than income of non-resident public entertainers) to a non-resident payee, he shall deduct 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.
The common types of withholding tax are stipulated in the table below:
| Payment Type | Income Tax Act 1967 | Withholding Tax Rate | Payment Form |
|
Contract payment
|
Section 107A (1) (a) & 107A (1) (b) | 10%, 3% | CP37A |
| Interest | Section 109 | 15% | CP37 |
| Royalty Section | 109 | 10% | CP37 |
|
Special classes of income: Technical fees, payment for services, rent/payment for use of moveable property |
Section 109B | 10% | CP37D |
| Income of non-resident public entertainers | Section 109A | 15% | Payment memo issued by Assessment Branch |
| Income under Section | Section 109F | 10% | CP37F |
The different types of withholding tax will be explained in more detail later on in this article. All withholding tax payments (other than for non-resident public entertainers) must be made with the relevant payment forms, duly completed, together with copy of invoices issued by the non-resident payee and copy of payment documents as proof of date of payment /crediting to the non-resident payee.
Contract payments made to non-resident contractors in respect of services under a contract are subject to withholding tax of:
"Services under a contract" refers to any work or professional services performed or rendered in Malaysia in connection with, or in relation to any undertaking, project or scheme carried on in Malaysia.
The payer is required to, within one month after the date of payment / crediting the contract payment, remit the withholding tax (whether deducted or not) to the IRB.
Interest paid to a non-resident payee is subject to withholding tax of 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). This is a final tax.
Interest is deemed derived from Malaysia if:
The following interest payments are not subject to withholding tax:
The payer must, within one month after the date of payment / crediting the interest, remit the withholding tax (whether deducted or not) to the IRB.
Royalty is defined as any sums paid as consideration for the use of or the right to use:
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). This is a final tax.
Royalty deemed derived from Malaysia if:
The payer must, within one month after the date of payment / crediting the royalty, remit the withholding tax (whether deducted or not) to the IRB.
Special classes of income include:
Provided that in respect of paragraph (1) and (2), this section shall apply to the amount attributable to services which are performed in Malaysia.
Payment is deemed derived from Malaysia if:
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 on-resident payee is tax resident). This is a final tax.
The payer must, within one month after the date of payment / crediting of the payment to the non-resident payee, remit the withholding tax (whether deducted or not) to the IRB.
"Public Entertainer" refers to a stage, radio or television artiste, a musician, athlete or an individual exercising any profession, vocation or employment of a similar nature. Remuneration or other income in respect of services performed or rendered in Malaysia by a non-resident public entertainer is subject to withholding tax at 15 % on the gross payment.
The present practice continues whereby the sponsor of the non-resident public entertainer is required to pay withholding tax at 15 % before an entry permit for the non-resident public entertainer can be obtained from the Immigration Department.
Income under Section 4(f) of The Act refers to gains and profits not covered under Section 4(a) to 4(e). These incomes typically generally include payments made to a non-resident in respect to commissions, guarantee fees and introducer’s fees.
The gross amount of "Other Income" paid for the above services rendered by a non-resident payee is subject to withholding tax at 10%. This is a final tax.
Where the payer fails to pay or pays withholding tax late (not within the period of one month after the date of payment / crediting to the NR payee), the IRB may:
Malaysia has concluded about 69 effective Double Taxation Agreements (DTA). For information on the varying rates of withholding tax on interest, royalty and technical fees, Kindly refer to "DTA Agreement Rates" on the IRB website, or speak to a staff member of ours. To learn more about DTAs, we published another article titled ‘Double Taxation Agreements’ to provide an overview on the subject.