Introduction – What is Withholding Tax

Withholding Tax Services in MalaysiaWithholding tax is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the Inland Revenue Board of Malaysia (IRB).

‘Payer’ refers to an individual/body other than individual carrying on a business in Malaysia. He 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.

Withholding Tax Deduction

The Income Tax Act, 1967 provides that where a person (referred herein as “payer”) is liable to make payment as listed below (other than income of non-resident public entertainers) to a non-resident person (NR 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 NR payee.

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 NR payee and copy of payment documents as proof of date of payment /crediting to the NR payee.

Interest Paid to Non-Resident Persons (Payee)

Interest paid to a NR 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 NR payee is tax resident). This is a final tax.

Interest 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. Interest is charged as an outgoing or expense against any income accruing in or derived from Malaysia.

Interest not subject to withholding tax:

a. Interest paid to a NR payee on an approved loan

b. Interest paid to a NR payee by a licensed bank or licensed finance company in Malaysia other than:

i. Such interest accruing to a place of business in Malaysia of the NR payee

ii. Interest on funds required for maintaining net working funds prescribed by Bank Negara.

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 Paid to Non-Resident Persons (Payee)

Royalty is defined as:-

Any sums paid as consideration for the use of or the right to use:

a. 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.

b. Know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill.

c. Income derived from the alienation of any property, know-how or information mentioned in above paragraph of this definition.

Upon coming into operation of the Finance Act 2016, the existing definition of “royalty” be substituted with the following: “royalty” includes any sums paid as consideration for, or derived from—

a. the use of, or the right to use in respect of any copyrights, software, artistic or scientific works, patents, designs or models, plans, secret processes or formulae, trademarks or other like property or rights;

b. the use of, or the right to use 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;

c. the use of, or the right to use know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

d. the reception of, or the right to receive, visual images or sounds, or both, transmitted to the public by—

i. satellite; or

ii. cable, fibre optic or similar technology;

e. the use of, or the right to use, visual images or sounds, or both, in connection with television broadcasting or radio broadcasting, transmitted by—

i. satellite; or

ii. cable, fibre optic or similar technology;

f. the use of, or the right to use, some or all of the part of the radio frequency spectrum specified in a relevant licence;

g. a total or partial forbearance in respect of—

i. the use of, or the granting of the right to use, any such property or right as is mentioned in paragraph (a) or (b) or any such knowledge, experience or skill as is mentioned in paragraph (c);

ii. the reception of, or the granting of the right to receive, any such visual images or sounds as are mentioned in paragraph (d);

iii. the use of, or the granting of the right to use, any such visual images or sounds as are mentioned in paragraph (e); or

iv. the use of, or the granting of the right to use, some or all such part of the spectrum specified in a spectrum licence as is mentioned in paragraph (f); or

h. the alienation of any property, know-how or information mentioned in paragraph (a), (b) or (c) of this definition;.

The gross amount of royalty paid to a NR 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 NR payee is tax resident). This is a final tax.

Royalty 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. The royalty is charged as an outgoing or expense against any income accruing in or derived from Malaysia.

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 Paid to Non-Resident Persons

Special classes of income include:

a. payments for services rendered by the NR 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 NR 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 (Note **)

c. rents or other payments (made under any agreement or arrangement) for the use of any moveable property.

*Provided that in respect of paragraph (a) and (b), this section shall apply to the amount attributable to services which are performed in Malaysia. (deleted upon coming into operation of the Finance Act 2016)

Note*: Upon coming into operation of the Finance Act 2016, income derived by a non-resident under Section 4A(i) and (ii) and deemed to be derived from Malaysia should be subject to withholding tax irrespective of whether the services were performed in Malaysia or outside Malaysia.

Note **: The Act is to be amended as follows:-

amounts paid in consideration of any advice given, or assistance or services rendered in connection with any scientific, industrial or commercial undertaking, venture, project or scheme; or. (Effective from coming into operation of the Finance Act 2018)

Withholding Tax Exemption in Relation to S.4A(i) and S.4A(ii) Income

The Income Tax (Exemption) (No. 9) Order 2017 [P.U.(A) 323] was gazetted on 24 October 2017. This Order exempts a person not resident in Malaysia from income tax payment in respect of income falling under Section 4A(i) and (ii) of the ITA 1967, where services are rendered and performed outside Malaysia. According to paragraph 3 of the Order, S.109B of the ITA 1967 is not applicable to the income exempted under this Order.

The exemption order is deemed to have come into operation on 6 September 2017.

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 NR 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 NR 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 NR payee, remit the withholding tax (whether deducted or not) to the IRB.

Contract Payments to Non-Resident Contractors (Payee)

Contract payments made to non-resident contractors in respect of services under a contract are subject to withholding tax of:-

a. 10 % on the service portion of the contract payments on account of tax payable by the NR payee;

b. 3 % on the service portion of the contract payments on account of tax payable by employees of the NR payee;

“Services under a contract” means 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; and

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 IRB.

Non-Resident Public Entertainers

“Public Entertainer” means a stage, radio or television artiste, a musician, athlete or an individual exercising any profession, vocation or employment of a similar nature.

Upon coming into operation of the Finance Act 2016, the existing definition of “public entertainer” be redefined as follows:

“public entertainer” includes—

a. a compere, model, circus performer, lecturer, speaker, sportsperson, an artiste or individual exercising any profession, vocation or employment of a similar nature; or

b. an individual who uses his intellectual, artistic, musical, personal or physical skill or character in,

carrying out any activity in connection with any purpose through live, print, electronic, satellite, cable, fibre optic or other medium, for film or tape, or for television or radio broadcast, as the case may be.

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)

With effect from 1 January 2009, a withholding tax mechanism to collect withholding tax at 10% on other types of income of non-residents under Section 4(f) of the Income Tax Act, 1967 has been introduced.  Income under Section 4(f) refers to gains and profits not covered under Sections 4(a) to 4(e) of the Income Tax Act, 1967.  Such income under Section 4(f), based on the IRB’s view, includes commissions, guarantee fees and introducer’s fees where these are not business income of the recipient.

Consequences Of Not Deducting And Remitting Tax

Failure to deduct and pay over such tax to the IRB within one month of the earlier of paying or crediting the non-resident would result in the following to the payer:

the IRB may impose late payment penalties at the rate of 10% of the amount of unpaid tax;

expense will be disallowed as a deduction and no capital allowances shall be available on the qualifying capital expenditure paid to a non-resident; and

the IRB can recover the withholding tax and penalties from the payer as a debt due to the Government.

With effect from 1.1.2011 for year of assessment 2011, in addition to the late payment penalty mentioned in above, the Director General of Inland Revenue is empowered to impose a penalty under subsection 113(2) of the Income Tax Act, 1967 if –

i. the withholding tax deduction is made or paid after the due date for the furnishing of an Income Tax Return Form for a year of assessment that relates to the payment, and

ii. a deduction for expenses related to the such payment is made in the Income Tax Return Form furnished or claimed in the information given to the Director General of Inland Revenue in arriving at the adjusted income of the payer [proviso to paragraph 39(1)(j) of the Income Tax Act, 1967].

This is regardless that the withholding tax together with the penalty for failure to withhold is subsequently paid to the Director General of Inland Revenue.