What You Need to Know – Withholding Tax in Malaysia

If your business makes payments to foreign individuals or companies, it’s important to understand how Malaysia’s withholding tax system works. It might sound technical but once you get the basics, it’s straightforward and knowing your responsibilities can save you from unwanted penalties down the road.

 

Here’s a breakdown of what withholding tax is all about, and how it affects you.

 

What is Withholding Tax?

Withholding tax is a tax deducted upfront when you make certain types of payment – especially to non-residents (foreign companies or individuals)

Instead of waiting for the tax authority to collect it later, you are required to deduct the tax and pay it directly to IRBM (Inland Revenue Board of Malaysia) on their behalf. This way, the Malaysian government ensures tax is collected at the source.

 

When Do You Need to Withhold Tax?

You need to withhold tax when you make payments to a non-resident for services or income types such as:

Type of Payment	Paid To	Description	Tax Rate
Contract Payments	Non-resident contractors	For services or work done under a contract in Malaysia	10% on services 3% on employees
Interest	Non-resident lenders	Payment of interest on loans, deposits, etc.	15% (may vary under DTA)
Royalties	Non-resident licensors	For use of intellectual property (IP), patents, trademarks, etc.	10% (may vary under DTA)
Technical or Management Services	Non-resident service providers	Services such as consultancy, IT, engineering, etc.	10%
Public Entertainer Payments	Non-resident artists/performers	Payment to musicians, actors, performers for shows in Malaysia	15%
Rental of Movable Property	Non-resident lessors	Rental of equipment or other movable assets	10%
Real Estate Investment Trusts (REITs)	Non-resident investors	Income distribution from Malaysian REITs	10% or 24% depending on type
Insurance & Takaful Funds	Non-resident policyholders	Income distribution from insurance-related investment funds	8% or 25%
Paragraph 4(f) Income	Non-resident recipients	Miscellaneous income not categorized elsewhere	10%
Private Retirement Scheme Withdrawals	Non-residents below age 55	Early withdrawals from retirement or annuity funds	8% (exceptions apply)

 

What qualifies someone as a “non-resident”?

A non-resident is typically someone who:

• Spends fewer than 183 days in Malaysia in a year
• Has no permanent business or office in Malaysia
• Foreign company providing services from overseas

 

Key Reminders:

• The exact rate may vary if Malaysia has a Double Taxation Agreement (DTA) with the other country involved
• To enjoy DTA benefits, the payee must provide a valid Certificate of Residence from their home country’s tax authority
• Withholding tax must be paid within one month from the date of payment or credit to the non-resident.

 

What Happens if You don’t Pay on Time?

If you fail to deduct and remit the withholding tax, you could face:

• A 10% penalty on the unpaid amount
• The expense not being allowed as a tax deduction for your business
• Legal action or additional penalties if incorrect information is submitted.

 

Can You Dispute or Get Relief?

Yes. If you’ve paid withholding tax late and LHDN disallows the expense, you may apply for relief under Section 131A of the Income Tax Act. This must be done within one year from the year in which the payment was made.

 

Summary

Withholding tax isn’t something to be afraid of – it’s just a matter of understanding when it applies and making sure you take the necessary steps. If your business regularly works with non-residents or foreign service providers, it’s worth setting up a process so you never miss a deadline.

For more details or updates, you can always check the official LHDN website here.

 

Frequent asked questions (FAQ)

1. What is withholding tax and why does it exist?
   Withholding tax is a portion of payment that a Malaysian business must deduct and pay to LHDN when making specific types of payments to non-residents. It ensures tax is collected at the source when income is earned in Malaysia by someone who doesn’t live or operate here permanently.

 

2. Who is considered a non-resident in Malaysia?
   A non-resident is an individual or company that:

• Stays in Malaysia for less than 183 days in a calendar year, or
• Does not have a permanent establishment or business presence in Malaysia.

 

3. What types of payments are subject to withholding tax?
   Common payments include:

• Contract payments
• Interest
• Royalties
• Technical or management services
• Public entertainment services
• Public entertainment fees
• Rental of moveable property
• Certain investment distributions (e.g. REITs)

 

4. Do I need to withhold tax if the service is performed outside Malaysia?
   Yes. If the service is used or enjoyed in Malaysia, even if performed overseas, it can still be subject to withholding tax (especially for technical or professional services)

 

5. What is Double Tax Agreement (DTA), and how does it affect withholding tax?
   DTA is an agreement between Malaysia and other country to avoid double taxation. If a DTA exists, the withholding tax rate may be lower than the standard rate. You must provide a Certificate of Residence to benefit from DTA rates.

 

6. When should the withholding tax be paid?
   It must be paid to LHDN within one month from the date the payment is made or credited to the non-resident. Late payment may result in penalties.

 

7. How can I pay withholding tax in Malaysia, and are manual payments still accepted?
   Starting 1 February 2024, manual payments (cash, cheque, bank draft) for withholding tax are only accepted at PPTH Kuala Lumpur. Other LHDN payment counters no longer accept this payment method.

   To pay withholding tax, you can use the following electronic methods:

• MyTax Portal via ‘ezHasil Services’ > ‘ByrHasiL’
• Internet banking
• Bank or post-office counters (appointed agents)
• Cash Deposit Machines (CDM) and ATM of selected banks

  Use your Bill Number or Tax Identification Number (TIN) as your payment reference.

 

8. Can I claim a refund on withholding tax?
   Yes, if there’s an overpayment or if the non-resident qualifies for reduced tax under a Double Tax Agreement (DTA), you can apply for a refund or tax relief with LHDN. The application must be made within 1 year from the end of the year the tax was withheld.

 

9. Can withholding tax be paid in foreign currency?
   No. All withholding tax payments must be made in Malaysian Ringgit (MYR)