Withholding Tax
Withholding tax is an amount of tax that is being withheld by the payer on the income earned by a non-resident payee. The amount of tax is paid to the Inland Revenue Board of Malaysia (IRBM).
- Who is the payer? Person who conducting business in Malaysia.
- Who is the payee? Non-resident employee that received payment of income.
How is Withholding Tax Calculated?
- Calculation is based on Income Tax Act 1967.
- Withholding tax will be deducted based on the rate listed in the table regardless if the tax has already been deducted or not.
- Payment of the tax needs to be made to the Director General of Inland Revenue within 1 month after the payment has been made to the payee.
- The payer has to make the payments based on 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% | CP 37A |
| Interest | Section 109 | 15% | CP 37 |
| Royalty | Section 109 | 10% | CP 37 |
| Special classes of income: Technical fees, payment for services, rent/payment for use of moveable property | Section 109B | 10% | CP 37D |
| Interest (except exampt interest) paid by approved financial institutions | Section 109C | 5% | CP 37C |
| Income of non-resident public entertainers | Section 109A | 15% | Payment memo issued by Assessment Branch |
Real Estate Investment Trust (REIT)
|
Section 109D | 10%, 25%, 10% | CP 37E |
Family Fund/Takaful Family Fund/Dana Am
|
Section 109E | 8%, 25% | CP 37E(T) |
| Income under Section 4(f) ITA 1967 | Section 109F | 10% | CP 37F |
Important Notes:
- All payments must be made along with the completed forms, a copy of the invoices issued by the non-resident payee, and a copy of the receipt as proof of payment.
- Forms must be accurately filled with the correct Malaysian tax reference number for the payer, payee, and the payee’s country of origin.
- You can get the payer’s reference number from: Director
Non Resident Branch
Customer Services Unit
3rd Floor Left, Block 8
Goverment Office Complex
Jalan Duta, 50600 Kuala Lumpur
Consequences for failure to pay Withholding Tax
| Examples of non-compliance | Action Taken |
|---|---|
|
A tax increase is imposed on payers that fail to pay taxes on time or fail to pay the tax at all. An increase of 10% is imposed.
Example:
Interest paid to NR payee on 03/10/2007 = RM10,000 Withholding tax received by IRBM on 10/09/2006 later than 02/11/2007 = RM1000 Increase in tax imposed on payer (1000 @ 10 %) = RM100 |
Types & Rates of Payments
1) Contract Payments to non-resident Contractors (payee)
- 10% tax rate is implemented on the service portion as the tax payable by the payee
- 3% tax rate is implemented on the service portion of the contract payments on account of tax payable by employees of the payee
2) Non-Resident Person (Payee) interest payment
Interest paid to Non-residential payee is subjected to withholding tax at 15%. Or any other amount as instructed under the Double Taxation Agreement between Malaysia and the payee’s country of origin.
3) Interest is taken from Malaysia if:
- Responsibility for payment is within the control of Government or State Government
- Responsibility of payment is on the Malaysian resident
- Interest charged as an outgoing expense against any accruing income from Malaysia
4) Interests that are not subjected to withholding tax
- Interest paid to payee on approved loan
- Interest paid to payee by a licensed bank or a licensed finance company in Malaysia
5) Payment of royalties to Non-Resident Payee:
Definition – Royalty : Payments made for the rights to use:
- Copyrights
- artistic/scientific work,
- patents, designs, 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.
- Information concerning technical, industrial, commercial or scientific knowledge, experience or skill.
- Income gained from the alienation of any property, information mentioned in above paragraph of this definition.
6) Special Classes of Income for Non-Residents
Payment for services provided by non-resident payee or his employee:
Payments for:
- technical advice
- property usage
- installation of operation / purchase of machinery from the non-resident payee
7) Non -Resident Public Entertainers
- Definition : Public Entertainers – stage, radio, television artist , musician, athlete, or any individual exercising any profession of a similar nature.
- Withholding tax at 15% for non-residents in Malaysia for these services performed.
- The 15% withholding tax is required by the sponsor of a non-resident public entertainer before an entry permit can be obtained from the immigration Dept.
8) Double Taxation Agreement and Protocols
- Malaysia has 69 effective Double Taxation Agreements (DTA).
- For withholding tax refund, due to DTA, payee must forward application for refund to the Director, Non Resident Branch together with the following details:
- Tax resident certificate of the payee from the tax authority of the country where the payee is resident.
- Evidence to prove that the conditions stipulated in the DTA are met.
- Proof of payment of withholding tax.
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