Generally, any person making certain payments such as royalties, interest, contract, payments, remuneration to a public entertainer, technical and management fees to non-residents is required to remit the tax deducted at an applicable rate (i.e. withholding tax) to the Inland Revenue Board of Malaysia (IRBM) within one month from the date of paying or crediting, whichever is earlier.
*Non-residents include foreign companies (independent or related parties), foreign contractors and foreign individuals who are not tax residents of Malaysia.
In summary, the following types of payments attract withholding tax (WHT) when paid to non-resident companies/individuals:
Special Classes of Income
The following payments to a non-resident could be subject to WHT:
I. Installation fees Charges paid in consideration of services which are performed in Malaysia, rendered by a non-resident person or his employee, in connection with:
(a) the use of property or rights belonging to the non-resident person, or
(b) the installation or operation of any plant, machinery or other apparatus purchased from him.
Example: ABC Sdn Bhd purchased a specialised machine from JP Corp, a Japanese company. As part of the deal, JP Corp sent 3 engineers to Malaysia to assist in the installation of the machine and charged RM100,000 for the installation services. The installation fee of RM100,000 is subject to 10% Malaysian withholding tax. ABC Sdn Bhd is required to withhold RM10,000 as tax (to be paid to IRBM), and JP Corp would be paid RM90,000.
II. Technical assistance, management and administrative fee
Charges paid to a non-resident person in consideration of technical advice, assistance or services, which are performed in Malaysia, rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.
Example: Pan-info Sdn Bhd is a software company providing online ordering system to retailers. The company had engaged an Indian company, GD Tech Pty Ltd to perform a system integration for a client with multiple branches in Kuala Lumpur, Penang and Johor.
Under the service contract, Pan-Info would pay GD Tech Pty Ltd a fee for the services plus air-tickets, local accommodation, food and other related expenses.
The fee and reimbursements (air-tickets, local accommodation, food and related expenses) are subject to 10% Malaysian withholding tax.
III. Rent or other payments for the use of any moveable property
This would consist of rents or other payments made for the use of any moveable property belonging to the non-resident person which include rents or other payments made for the use of oil rigs, boats, ships, cars, aircraft or other equipment.
Payments that could fall under this category include lease payments for ships, cars, oil rigs and any other equipment. Payment for slot hire, leasing, time charter, voyage charter of ships (bare boat or with crew) would also be exposed to tax.
Interest
Where a payer is liable to pay interest which is deemed derived from Malaysia to a non-resident, he shall upon payment or crediting the interest, deduct 15% of the interest as WHT. The non-resident lender will receive 85% of the gross interest income. Double Tax Agreement may offer lower WHT rate.
The interest shall be deemed to be derived from Malaysia— a) if responsibility for payment of the interest or royalty lies with the Government, a State Government or a local authority;
b) if responsibility for payment of the interest or royalty in the basis year for a year of assessment (the responsibility of any guarantor being disregarded in the case of interest) lies with a person who is resident for that basis year; and
c) in the case of interest it is payable in respect of money borrowed by that person and employed in or laid out on assets used in or held for the production of any gross income of that person derived from Malaysia or the debt in respect of which the interest is paid is secured by any property or asset situated in Malaysia; or\
d) if the interest or royalty is charged as an outgoing or expense against any income accruing in or derived from Malaysia.
WHT would not apply if the interest income is i) attributable to a business carried on by the non-resident in Malaysia; or ii) on approved loan; or iii) exempted under Schedule 6 of ITA.
Royalties
When a payer remit royalty payment to a non-resident, he shall upon paying or crediting the royalty, deduct 10% of the royalty as WHT and remit the WHT to IRBM.
Royalty is defined in very broad terms in S.2 of Income Tax Act (ITA) which include 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;
With the expansion of the definition of royalty that includes payment for the use or the right to use software (effective from 17 Jan 2017), these payments could be exposed to withholding tax: - Payment for software and apps (include purchase price, renewal fee and access fee) to foreign suppliers; - Payment for software or apps downloaded from internet and payment made to an oversea supplier; and - Payment for online advertisement and marketing services (where there is usage of software or apps).
Contract Payments
When contract payments are made to a non-resident contractor in respect of services under a contract – such payments are subject to WHT.
Withholding tax rates are 10% + 3% (The 10% is in respect of the tax liabilities of the non-resident contractor while the 3% is for the tax liabilities of the employees of the non-resident contractor.
Example: Damit Pty Ltd (an Australian company) is engaged by MM Sdn Bhd to build a dam in Ulu Langat, Selangor. The dam will take 1 year to be built. Payments made by MM Sdn Bhd to Damit Pty Ltd for the construction of the dam would be a “contract payment”
and be subject to withholding tax.
Public Entertainers
Services rendered by a non-resident public entertainer in Malaysia is subject to tax. The payer is required to withhold and remit the tax to IRBM.
The WHT rate is 15% and it is a final tax of the non-resident.
“Public entertainer” includes – (a) a compere, model, circus performer, lecturer, speaker, sportsperson, an artiste or an 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, allowances, out-of-pocket expenses such as accommodation, transportation, meals, laundry are subject to WHT.
Cash prize is exempted from tax. Example: A professional cyclist from France participated in a competition in Malaysia. The organiser paid for cost incurred for transportation, accommodation, meals and laundry. The cyclist finished second in the competition. He received a trophy and a cash prize. While all the costs (transportation, accommodation, meals and laundry) paid by the organiser are taxable, the cash prize is exempted from tax.
It is the practice of IRBM 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.
Other Income under S.4(f) ITA
This is also known to some as the “sweeper clause”, introduced by the government to deal with taxable income not otherwise addressed under the Income Tax Act.
Effective from 1 Jan 2009, non-resident receiving casual or occasional income such as commissions, guarantee fees and introducer’s fees (not an exhaustive list) would be subjected to WHT of 10% if such income is derived from Malaysia. As such, the resident payer must ensure tax is withheld.
In Public Ruling 1/2010, the IRBM indicated that for S.4(f) income to be taxable, the i. The payment is revenue and not capital in nature; ii. The payment is not income that falls under S.4(a)-(e) or S.4A; iii. The payment received by a non-resident is a miscellaneous or casual/occasional income in nature, which is received outside the ordinary course of trade or vocation. iv. The payment is for an isolated transaction; and v. There is an absence of repetition of transactions to indicate the commercial nature of the transaction.
Example: Amir, a businessman in Kuala Lumpur owns a bungalow in Johor Bahru, which had been left vacant for a year. His former schoolmate Aziz, a full time retiree and living in Singapore has a neighbour who is looking for a house in Johor Bahru to purchase for investment purposes. Therefore, Aziz introduces his neighbour to Amir and his neighbour contacts Amir to enquire about his vacant bungalow. On 10 Feb 2009, a sales and purchase agreement is signed and the bungalow is sold to Aziz’s neighbour for RM1.5 million.
On 02 May 2009, Amir visits Aziz in Singapore and presents him a cheque for a sum of RM36,900 after deducting the withholding tax of RM4,100 at the rate of 10% from the gross commission of RM41,000 for introducing a buyer to him [this is pursuant to the
requirement of S.4(f), as Aziz is a non-resident under the ITA].
The RM41,000 commission paid to Aziz, a non-resident is taxable under paragraph 4(f) of the ITA because: (a) the commission is revenue in nature;
(b) Aziz acted as an introducer between the buyer (neighbour) and the seller (Amir) of the property;
(c) Aziz is not engaged in the real estate business;
(d) the commission is a casual income to Aziz; and
(e) the commission is deemed derived from Malaysia since the payer (Amir) is a resident of Malaysia.
(f) The liability to pay Aziz arises on the date the sales and purchase agreement is signed. The gross commission received by Aziz is subject to withholding tax of 10% pursuant to S.4(f) and S.109F of the ITA.
Non-compliance
The amount of WHT that the payer has filed to remit to IRBM shall be increased by 10% penalty and the total sum shall be a debt due payable to the Government; and
The payer is not allowed to claim the payment made to the non-resident as an expense in computing his tax payable.
Notes:
S. denotes Section in the Income Tax Act (ITA)
ITA denotes Income Tax Act
IRBM denotes the Inland Revenue Board of Malaysia
WHT denotes withholding tax
Last Reviewed: 30 Sept 2018
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Disclaimer: Every effort has been made to provide accurate information. However, the information and regulations contained in this article are subject to changes and amendments by the relevant authority at any time. As such, the information in this article may not be current.
And the information provided in this article is general commentary only and shall not be considered as advice or recommendation. As all tax situations are specific to their facts and will differ from the situations in this article - if you have specific tax questions you should consult a licensed tax agent.