What is Withholding Tax in Malaysia?

Withholding tax is imposed on income that is paid to a non-resident individual.
The payer (the party making the payment) deducts taxes from the payee’s (non-resident individual) income. The withheld amount will be paid to the Inland Revenue Board (IRB) of Malaysia to calculate and pay all relevant taxes.

Withholding tax is essential because it helps to provide the government with a steady revenue stream, it also prevents from incurring double taxation.

‘Payee’ refers to a non-resident individual or any person other than an individual in Malaysia; this includes payments made by a foreign company that is remitted to a non-resident recipient and payments made by Malaysian companies or government agencies themselves to non-residents.

Tax Treatment on Foreign Source Income

If you are a foreigner working in Malaysia, you must pay a withholding tax. The withholding tax in Malaysia generally applies to foreign individuals classified as “Public Entertainers.” These individuals include artists, athletes, musicians, radio personalities, and sportspersons.

The withholding tax for foreign individuals earning income in Malaysia is 15% of the gross payment. Therefore, before the non-resident public entertainers are permitted entry from the Immigration Department in Malaysia, the sponsor must pay a withholding tax of 15%.

The Income Tax Act 1967 (ITA)

The Inland Revenue Board of Malaysia issued the Technical Guidelines on Tax Treatment of Foreign Source Income (FSI) to clarify how foreign source income should be taxed.

Section 3 of the Income Tax Act 1967 provides guidelines for the tax treatment of foreign source income, which includes revenue from any source outside Malaysia and income derived by a Malaysian resident outside Malaysia, including foreign source capital gains.

Effective January 1, 2022, foreign-sourced income (FSI) of Malaysian residents (both individuals and companies) received in Malaysia from January 1, 2022, until June 30, 2022, was subject to a taxation rate of 3% on gross income. The income received from July 1, 2022, was subject to a prevailing taxation rate.

However, in a recent announcement by the Malaysian government, some tax residents in Malaysia will continue to enjoy tax exemption for another five years, from January 1, 2022, to December 31, 2026. The tax provides that if the tax resident qualifies for the income tax exemption and the applicable conditions, he shall be exempt from paying any income tax on his foreign-sourced income.

The amended act aims to ensure sustainable revenue for Malaysia and to comply with international tax best practices. It also aims to prevent evasion and avoidance of taxes by corporations and individuals alike.

This act also ensures that the government has access to sufficient income, which can be used for public purposes such as health care, education, and welfare benefits.

Withholding tax rate in Malaysia

The Income Tax Act 1967 states that an individual is liable to pay on the types of income listed below (aside from income of non-resident public entertainers) that a non-resident earns, deemed derived in Malaysia.

The tax payment shall be made to the Director General of Inland Revenue within a month after the non-resident payment receives the income listed below.

Types of PaymentWithholding Tax Rate
Contract Payment10% + 3% of the gross payment
Interest15% of the gross payment
Royalty10% of the gross payment
Public Entertainer15% of the gross payment
Special Classes of Income10% of the gross payment
Other Income10% of the gross payment

When would Withholding Taxes be Applicable?

With the implementation of the withholding tax law, it is mandatory for any non-resident with no business presence in Malaysia to deduct and remit tax on any of the above-stated income that is deemed derived in Malaysia.

Foreigners who are not employed in Malaysia and do not have a business presence in Malaysia will be liable to withhold tax when receiving any income.

Conditions of Withholding Tax on Payment

  1. Non-resident recipient.
  2. The non-resident recipient receives payment for service or any above-stated income.
  3. The non-resident recipient does not have a business presence in Malaysia.

Consequences Of Not Deducting and Remitting Tax

An individual must know the consequences of not deducting and remitting tax. If you fail to do so, you could face serious consequences.

The penalties and consequences are the same for all types of withholding tax. You can be charged a penalty of 10% or more on unpaid taxes due to non-deduction or non-remittance. There could also be interest on any unpaid taxes due to non-deduction or non-remittance.

Noncompliance with proper tax payment constitutes the following:

  1. The payer is not able to pay the withholding tax at the imposed rate (whether deducted or not)[JS1] 
  2. They may be penalized if the payer fails to deduct and remit withholding tax on time. The penalty is applicable if the amount withheld is not paid within 30 days after it was withheld.
  3. The payer fails to pay the increased tax imposed for late payment of the withholding tax.
  4. The payer fails to pay the withholding tax.
  5. The payer fails to ultimately settle the withholding tax and penalties by the due date of the tax return and is not allowed to claim for the deduction, or else further liability will be imposed under S113(2) – Penalty of incorrect return.
  6. Power of the Director General to remit penalty “the Director General may, in his discretion on any worthy cause shown should remit the whole or any part of the sum and, where the amount sent has been paid, the Director General shall repay the same. “

Double Taxation Agreement

The Double Taxation Agreement in Malaysia is a treaty that has been concluded between Malaysia and other countries. The agreement is designed to prevent double taxation of profits and income.

Country Rate of Withholding Tax
Interest Royalties Technical Fees
Albania10% or Nil10%10%
Australia15% or Nil10%Nil
Austria15% or Nil10%10%
Bahrain 5% or Nil8%10%
Bangladesh15% or Nil10% or Nil10%
Belgium10%, 15% or Nil10%10%
Bosnia & Herzegovina10% or Nil8%10%
Brunei10% or Nil10%10%
Cambodia110% or Nil10%10%
Canada15% or Nil10% or Nil10%
Chile15%10% 5%
China, People’s Republic10% or Nil10%10%
Croatia10% or Nil10%10%
Czech Republic12% or Nil10%10%
Egypt15% or Nil10%10%
Fiji15% or Nil10%10%
Finland15% or Nil10% or Nil10%
France15% or Nil10% or Nil10%
Germany10% or Nil 7% 7%
Hong Kong10% or Nil 8% 5%
Hungary15% or Nil10%10%
India10% or Nil10%10%
Indonesia10% or Nil10%10%
Iran15% or Nil10%10%
Ireland10% or Nil 8%10%
Italy15% or Nil10% or Nil10%
Japan10% or Nil10%10%
Jordan15% or Nil10%10%
Kazakhstan10% or Nil10%10%
Korea Republic15% or Nil10% or Nil10%
Kuwait10% or Nil10%10%
Kyrgyz Republic10% or Nil10%10%
Laos10% or Nil10%10%
Lebanese Republic10% or Nil 8%10%
Luxembourg10% or Nil 8% 8%
Malta15% or Nil10%10%
Mauritius15% or Nil10%10%
Mongolia10% or Nil10%10%
Morocco10% or Nil10%10%
Myanmar10% or Nil10%10%
Namibia10% or Nil 5% 5%
Netherlands10% or Nil 8% or Nil 8%
New Zealand15% or Nil10% or Nil10%
Norway15% or Nil10% or Nil10%
Pakistan15% or Nil10% or Nil10%
Papua New Guinea15% or Nil10%10%
Philippines15% or Nil10% or Nil10%
Poland15% or Nil10% or Nil10%
Poland (New)110% or Nil 8% 8%
Qatar 5% or Nil 8% 8%
Romania15% or Nil10% or Nil10%
Russian Federation15% or Nil10% or Nil10%
San Marino10% or Nil10%10%
Saudi Arabia 5% or Nil 8% 8%
Senegal10% or Nil10%10%
Seychelles Republic10% or Nil10%10%

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