Withholding tax is an amount withheld by the resident carrying on business in Malaysia on income earned by a non-resident and paid to the Inland Revenue Board of Malaysia.
The Malaysian Income Tax Act, 1967 (“ITA 1967”) provides that where a resident is liable to make payment as listed below (other than income of non- resident public entertainers) to a non-resident, he shall deduct withholding tax at the prescribed rate from such payment and pay that tax to the Director General of Inland Revenue within one month after such payment has been paid or credited to the non- resident.
• Contract payments
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 non-resident;
b. 3% on the service portion of the contract payments on account of tax payable by employees of the non-resident.
• Interest
Interest paid to a non-resident is subject to withholding tax at 15%.
• Royalty
The gross amount of royalty paid to a non- resident is subject to withholding tax at 10%.
• Special classes of income under Section 4A ITA 1967
Special classes of income include:
a. Section 4A(i)
Payments for services rendered by the non- resident 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 non-resident;
b. Section 4A(ii)
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
c. Section 4A(iii)
Rents or other payments for the use of any moveable property.
The gross amount of “Special classes of income” paid for the above services rendered by a non-resident is subject to withholding tax at 10%.
• Non-resident public entertainers
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 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) ITA 1967
Generally, a payment made to a non-resident falls under Section 4(f) of the ITA 1967 if the payment received by a non-resident person is in the nature of a miscellaneous income.
Such income is often casual in nature. Casual income means an occasional income, an isolated transaction and there is an absence of repetition of transactions to indicate the commercial nature of the transaction.
The gross amount of income under Section 4(f) ITA 1867 paid to a non-resident is subject to withholding tax at 10%.
Following the gazette of Finance Act 2017 on 16 January 2017, some significant changes were made to the withholding tax in Malaysia.
• Royalty
The definition of royalty has been widened to include the reception and transmission of visual images, sounds and use of radiofrequency spectrum through communication mediums such as satellites, cable, fibre optic or similar technologies; and software.
• Special classes of income under Section 4A ITA 1967
Income derived by a non-resident under Section 4A(i) and (ii) shall be deemed derived from Malaysia and hence subject to withholding tax irrespective of whether the
services were performed in Malaysia or outside Malaysia.
Since 21 September 2002, withholding tax for income under Section 4A(i) and (ii) is applicable provided that such income are attributable to services performed in Malaysia. The Finance Act 2017 reverts to the previous position prior to 21 September 2002 where a non-resident was subject to Malaysian withholding tax in respect of income falling under Section 4A(i) and (ii) for both offshore and onshore services.