What is Withholding Tax in Malaysia? Meaning, Rates, Examples

If you are a businessman in Malaysia or involved in financial transactions in the country, having an understanding of the concept of withholding tax in Malaysia is crucial. This post aims to explain Withholding Tax in Malaysia, rates and examples to help businesses navigate the financial landscape. Read on!

What is Withholding Tax in Malaysia?

Withholding tax in Malaysia, also known as retention tax, is a tax deducted at the source while making a payment to a non-resident entity

Any entity or body conducting business in Malaysia (except individuals)  must deduct a portion of the amount payable to Non-resident individuals or bodies for all specified payments and remit the amount to Malaysia LHDN (Inland Revenue Board of Malaysia) under the Withholding Tax bracket. 

Note: 

• Withholding tax is applied to specific payments such as interest, technical fees, royalties, dividends, contract payments, etc, as specified in section 109 of the Income Tax Act, 1967.

Withholding Tax Example

To understand how withholding tax in Malaysia works, let’s look at this example:

If you're a Malaysian company making a payment of 5,000 MYR as royalty to a foreign entity, you must withhold 10% (500 MYR) under Withholding Tax in Malaysia and remit it to LHDN. The remaining 4,500 MYR goes to the foreign entity.

This ensures that the Malaysian government collects taxes on income earned by non-resident entities from Malaysian sources, even though the tax liability ultimately rests with the non-resident entity.

Withholding Tax Rates for Specified Payments in 2024 (Section 109)

The following are the types of payments subject to withholding tax, which are specified under Section 109 of the Income Tax Act 1967 

Notes:

• Withholding tax rates differ based on the country of residence/registration of the payee as notified by LHDN.
• The rates mentioned above are used when there is no Double Taxation Agreement (DTA) between Malaysia and the country of origin of the payee.
• Whenever there is a DTA for withholding tax, the rate of deduction is subject to the rates mentioned in Double Taxation Agreements Withholding Tax Rates notified by LHDN.
• Withholding tax deducted must be remitted to LHDN with specified forms ( as mentioned in Section 109) within 1 month from the date of payment.

Penalty for Non-Deduction or Non-Deposit of Withholding Tax

If a payer doesn't deduct and remit withholding tax as required by the law, they owe the government the amount of tax they failed to pay plus an extra 10% on the total tax payable.

If the payer still does not deposit the withholding tax along with the imposed penalty, the entire payment made is disallowed and cannot be claimed as an expense for any tax purposes. 

However, if the tax is paid later along with the extra amount, the payment can be claimed as an expense.

Calculation of Withholding Tax

The process to calculate withholding tax is as follows 

1. Identify Payment Amount: Total payment to non-resident entities, e.g., RM 100,000 for technical services.
2. Determine Tax Rate: Withholding tax rate, e.g., 10% for technical services.
3. Withholding Tax Amount: RM 100,000 * 10% = RM 10,000 which is to be deposited to 
4. Deduct Tax: Subtract RM 10,000 from RM 100,000 to get net payable: RM 90,000, which is to be paid to the Non-Resident Entity
5. Remit Tax: Send RM 10,000 withheld tax to Malaysia LHDN.

In a Nutshell

Withholding tax rule ensures that LHDN collects the taxes on income earned in Malaysia before the payment is remitted outside. Kindly check with the government notifications and DTA rules and take professional advice before deducting and remitting withholding tax.