Withholding Tax in Malaysia: Meaning, Rates, Examples & How It Works

Withholding tax in Malaysia impacts various transactions between local entities and non-residents, such as payments for interest, royalties, technical fees, and more. If you're a business owner or involved in financial transactions in Malaysia, understanding withholding tax is crucial to ensure compliance. 

This guide will explain the meaning of withholding tax in Malaysia, how to calculate it, exemptions available, and the steps to make the payment.

What is Withholding Tax in Malaysia?

Withholding tax in Malaysia is a tax deducted at the source when making payments to non-resident entities or individuals for specific types of income. This tax system ensures that the Malaysian government collects tax revenue on income earned by non-residents in Malaysia, reducing the risk of tax evasion. 

The payer, typically a business or individual, must deduct the specified tax amount from the payment and remit it to the Inland Revenue Board of Malaysia (IRBM).

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 2025 (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.

Exemptions in Malaysian Withholding Tax

These following exemptions are subject to the specific provisions outlined in the Income Tax Act and may vary based on the terms of any applicable Double Taxation Agreements (DTAs) between Malaysia and other countries. 

Non-residents claiming these exemptions are generally required to maintain proper documentation to substantiate their eligibility.

Calculation of Withholding Tax

To calculate withholding tax in Malaysia, follow these steps:

1. Identify Payment Amount: Determine the total amount to be paid to the non-resident entity.
2. Determine the Tax Rate: Find the applicable withholding tax rate (e.g., 10% for technical services).
3. Calculate the Tax: Multiply the payment amount by the tax rate to determine the withholding tax.
4. Subtract the Tax: Deduct the withholding tax from the total payment to calculate the net amount to be paid to the non-resident.
5. Remit to LHDN: Send the withheld tax to Malaysia’s Inland Revenue Board (LHDN) within one month.

Formula for Withholding Tax Calculation

• Withholding Tax = Payment Amount ×× Tax Rate Tax Rate Payment Amount Tax Rate
• Net Payment to Non-Resident= Payment AmountWithholding Tax Payment Amount−− Payment AmountWithholding Tax

Example:

• A Malaysian company pays 100,000 MYR for technical services.
• Withholding tax rate: 10%
• Withholding tax = 10,000 MYR
• Net payment to the non-resident = 90,000 MYR
• The withheld tax of 10,000 MYR must be remitted to LHDN.

Conclusion

Understanding withholding tax in Malaysia is crucial for businesses and individuals involved in cross-border transactions. Businesses must identify payments subject to withholding tax deduct it from payments and remit to IRBM. Withholding tax rates vary based on the payment type, such as interest, royalties, technical fees, and dividends.

Exemptions exist for specific payments like interest to non-resident financial institutions, royalties for intellectual property, and technical services. Businesses can also benefit from reduced rates through Double Taxation Agreements (DTAs) or industry-specific incentives.