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

Q: How to pay Withholding tax?

To pay withholding tax online, follow these steps:Log in to https://mytax.hasil.gov.my and select "e-TT" in the ezHasil Services section.Proceed to "Electronic Telegraphic Transfer" and fill in the required details.Verify your email with OTP and select "withholding tax" and select the required formEnter payer and payee information, including income tax numbers and addresses.Receive an e-TT verification slip via email with payment instructions.Besides you can pay the withholding tax through bank transfer and then send the required documents and details via email to e-mail to whtoperasi@hasil.gov.my

Updated on: Sep 9th, 2024

14 min read

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

Payments	Description	Exclusion	Rate
Contract Payments	Payments made to non-resident contractors for services rendered in Malaysia	Services rendered outside Malaysia	10% (Service Portion) + 3% (Employee Portion)
Interest Payments	Interest paid to non-resident persons deemed derived in Malaysia	Interest on approved loans and from licensed banks or finance companies in Malaysia	15%
Royalty Payments	Royalty, covering various intellectual property rights or use of non tangible assets. Payments made to digital advertisers like Google and Meta also comes under Royalty.	-	10%
Special Classes of Income Payments	Payments for services, technical advice, assistance, or rents for movable property performed in Malaysia		10%
Non-Resident Public Entertainers	Remuneration paid to public entertainers (e.g., stage, radio, TV artists, musicians, athletes) Sponsor should pay withholding tax before obtaining entry permit for the entertainer from the Immigration Department		15%
Other Sources	All other payments made to non-resident individuals	Employment Dividend	10%

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

Identify Payment Amount: Total payment to non-resident entities, e.g., RM 100,000 for technical services.
Determine Tax Rate: Withholding tax rate, e.g., 10% for technical services.
Withholding Tax Amount: RM 100,000 * 10% = RM 10,000 which is to be deposited to
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
Remit Tax: Send RM 10,000 withheld tax to Malaysia LHDN.

Conclusion

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.

Also Read

e-Invoicing in Malaysia

e-Invoicing FAQs in Malaysia

Transaction Types of e-Invoicing in Malaysia

e-Invoice Model in Malaysia

Important Terms in Malaysia e-Invoicing

e-Invoice Exemptions in Malaysia

Reasons for Rejection and Cancellation of e-Invoice in Malaysia

e-Invoice Malaysia Penalties

Self-Billed e-Invoice in Malaysia

Frequently Asked Questions

What is withholding tax?

Withholding tax or retention tax, is a tax deducted at the source of payment, requiring the payer to withhold a portion of the payment to non-residents and remit it to the Inland Revenue Board of Malaysia (LHDN).

How to pay Withholding tax?

To pay withholding tax online, follow these steps:

Log in to https://mytax.hasil.gov.my and select "e-TT" in the ezHasil Services section.
Proceed to "Electronic Telegraphic Transfer" and fill in the required details.
Verify your email with OTP and select "withholding tax" and select the required form
Enter payer and payee information, including income tax numbers and addresses.
Receive an e-TT verification slip via email with payment instructions.

Besides you can pay the withholding tax through bank transfer and then send the required documents and details via email to e-mail to whtoperasi@hasil.gov.my

Are there any exemptions from withholding tax?

Certain payments may be exempt from withholding tax based on specific criteria. Therefore, it’s important to check with the LHDN or consult a tax expert to determine whether your payment qualifies for an exemption.

What happens if I fail to withhold tax?

Failure to withhold tax could lead to penalty up to 10% of the total tax obligation and even disallowance of the total paid amount as expense for tax purposes.

What is the difference between withholding tax and income tax?

While income tax is levied on an individual's or company's entire income, withholding tax is only applied to specific payments such as interest, technical fees, royalties, dividends, contract payments, etc.

Who is subject to withholding tax in Malaysia?

In Malaysia, non-residents whether individuals or entities (such as companies, partnership firms not incorporated in Malaysia) are subject to withholding tax.

Do I need to file a tax return if I am subject to withholding tax?

Withholding taxes are mostly levied on non-residents. Whether tax returns are compulsory to be filed or not depends upon factors such as type of income, double taxation agreements, etc.

How can I claim a refund if the withheld tax is more than my actual tax liability?

To claim a refund, it is essential to file income tax return with proper information and attached supporting documents. Once, the returns are processed, IRBM will assess the claim and determine the liability. If the person would be liable for refund, IRBM will process it. However, it takes approximately 3 to 6 months.