Malaysian companies that pay certain categories of income to non-residents are generally required to withhold tax at source before the payment is remitted abroad. This obligation sits with the Malaysian payer, not the non-resident recipient, and applies regardless of whether the payer ultimately bears the cost of the tax or passes it on. Getting withholding tax (WHT) wrong — through a missed deduction, a late remittance, or an incorrectly applied rate — can result in the tax authority disallowing the related expense for income tax purposes, in addition to the withholding tax liability itself.
This article sets out the main categories of payment affected, the rates commonly cited for each under the Income Tax Act 1967 (ITA 1967), the remittance deadline, and practical steps for reviewing existing arrangements. It does not cover every category of withholding tax in the Act, and it is not a substitute for a review of a specific payment against current legislation, gazette orders, and any applicable double taxation agreement (DTA).
What withholding tax is and who is responsible for it
Withholding tax is a mechanism for collecting Malaysian tax on certain types of income paid to non-residents at the point of payment, rather than through a tax return filed by the non-resident afterwards. Several provisions of the ITA 1967 impose this obligation on the Malaysian payer, including:
- Section 107A — contract payments to a non-resident contractor for services performed under a contract carried out in Malaysia.
- Section 109 — interest and royalty payments to non-residents.
- Section 109B — special classes of income, including technical fees, payments for advice, assistance or services connected with management or the operation of plant and machinery, and rental of movable property.
Where any of these provisions apply, the payer must deduct tax from the payment at the prescribed rate before crediting or remitting the balance to the non-resident, and then remit the amount deducted to the Inland Revenue Board of Malaysia (LHDN, or Lembaga Hasil Dalam Negeri Malaysia) within the statutory deadline. The obligation arises on payment or crediting the amount to the non-resident's account, whichever happens first — it is not tied to when the non-resident's invoice was issued.
Whether a recipient is "non-resident" for this purpose is a question of Malaysian tax residence rules, not nationality or country of incorporation alone, and should be confirmed before assuming withholding tax applies at all.
Withholding tax rates by category of income
The table below summarises rates that are commonly cited for these categories of payment as at the time of writing. Rates, exemptions and the scope of each category can change through Budget announcements, gazette orders, and public rulings, and a specific payment may also qualify for a reduced rate under an applicable DTA. Readers should verify the current position for their transaction directly with LHDN (hasil.gov.my) or with a qualified tax adviser before relying on any rate below.
| Type of payment | ITA 1967 section | Rate commonly cited (no DTA) | Notes |
|---|---|---|---|
| Interest paid to a non-resident | Section 109 | 15% | Certain interest paid by licensed banks and other specified categories may be exempt; treaty rates are often lower. |
| Royalty paid to a non-resident | Section 109 | 10% | The statutory definition of royalty is broad and has been applied by LHDN to certain software and digital-service payments; scope should be checked against the current definition and any relevant public ruling. |
| Contract payments to a non-resident contractor (services under a contract performed in Malaysia) | Section 107A | 10% + 3% (commonly described as 13% in total) | The 10% portion relates to the contractor's own tax liability; the 3% portion relates to the tax liability of the contractor's employees. This is a payment on account, not necessarily a final tax. |
| Special classes of income — technical fees, management/administration advice or assistance, rental of movable property | Section 109B | 10% | An exemption order has applied to certain technical and other services performed wholly outside Malaysia; services performed in Malaysia generally remain within scope. |
Other categories exist outside this table — for example, payments to non-resident public entertainers, distributions from real estate investment trusts, and payments to resident agents, dealers or distributors under separate provisions — and are outside the scope of this article. A payment can also fall into more than one possible category depending on its substance, so the correct classification should be confirmed before a rate is applied.
Double taxation agreement relief
Malaysia has DTAs with a number of jurisdictions, and many of these agreements provide for a reduced withholding tax rate, or in some cases an exemption, on interest, royalties, and certain service fees paid to a resident of the treaty partner country. Treaty relief is not automatic: the payer generally needs to hold evidence that the non-resident recipient is a tax resident of the treaty country (typically a certificate of residence) and needs to apply the correct treaty article to the specific type of income. Where a DTA is being relied upon, the applicable article and rate should be confirmed against the treaty text and current LHDN guidance, and not assumed from a general rate table.
Remittance deadline and penalties for non-compliance
Withholding tax deducted under sections 107A, 109 and 109B is generally required to be remitted to LHDN within one month of the date the payment is made or credited to the non-resident, using the relevant prescribed form. A limited deferment concession has applied to small-value withholding tax payments on royalty, interest and special classes of income not exceeding a specified threshold per transaction, allowing batched remittance within a permitted period rather than the standard one-month deadline — this is a timing concession, not an exemption from the obligation to deduct and remit.
Where withholding tax that should have been deducted is not deducted, or is deducted but not remitted within the deadline, the amount is generally treated as a debt due to the Government and has commonly been subject to an increase of 10% on the outstanding amount. Separately, under section 39(1)(j) of the ITA 1967, the underlying payment (for example, the interest, royalty, technical fee or contract payment) can be disallowed as a deductible expense for income tax purposes where the related withholding tax has not been paid, which can significantly increase the payer's own tax liability regardless of the withholding tax penalty itself. Persistent or significant non-compliance can also lead to wider enforcement action. Exact penalty rates, thresholds and enforcement practice should be confirmed with LHDN or a qualified tax adviser, as they can change and may depend on the facts of the case.
Common pitfalls
Businesses making payments to non-residents commonly encounter the following issues:
- Treating foreign digital and software payments as outside scope. The broad statutory definition of royalty has been applied to certain cross-border software and digital-service arrangements, which is not always intuitive from the vendor's invoice description.
- Assuming a DTA rate applies without supporting documentation. Claiming a reduced treaty rate without holding a valid certificate of residence, or without checking that the specific income type is covered by the relevant treaty article, is a common exposure.
- Missing the one-month remittance deadline because withholding tax is calculated only when the annual tax return is prepared, rather than at the point each payment is made.
- Confusing "contract payments" under section 107A with general service fees under section 109B — the correct category depends on the nature of the arrangement and where the services are performed.
- Not grossing up correctly where a contract requires the Malaysian payer to bear the withholding tax cost, which changes the amount that is actually remitted to LHDN.
Practical steps for reviewing your withholding tax position
- Identify every category of payment made to non-residents in the current financial year, including interest, royalties, licence fees, software and digital-service payments, technical and consultancy fees, and contract payments for services performed in Malaysia.
- Confirm the tax residence status of each non-resident recipient, and whether a DTA between Malaysia and that recipient's country of residence may apply.
- Classify each payment against the relevant ITA 1967 section and confirm the applicable rate directly with LHDN or current legislation, rather than relying on a rate used in a prior year.
- Check remittance timing against the one-month deadline for each payment already made, and identify any payments where withholding tax may not have been deducted.
- Retain supporting documentation, including contracts, invoices, and any certificate of residence relied upon for treaty relief.
- Where a gap or historical exposure is identified, take advice on regularising the position before it is raised in a tax audit.
How SNCO can help
We support Malaysian businesses with reviewing cross-border payment arrangements against current withholding tax obligations under the ITA 1967, including classification of payments, remittance compliance, and consideration of DTA relief where applicable. Any withholding tax position we recommend must have a credible basis in Malaysian tax law, and we discuss the compliance and cost implications of a proposed approach before it is implemented.
If your business is making or planning payments to non-resident suppliers, contractors, or lenders, and you would like your current withholding tax position reviewed, please request a consultation with our tax team.
The rates, sections, and thresholds referenced in this article reflect information available at the time of writing and are provided for general guidance only. Withholding tax rates, exemptions, and administrative practice can change, and the correct treatment depends on the specific facts of each payment. Readers should confirm the current position for their own transactions with Lembaga Hasil Dalam Negeri Malaysia (LHDN) or a qualified tax adviser before acting.
Last updated: July 2026