Withholding Tax in Malaysia: Payments to Non-Residents

Withholding tax is a payer obligation. The Malaysian company making the payment is responsible for deducting and remitting it — not the recipient — and the cost of getting it wrong falls on the payer, in the form of an increase in tax and a disallowed deduction.

The obligation attaches to the payer, and to the nature of the payment

HASiL describes the payer as the Government, a State Government or a local authority, a resident, or any person claiming the payment as an expense in business accounts carried on in Malaysia. Tax properly deducted must be remitted to HASiL within one month after paying or crediting the recipient.

Different provisions of the Income Tax Act 1967 apply to different payment types, each with its own rate and prescribed form. On HASiL's current withholding tax schedule:

• contract payments to a non-resident — section 107A, 10% and 3%, Form CP37A;
• interest paid to a non-resident — section 109, 15%, Form CP37;
• royalty paid to a non-resident — section 109, 10%, Form CP37;
• payments to a non-resident public entertainer — section 109A, 15%, with the tax computation issued by HASiL;
• special classes of income under section 4A paid to a non-resident — section 109B, 10%, Form CP37D;
• income under paragraph 4(f) — section 109F, 10%, Form CP37F.

Classification is therefore the first question, and it turns on what was actually supplied rather than on how the invoice was labelled. A payment described as a management fee or consultancy may fall within a particular provision, or outside it, depending on the substance of the service.

Where the service was performed changes the answer

For special classes of income, the place of performance matters as much as the classification. HASiL's Public Ruling 10/2019 works through this at length. With effect from 6 September 2017, income from services falling within paragraphs 4A(i) and 4A(ii) that are performed outside Malaysia is exempted from income tax under the Income Tax (Exemption) (No. 9) Order 2017.

Where a single engagement is performed partly in and partly outside Malaysia, the ruling requires the contract value to be apportioned on a reasonable basis, on the facts of each case. Its worked example apportions a RM20,000 project by the time spent in Malaysia — six days of a 42-day project — so that RM2,857.14 falls within the charge. The mechanism is unremarkable; what causes difficulty is the absence of contemporaneous records showing where the work was actually done. Time records, travel evidence and a contract that allocates scope by location are what make the apportionment defensible later.

Reimbursements and disbursements sit inside the charge

This is where payers are most often caught out, because the intuition runs the other way — a reimbursement feels like a recovery of cost rather than income.

Public Ruling 10/2019 treats both as part of the contract value:

• Reimbursements are out-of-pocket expenses incurred by the payee in rendering services, and subsequently reimbursed by the payer — the ruling names airfare, travelling, accommodation, telephone and photocopying charges. They are income of the payee under section 4A and subject to withholding tax at 10% on the gross amount under section 109B.
• Disbursements are out-of-pocket expenses incurred by the payer and paid to a third party on the payee's behalf. They are likewise part of the contract value, and subject to withholding tax at 10% on the gross amount.
• Advance payments and non-refundable deposits for services to be rendered form part of the gross income of the contract and fall within section 109B.

One exclusion is worth knowing, because it is the exception that proves the rule rather than a general escape: reimbursements and disbursements on hotel accommodation, in or outside Malaysia, are not included in the computation of gross income falling under section 4A for withholding tax purposes. The ruling states the purpose plainly — to reduce the cost of services provided by non-residents.

A contract that separates a professional fee from out-of-pocket expenses recharged at cost does not, by that separation alone, place the recharged element outside the charge. The gross amount needs to be assessed rather than assumed.

The one-month deadline, and what missing it actually costs

Where the payer fails to deduct and remit within the prescribed period, HASiL states that the unpaid amount is increased by 10%, and the total becomes a debt due to the Government payable immediately. HASiL's own illustration: royalty of RM200,000 paid on 15 November 2023, with withholding tax of RM20,000 received on 20 December 2023 — after the 15 December due date — attracts an increase of RM2,000.

The larger cost is usually elsewhere. Under paragraph 39(1)(j) of the ITA, where withholding tax on a section 4A payment has not been deducted and remitted, the payment is not allowed as a deduction in computing adjusted income from any source of the payer — regardless of it being an expense properly incurred under subsection 33(1). The proviso to paragraph 39(1)(j) allows the deduction once the tax and the increase are subsequently paid. HASiL may also take legal action under subsection 106(1) to recover the unpaid tax and increase.

Payment is made through the e-TT and e-WHT electronic services, or manually by bank draft, and a bill number must be generated for the payment to be receipted. The payment forms and supporting documents are not submitted to HASiL but must be retained and produced on request.

Treaty relief changes the rate, not the process

Where a relevant double taxation agreement applies, a reduced rate may be available — Public Ruling 10/2019 gives 8% under the Malaysia–United Kingdom agreement and 5% under the Malaysia–Singapore agreement as examples for section 4A income.

The entitlement has to be established and evidenced before the reduced rate is applied, not asserted afterwards. The ruling requires confirmation in the form of a letter or certificate from the revenue authority of the relevant country confirming the recipient's resident status, submitted together with Form CP37D. It also warns that not every agreement contains a technical fees article; where it does not, the royalty article or the other income article may apply instead, with a different result. Reading the specific agreement is therefore part of the work, not a formality.

Withholding tax audit sits inside the consolidated framework

HASiL previously maintained a separate Rangka Kerja Audit Cukai Pegangan, issued in 2015. Its framework index now records that framework as superseded by the Rangka Kerja Audit Cukai Pendapatan dan Majikan, effective 15 March 2025.

Under that framework a withholding tax audit may cover up to three years of assessment, and up to five under subsection 91(1) of the ITA, with no limit where fraud, wilful default or negligence is involved. Case settlement periods run to 90 calendar days for the payer and 180 calendar days for the payee. Failure to remit, under-remittance or late remittance is dealt with as an increase in tax of 10%, while a penalty under subsection 113(2) for a wrongly claimed deduction follows the graduated scale used for income tax audit findings.

Separately, since 1 January 2013 a payer liable to withholding tax under section 109, 109B or 109F may appeal to the Special Commissioners of Income Tax where the basis of the appeal is that the payment is not subject to tax under the ITA. That appeal is made using Form CP15D within 30 days from the date the amount became payable.

What the payer should establish before paying

1. Determine the recipient's residence status, with supporting evidence from the relevant revenue authority where a treaty rate is intended.
2. Classify the payment by its substance, not its contractual label, and identify the applicable section and form.
3. Assess the gross amount, including reimbursed, recharged, advance and deposit elements, and identify any hotel accommodation component separately.
4. Where services are performed partly outside Malaysia, record the basis of apportionment contemporaneously.
5. Diarise the remittance deadline — one month after the payment is paid or credited — and generate the bill number.
6. Retain the contract, invoices, residence evidence, apportionment working and computation together, in a form that supports the deduction claimed.

General-information limitation

This article is general information, not tax advice for a particular organisation, and it does not determine whether withholding tax applies to any payment, at what rate, or whether any treaty relief is available. Rates, provisions, forms and rulings are periodically revised. Confirm the current position against HASiL's own published material, including the applicable public rulings and double taxation agreements, and obtain fact-specific advice where the amounts are material.

To discuss your circumstances, contact Saifudin & Co.