✅ Top 3 Key Takeaways
- What is Withholding tax in Malaysia? It is a tax deducted at source from payments made to non-residents, including fees for services, royalties, interest, and rent, in accordance with LHDN regulations.
- Companies and individuals who make payments to non-resident entities—such as SMEs, corporations, and startups—are required to deduct and remit withholding tax to LHDN within one month of payment.
- Understanding Malaysia’s 15 key withholding tax facts helps businesses stay compliant, avoid penalties, and leverage expert support from Procheck Faculty Sdn Bhd for efficient tax planning and regulatory adherence.
Withholding tax Malaysia is one of the most misunderstood yet critically important obligations for businesses making payments to non-residents.
Whether you’re a startup paying a foreign consultant or a multinational remitting royalties overseas, failing to understand how this tax works can lead to hefty penalties and compliance risks.
In simple terms, withholding tax is a portion of payment withheld by the payer and remitted directly to the Inland Revenue Board of Malaysia (LHDN).
It primarily applies to cross-border payments such as interest, royalties, technical services, and contract payments.
This ensures that non-residents contribute their fair share of tax to the Malaysian government—even if they do not operate directly within the country.
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Why does this matter to you? Because any Malaysian business engaging with international service providers or foreign entities could be liable to deduct and pay withholding tax.
This includes SMEs, corporations, entrepreneurs, and even growing startups—the very clients that Procheck Faculty Sdn Bhd supports through its expert tax compliance and advisory services.
With over 25 years of experience in taxation and business consulting, Procheck helps clients understand the withholding tax Malaysia system, apply the correct rates, and stay on the right side of the law.
This article breaks down 15 key facts about withholding tax in Malaysia so you can gain clarity, avoid costly errors, and make smarter decisions when working with foreign parties.
Read on to uncover what withholding tax really is, who needs to pay it, how it works under LHDN rules, and the best practices to stay compliant in today’s regulatory.
What Is Withholding Tax Malaysia? (WHT)
Definition and Overview
Withholding tax in Malaysia is a tax deducted at source on payments made to non-resident individuals or companies for services rendered, interest earned, royalties, rent, and other types of income. The payer (Malaysian resident) is responsible for withholding the tax and remitting it to LHDN.
Historical Context and Legal Basis
The legal foundation of WHT is established under the Income Tax Act 1967, which outlines the types of payments subject to WHT and the applicable tax rates. The tax applies whether the services are rendered in Malaysia or if the income is deemed derived from Malaysia.
Withholding tax serves as a mechanism to ensure tax is collected from foreign entities who derive income from Malaysia without being locally taxed.
“Provide service account, tax, audit, company secretary.”
Why Is Withholding Tax Imposed?
“Perkhidmatan Setiausaha Syarikat dari Procheck sangat profesional dan cekap. Mereka membantu saya menguruskan dokumentasi syarikat dengan teliti dan memastikan pematuhan undang-undang.”
Purpose of WHT in Malaysia’s Tax System
The primary reason for imposing withholding tax is to prevent tax leakage from cross-border transactions. It ensures that non-residents contribute tax on Malaysian-sourced income, even if they don’t have a physical presence in Malaysia.
The Role of LHDN in WHT Collection
The Inland Revenue Board (LHDN) oversees withholding tax compliance and has the authority to penalize late payments or underreporting. LHDN provides guidelines to determine what constitutes taxable payments.
The withholding tax Malaysia system enhances national revenue integrity while giving LHDN better control over international tax obligations.
Who Is Subject to Withholding Tax Malaysia?
Residents vs Non-Residents
Withholding tax Malaysia primarily affects non-residents, but the obligation to deduct and pay the tax falls on Malaysian residents or companies who make payments to non-resident service providers. Residents include locally incorporated companies, permanent establishments, and individuals operating businesses in Malaysia.
Businesses and Sectors Commonly Affected
The following entities frequently encounter WHT obligations:
- SMEs hiring overseas consultants or vendors
- Startups paying for foreign digital tools or services
- Corporations involved in licensing or royalty agreements
- Businesses in M&A processes with international advisors
Any Malaysian entity making payments to non-residents must assess whether those payments are subject to WHT—regardless of industry or business size.
Types of Payments Subject to Withholding Tax
Common Payment Categories
According to LHDN, the following payments to non-residents are subject to WHT:
- Interest and Royalties
- Contract Payments (Public Works, Design, Consulting)
- Rental of Moveable Properties
- Technical and Management Services
- Special Classes of Income (e.g., training, installation, etc.)
Payments to Non-Residents
Even if the service is rendered outside of Malaysia, WHT may still apply if the income is deemed to be Malaysian-sourced.
Understanding payment categories helps businesses apply the correct tax treatment and avoid underpayment or penalties.
Applicable Withholding Tax Malaysia Rates
Breakdown by Payment Type
The withholding tax Malaysia (WHT) rates vary depending on the nature of the payment:
- Royalty – 10%
- Interest – 15%
- Technical/Management Fees – 10%
- Contract Payments – 10% on services + 3% on equipment
DTA Rates and Reductions
If a Double Taxation Agreement (DTA) exists between Malaysia and the recipient’s country, reduced rates may apply. Businesses must furnish a Tax Residency Certificate to benefit from DTA provisions.
Always verify if a DTA exists and obtain proper documentation before applying reduced rates to avoid LHDN rejection.
When and How to Pay Withholding Tax to LHDN
Payment Timelines and Deadlines
- Withholding tax must be remitted to LHDN within one month from the date of payment or crediting to the non-resident.
- Failure to comply with this timeline will result in penalties and disallowed deductions for tax computation purposes.
Filing Requirements and Forms (CP37, CP38, etc.)
- The standard form used is CP37 (for payment to non-residents).
- Supporting documents must include:
- Invoice/contract from non-resident
- Proof of payment
- Tax Residency Certificate (if applicable)
- Invoice/contract from non-resident
Timely submission with accurate documents is essential to ensure tax deductibility and prevent compliance issues.
Key Responsibilities of Payer and Payee
Obligations of Malaysian Payers
- Must withhold the correct amount of tax from payments to non-residents.
- Must remit the withheld amount to LHDN promptly.
- Must keep proper records and documentation for audit purposes.
Obligations of Non-Resident Payees
- Non-residents must ensure their income complies with Malaysia’s source rules.
- They should provide relevant documents, such as invoices, service agreements, and tax certificates, to avoid excessive withholding.
Withholding tax Malaysia compliance is a shared responsibility, but the Malaysian payer bears the legal and financial risk for mistakes.
What is Withholding Tax on Payments to Non-Residents
Services Rendered Outside vs Inside Malaysia
- If a service is performed entirely outside Malaysia, WHT may still apply if the income is deemed derived from Malaysia.
- Key determinant: “source of income” test under Malaysian tax law.
Tax Residency Certificate and Its Role
- The Tax Residency Certificate (TRC) is issued by the foreign tax authority to confirm that the non-resident is tax resident in their country.
- It is mandatory to enjoy DTA benefits and reduced WHT rates.
Even cross-border services may fall under WHT. Proper documentation such as TRC can result in significant tax savings.
Common Payments That Trigger Withholding Tax Malaysia
Real Examples from SMEs and Corporates
- A Malaysian SME hires a US-based consultant for a short-term project – 10% WHT on service fee applies.
- A startup licenses software from a European provider – WHT on royalty payments may apply.
- A company rents machinery from a Thai vendor – rental WHT applies based on LHDN’s guidelines.
The scope of WHT extends far beyond large contracts—even small SaaS subscriptions and consulting fees can be subject to tax.
What Happens If You Fail to Comply with Withholding Tax Malaysia (WHT) Requirements?
Penalties and Legal Consequences
- Late payment penalty: 10% of unpaid WHT.
- Disallowance of expense deduction in income tax computation.
- Risk of audit, interest charges, and legal proceedings for non-compliance.
Case Examples of Non-Compliance
- A startup paid a non-resident agency without deducting WHT—result: LHDN disallowed RM100,000 as deductible expense and imposed a fine.
- A company failed to submit CP37 forms—result: audit and delay in obtaining tax clearance.
Compliance failures are costly and can severely impact a company’s bottom line. Prevention is far better than cure.
How to Claim a Refund or Tax Credit for Overpaid WHT
Steps to Apply for Refund or Setoff
- File a formal application to LHDN with a cover letter and refund form.
- Include supporting documents such as:
- Proof of overpayment
- CP37 or CP37A form copies
- Tax Residency Certificate (if relevant)
- Remittance slips and payment evidence
- Proof of overpayment
Supporting Documents Required
- Full documentation is necessary to prove:
- Over-deduction
- Payment was not due
- Eligibility for DTA benefits not applied initially
- Over-deduction
Withholding tax refunds are possible but require detailed records, tax knowledge, and professional assistance—something Procheck handles with precision.
What is Withholding Tax Malaysia for Agents, Dealers, and Distributors?
Special Guidelines from LHDN
- As of 2022, LHDN requires that payments of incentives, commissions, or bonuses to agents, dealers, and distributors may fall under Section 109F WHT rules.
- Applies if the recipient is a non-resident individual or company.
FAQs Clarified by EY Malaysia
- Resident agents are not subject to WHT.
- However, foreign dealers, even without permanent establishments, may still be liable under Section 109B or 109F depending on the nature of the payment.
Businesses with cross-border sales channels must assess whether commission payments to foreign agents trigger WHT obligations—non-compliance risks are real.
Double Taxation Agreements (DTA) and Their Impact on Withholding Tax Malaysia (WHT)
How DTA Protects Against Double Tax
- DTAs prevent the same income from being taxed in both Malaysia and the recipient’s home country.
- They also reduce WHT rates depending on treaty terms—e.g., from 15% to 5% in some cases.
Procedures to Enjoy Reduced Rates
- Obtain a Tax Residency Certificate (TRC) from the non-resident’s home country.
- Submit TRC along with the CP37 form to claim reduced rate.
- Ensure all DTA conditions are fulfilled.
Utilizing DTAs can significantly reduce WHT liabilities—but the process must be done before remittance, not after.
Penalties and Interest for Late Withholding Tax Payments
Breakdown of Penalty Structure
- 10% penalty on unpaid withholding tax.
- Interest may accrue if delays are prolonged.
- Non-compliance may lead to tax deduction disallowance in the company’s income tax return.
How to Avoid or Appeal Penalties
- Set up automated tracking or alerts for cross-border payments.
- Engage a licensed tax agent to handle submissions.
- File an appeal with proper documentation if there is a reasonable cause for the delay.
Prevention is the best defense—Procheck’s structured compliance approach helps clients steer clear of costly oversights.
Tips to Ensure Withholding Tax Compliance for Your Business
Actionable Steps for SMEs and Startups
- Conduct regular payment reviews to non-residents.
- Maintain a checklist of WHT conditions.
- Confirm recipient residency status upfront.
- File all necessary forms before payment deadlines.
Why Procheck’s Tax Services Help Ensure Compliance
Procheck Faculty Sdn Bhd helps clients:
- Classify payments correctly under WHT rules
- Liaise with LHDN on disputes or queries
- Structure contracts and payments to optimize WHT exposure
- Apply relevant DTA provisions to reduce liability
WHT compliance requires expertise—especially when your business deals internationally. Procheck ensures you’re protected, informed, and compliant.
Withholding tax Malaysia is more than just a regulatory requirement—it’s a crucial component of cross-border financial compliance.
From understanding who needs to pay it, to applying correct rates and deadlines, every step matters.
Whether you’re a startup paying for overseas software or a large corporation engaging foreign consultants, ensuring proper withholding tax practices protects your business from penalties, disallowed deductions, and reputational risks.
Need help navigating the complexities of withholding tax Malaysia?
At Procheck Faculty Sdn Bhd, we simplify tax compliance so you can focus on growing your business. With over 25 years of experience in tax, accounting, and advisory, our expert team ensures you’re always compliant and protected.
Get a free consultation to review your withholding tax obligations or corporate tax strategy.
Explore our expert tax services to get started today.
Frequently Asked Questions (FAQ)
What is withholding tax Malaysia?
Withholding tax in Malaysia is a tax deducted at source from payments made to non-residents for services such as royalties, interest, rent, and technical fees. The payer must remit the tax to LHDN.
Who is required to pay withholding tax Malaysia?
Any Malaysian resident or company that makes payments to a non-resident for specified services is responsible for deducting and paying withholding tax to LHDN.
What are the current withholding tax rates in Malaysia?
Rates vary depending on the type of payment:
- Royalties: 10%
- Interest: 15%
- Technical/management services: 10%
- Contract payments: 13% (10% services + 3% equipment)
How does a business avoid withholding tax penalties?
Ensure timely filing (within 1 month), apply correct rates, maintain documentation, and consult tax professionals like Procheck to handle submission and compliance.
Can withholding tax be refunded in Malaysia?
Yes, businesses can claim a refund or tax credit if they overpay or incorrectly apply WHT, provided they submit the proper documents and justification to LHDN.
