Withholding Tax Malaysia: What Business Owners Need to Know

Disemak oleh Pengamal Bertauliah

Ahmad Rizal Abd Razak

Pengarah Urusan SASCO · Akauntan Bertauliah & ASEAN CPA

MIA No: 25855 · No. Sijil Amalan SSM: 201908000244

Do you pay a foreign contractor, consultant, or supplier? Then withholding tax Malaysia rules likely apply to you. Under the Income Tax Act 1967, certain payments to non-residents trigger a duty to withhold tax before you send the money. Many business owners only discover this after LHDN flags a shortfall.

Withholding tax is not an extra tax on your business. Instead, it is tax you deduct on behalf of the non-resident and pay to LHDN. However, if you get it wrong, the consequences fall on you, not the foreign recipient.

This guide covers the main categories, current rates, deadlines, and penalties. It also explains what happens if you forget to withhold, and how double tax agreements can lower the rate you pay.

What Is Withholding Tax in Malaysia and Who Must Pay It?

Withholding tax applies when a Malaysian payer makes certain payments to a non-resident. The payer deducts a percentage of the payment and remits it to LHDN. The non-resident then receives the balance.

The rule covers several payment types. These include contract payments, interest, royalties, technical fees, and rental of moveable property. In addition, it can apply to non-resident public entertainers who perform in Malaysia.

Your business must comply even if the non-resident is a solo freelancer, an agency, or a large supplier. For example, if you hire an overseas developer to build software remotely, the payment may still count as a contract payment under the law. Therefore, always check the nature of the payment before you assume no withholding is due.

Main Categories and Current Withholding Tax Malaysia Rates

Malaysia taxes several categories of payments to non-residents differently. Here are the main ones business owners encounter most often.

• Contract payments to non-resident contractors (Section 107A): 10% on the contract value, plus 3% attributable to the contractor’s employees. Together, this is often called the “10% + 3%” rule.
• Interest paid to non-residents (Section 109): 15%, unless a double tax agreement (DTA) reduces it.
• Royalties paid to non-residents (Section 109): 10%, subject to any applicable DTA rate.
• Special classes of income (Section 109B): 10% on technical fees, management or administration fees, and rental of moveable property.
• Non-resident public entertainers (Section 109A): 15% on their income from Malaysian performances.
• Other income under paragraph 4(f) (Section 109F): 10% on miscellaneous non-resident income that does not fall under the categories above.

Note: a separate 2% withholding applies under Section 107D to payments made to resident individual agents, dealers, and distributors. This is a different mechanism from non-resident withholding tax, so do not confuse the two.

Withholding tax is calculated on the gross payment, not the net amount. As a result, businesses that “gross up” a contract price often underestimate their real cost.

How and When to Remit Withholding Tax to LHDN

You must remit withholding tax to LHDN within one month of paying or crediting the non-resident. This deadline applies regardless of when the underlying invoice was issued.

Each category uses its own remittance form, for example CP37 for interest and royalties, CP37A for contract payments, and CP37D or CP37F for other categories. You can submit payment online through LHDN’s e-Withholding Tax system or at an LHDN payment centre.

Meanwhile, keep clear records of the payment date, the amount, and the recipient’s tax residency status. This documentation matters if LHDN later reviews the transaction.

Penalties for Getting Withholding Tax Malaysia Wrong

Missing the one-month deadline triggers an automatic increase of 10% on the unpaid withholding tax. LHDN can recover this amount, plus the increase, as a debt owed to the government.

In addition, the law disallows the underlying payment as a tax-deductible expense for your business until you settle the outstanding withholding tax and the increase. This means the full payment amount, not just the withholding tax, can end up added back to your taxable income. Consequently, the real cost of forgetting to withhold is often far higher than the withholding tax itself.

Once you pay the outstanding tax and the increase, the deduction is generally reinstated. However, deliberate or repeated non-compliance can attract further, heavier penalties under the Income Tax Act 1967.

Practical Tips to Stay Withholding Tax Malaysia Compliant

• Check whether the payment falls under contract payments, interest, royalties, technical fees, or another category before you pay.
• Ask for a valid Certificate of Residence from the non-resident before you pay, since this is required to apply a reduced DTA rate.
• Keep contracts and invoices that clearly describe the nature of each payment.
• Calendar the one-month remittance deadline for every foreign payment.
• Get professional advice before signing large cross-border contracts, since the correct category is not always obvious.

Withholding Tax Malaysia Rates at a Glance

Rates shown are domestic statutory rates. A valid DTA may reduce them, so always check the treaty with the recipient’s country before you finalise a contract.

Further Reading

• Corporate Tax Rate in Malaysia: What Business Owners Need to Know
• CP58 Form Explained: What Business Owners Need to Know
• What Is SST Malaysia?
• LHDN: Withholding Tax (Official Guidance)

How SASCO Can Help

SASCO helps Malaysian businesses handle their tax compliance obligations, including withholding tax on payments to non-residents. Our team can help you identify which category applies, calculate the correct rate, and remit on time, so you can focus on running your business.

If you are unsure whether a payment to a non-resident needs withholding tax, talk to SASCO before you pay.

Frequently Asked Questions About Withholding Tax Malaysia

Do I need to withhold tax on payments to a foreign freelancer?

Yes, in most cases. If the freelancer is a non-resident and the payment is for services performed under a contract, it likely falls under Section 107A or Section 109B. Check the nature of the work before you pay.

What if the non-resident is in a country with a tax treaty with Malaysia?

A double tax agreement (DTA) may reduce the withholding rate below the standard domestic rate. However, you must obtain a valid Certificate of Residence from the recipient before payment to apply the treaty rate.

What happens if I forget to withhold tax?

LHDN can impose an automatic 10% increase on the unpaid withholding tax. In addition, your business loses the tax deduction for the full payment until you settle the outstanding tax and increase.

Is withholding tax the same as SST?

No. SST is a consumption tax on goods and services. Withholding tax, by contrast, is an income tax mechanism that applies specifically to certain payments made to non-residents.

Do I still need to withhold tax if the non-resident invoices through a Malaysian bank account?

Yes. Withholding tax depends on the recipient tax residency status and the nature of the payment, not on which bank account receives the funds.

How do I actually pay withholding tax to LHDN?

You remit the tax using the relevant CP form for the payment category, either online through LHDN’s e-Withholding Tax system or at an LHDN payment centre, within one month of paying or crediting the non-resident.