Understanding Withholding Tax

Withholding tax in Malaysia is a mechanism where the payer deducts tax from the income payable to a non-resident recipient and remits it directly to the Inland Revenue Board of Malaysia (LHDN). This process ensures tax is collected at the source, primarily from income outside Malaysia.

 

Types of Income Subject to Withholding Tax

Several types of payments to non-residents attract withholding tax in Malaysia, including technical fees, service payments, rent for movable property, contract payments, royalties, and interest, each subject to specific rates. For instance, technical fees and service payments are generally taxed at 10%, while interest payments are at 15%. Real estate investment trusts, family funds, and the income of non-resident public entertainers also fall under this taxation.

 

Compliance and Penalties

Payers must deduct and remit withholding tax to the LHDN by the end of the month following the payment or crediting to the non-resident. Failure to comply results in penalties, including a 10% late payment charge, disallowance of the expense for tax deduction purposes, and the recovery of the tax and penalties as a debt to the government.

 

Recent Updates

From the Year of Assessment 2022, a 2% withholding tax applies to payments made to resident individual agents, dealers, or distributors (ADDs) by companies if the payment exceeds RM100,000 in the previous year. This includes commissions and incentives in monetary form. The tax deducted must be remitted to the LHDN by the end of the following month, and compliance is facilitated through specific forms and electronic submission requirements.

Understanding and adhering to Malaysia’s withholding tax obligations is crucial for both payers and recipients to avoid penalties and ensure proper tax treatment of cross-border and domestic transactions.