Everything About Withholding Tax in Malaysia

Published: 11 April 2025

Withholding tax (WHT) is an amount withheld by the payer on income received by the payee (resident or non-resident), which the income is derived from Malaysia, and this amount is paid and remitted to the Inland Revenue Board of Malaysia (IRBM). Withholding tax in Malaysia is vital to the country's tax system because it is used to collect taxes from a person who received payments from transactions that are subject to WHT. This tax is taken right from the source to ensure everyone pays their fair share.

Businesses need to have knowledge of the WHT when making payments that are subject to WHT in Malaysia. Not following these rules can lead to big problems which can affect both cash flows and tax compliance areas.

In this article, you'll learn why it's important to follow WHT rules and also the potential consequences if not to follow the said rules.

Key Takeaways

• Key transactions that can attract and are subject to withholding tax.
• WHT rates for each payment that is subject to WHT in Malaysia.
• Awareness of the deadline for WHT payment to the IRBM.
• Penalties imposed by the IRBM on the late payment of WHT and non-compliance of WHT provisions if found during a tax audit conducted by the IRBM.
• Administration and filing process of WHT forms and payment remitted to the IRBM.
• Advantage of the reduction or exemption of the WHT rate in accordance with tax treaties under different tax jurisdictions of different countries.

Understanding WHT in Malaysia

Generally, income accruing in or derived from Malaysia is subject to income tax. Hence, certain income received by payees is subject to WHT if this income is derived from Malaysia. The payers are obligated to withhold the aforesaid income at a prescribed rate and remit the withheld amount to the IRBM within a stipulated period after the payments have been paid/credited to the payees.

Applicable Rates for Different Types of Income

For example, the following income received by payees is subject to WHT:

Type of Income	WHT Rate	Due date of withheld amount to be remitted to the IRBM
Interest payments to non-resident	15%	Within 1 month after paying or crediting the payment to a non-resident
Royalty Payments to non-resident	10%
Payments of special classes of income to non-residents**	10%
Payments of other income (eg commission) derived from Malaysia to non-resident	10%
Contract payments to non-resident	10% + 3%
Payment to resident individual Agents, Dealers or Distributors (ADDs) who have received a total sum of payment of > RM100,000 in the immediately preceding year of assessment	2%	Not later than the end of the following calendar month after paying or crediting to the ADDs

** Special classes of income includes:

1. Services in connection with the use of property or right belonging to, or the installation or operation of any plant or machinery purchased from non-resident payee;
2. Advice, assistance or services rendered in connection with management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; or
3. for rent or other payments made under any agreement or arrangement for the use of any moveable property.

Non-compliance with the above WHT rules causes a 10% increment from the unpaid WHT to be payable to the IRBM.

Potential consequences on the non-compliance of withholding tax

Typically, payers may face the following non-compliance when it comes to WHT:

Type of non-compliance	Impact	Consequences
Payer fails to remit WHT on the expenses to IRBM	The relevant payment made to the payee is not deductible.	The payer will pay more taxes as the deductible underlying expense is not eligible for tax deduction.
Payer remits WHT on the expenses to the IRBM but exceeds the stipulated deadline	The payment made to payee is deductible provided that the relevant late payment penalty is also remitted to the IRBM	The payer needs to make an additional cash payment to IRBM to allow the deductible underlying expense to be claimed for tax deduction.
Payer claims deduction on the expense that is subject to WHT but did not remit the relevant WHT to the IRBM	Incorrect tax return	IRBM will impose a hefty penalty on incorrect tax return which heavily impacts the cash flow of the payer.

In summary, it is vital to understand the above non-compliance scenario and how to take appropriate measures to reduce, mitigate and eliminate the risk of being non-compliant. The payer needs to consider WHT rules when planning their finances to avoid unexpected costs and keep operations running smoothly.

Consequences of Non-Compliance with WHT Rules

The following scenarios illustrate the consequences of non-compliance with WHT rules:

• Scenario 1: Failure to Remit WHT to the IRBM
• Scenario 2: Late Payment of WHT to the IRBM
• Scenario 3: Claiming a Tax Deduction Before Remitting WHT

Background

ABC Sdn Bhd (ABC) advertises its products and services on social media platforms such as Facebook and Instagram. To use these platforms for advertising, ABC is required to pay royalty fees to the respective non-resident companies that own them. As a result, ABC is obligated to remit WHT to the Inland Revenue Board of Malaysia (IRBM) for the right to use these platforms.

Assumptions:

1. ABC’s financial year-end is December.
2. ABC’s net loss before tax (adjusted loss for illustration purposes) is (RM500,000).
3. Annual royalty fees paid to non-resident companies amount to RM1,000,000.
4. ABC’s applicable tax rate is 24%.

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Scenario 1: Failure to Remit WHT

If ABC does not remit the required WHT to the IRBM before submitting its tax return, the royalty fees will be disallowed as a tax deduction. Consequently, ABC’s tax position will shift from an adjusted loss of RM500,000 to an adjusted income of RM500,000, resulting in a tax liability of RM120,000 (RM500,000 × 24%).

Despite being in a loss-making position, ABC will still be required to pay RM120,000 in income tax due to the disallowance of the royalty fee deduction.

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Scenario 2: Late Payment of WHT

To claim the RM1,000,000 royalty fees as a tax deduction, ABC must remit the WHT payment along with a 10% late payment penalty before submitting its tax return. The total WHT-related payment required in this case will be RM110,000 (WHT of RM100,000 + late payment penalty of RM10,000).

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Scenario 3: Claiming a Tax Deduction Before Remitting WHT

If ABC, after considering the consequences of Scenarios 1 and 2, decides to claim the RM1,000,000 royalty fees as a tax deduction before remitting the WHT, with the promise of settling the WHT payment later, the following consequences arise:

• The royalty fee deduction is only allowed after WHT is remitted.
  
• Since ABC initially claimed the deduction before remitting WHT, its tax return was incorrect at the time of submission.
  
• This incorrect claim results in an undercharged tax liability, triggering a penalty under Section 113(2) of the Income Tax Act (ITA).
  
• The penalty imposed is calculated as RM240,000 (RM1,000,000 × 24%).
  

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Summary of Consequences

	Scenario 1 (No WHT Paid)	Scenario 2 (WHT Paid Before Tax Submission)	Scenario 3 (Deduction Claimed, WHT Paid Later)
Net Loss Before Tax	(500,000)	(500,000)	(500,000)
Non-Deductible Royalty Fee	1,000,000	-	-
Adjusted Income / (Loss)	500,000	(500,000)	(500,000)
Chargeable Income	500,000	-	-
Tax Payable @ 24%	120,000	-	-
Unabsorbed Business Loss Carry forward	-	(500,000)	(500,000)
WHT Paid (RM1,000,000 × 10%)	-	100,000	100,000
10% Late Payment Penalty	-	10,000	10,000
Total WHT and Penalty Paid	-	110,000	110,000
Penalty for Incorrect Tax Return (RM1,000,000 × 24%)	-	-	240,000
Total Cash Outflow	120,000	110,000	350,000

Non-compliance with WHT rules can significantly impact cash flow due to tax liabilities, penalties, and additional costs. Ensuring timely WHT payments helps avoid unnecessary tax burdens and penalties.

Filing Process of WHT Forms and Payment

As the WHT impacts business a lot, it is important to understand the type of forms to be completed for the respective expenses paid to a payee and the timely tax payments to IRBM. Knowing these rules and the administration process helps your business stay on the right track of the tax law.

The forms to be submitted for WHT to be paid to IRBM are as follows:

Type of Income	WHT forms to be filled
Interest payments to non-resident	CP 37
Royalty payments to non-resident	CP 37
Payment of special classes of income to non-resident	CP 37D
Payments of other income derived from Malaysia to non-resident	CP 37F
Contract payments to non-resident	CP 37A
Payment to resident individual ADDs	CP107D

To ease the administration's burden on the payer, a deferment of WHT payments for recurring small-value WHT transactions is applicable for the payment made to a non-resident in respect of interest, royalty, and special classes of income. The following forms are required to be completed for small-value WHT transactions:

1. Form CP37S – Interest and royalty
   
2. Form CP37DS – Special classes of income
   

The above forms can also be completed via e-filing through the IRBM’s MyTax portal and WHT payments to IRBM can be done online through FPX (ByrHasil) or Electronic Telegraphic Transfer (e-TT).

Reduction or Exemption of the WHT rate

In Malaysia, around 74 countries have effective tax treaties, also known as Double Taxation Agreements (DTA) with Malaysia where there will be preferential rates or exemptions of WHT under certain treaty provisions, depending on the location of the non-resident payees having residency in the respective countries. Hence, it is necessary to understand the conditions of qualifying the preferential rates or exemptions of WHT under the DTA so the payer can enjoy a competitive advantage when engaging with a non-resident with the application of preferential rates or exemptions of WHT.

Conclusion

A business can maximize its expense claim and reduce tax burden by understanding the WHT rules and compliance with the rules. Knowing and taking advantage of the preferential or exemption rates can also help the business gain a competitive advantage when engaging with non-residents.

Getting to grips with WHT helps you stay compliant and make better financial choices. However, if you find it time-consuming, our team of expertise here in YYC Advisors, the best advisory firm in Malaysia are equipped to provide tailored tax services specifically for your withholding tax. Use this knowledge to handle withholding tax in Malaysia effectively.