Withholding Tax in Malaysia Explained for Employers

Withholding tax is a key part of Malaysia’s tax system for payments to non-residents. It applies to certain transactions such as services, interest, royalties, and contract payments.

Check this article below to know when withholding tax applies, the correct rates, and how to pay.

What Is Withholding Tax in Malaysia?

Withholding tax is a tax that a Malaysian payer deducts from certain payments made to a non‑resident (individual or company) and remits to the Inland Revenue Board of Malaysia (LHDN/HASiL). The rule sits under the Income Tax Act 1967.

It covers payments such as interest, royalties, service fees, rental of movable property, and contract payments. The payer must send the tax to LHDN within one month from the date the payment is paid or credited to the non‑resident, whether the deduction has physically been made or not.

Why Should Employers Understand Withholding Tax?

For cross‑border payments, the duty sits with the Malaysian payer. If you do not deduct and remit the right amount on time, LHDN can add 10% to the unpaid tax, and the expense you paid to the non‑resident can be disallowed in your tax computation. Late or missing payments can also trigger reviews or legal recovery.

Since many employers pay foreign vendors, freelancers, software providers, entertainers, and technical specialists, this topic sits squarely in HR, procurement, and finance workflows.

When Is Withholding Tax Applicable?

Withholding tax generally applies when a Malaysian entity pays a non‑resident for income derived from Malaysia. Common situations include:

Services performed in Malaysia, including technical advice and management services (special classes of income).
Interest and royalties that are deemed to arise from Malaysia.
Rental or payments for the use of movable property (e.g., equipment leased from a foreign party).
Contract payments to non‑resident contractors for services under a contract in Malaysia.
Public entertainers performing in Malaysia (handled with a fixed rate).

Payment can be “derived from Malaysia” based on who is responsible for paying it, where the services are performed, or how the expense is charged in your Malaysian accounts.

Withholding Tax Rates (General Guide)

Actual rates come from the Act and, in many cases, Double Taxation Agreements (DTAs). Broad guidance you’ll see in practice:

Interest: 15% (final tax).
Royalties: 10% (final tax).
Service fees / special classes of income (performed in Malaysia): 10% (final tax).
Contract payments: 10% on the contractor’s service portion plus 3% on the employees’ portion.
Public entertainers: 15%.

Some payments have different rules (e.g., certain interest paid by approved financial institutions) and DTAs may reduce the rate if the payee provides a tax residency certificate from their country. Always match the payment type to the correct section and form.

How to Pay Withholding Tax

Start by confirming that the payee is non‑resident and that the payment is a type that attracts withholding tax. Calculate the tax on the gross amount, deduct it from the payment (or fund it separately if the contract is “gross‑up”), and remit it within one month of payment/crediting.

Payment can be made:

Online via LHDN e‑services (e‑TT or e‑WHT) using a generated bill number; or
Manually (bank draft) at the Revenue Management Centre counter.

Use the correct form with each payment type (examples: CP37 for interest/royalties, CP37D for special classes of income, CP37A for contract payments). Keep all forms and supporting documents on file; submit them to LHDN if requested.

Documents Needed

Before making a withholding tax payment, prepare documents and keep certain records below.

Invoice from the non-resident showing the payment amount and purpose.
Signed contract or agreement outlining the scope of work, services, or rights provided by the non-resident.
Proof of remittance to LHDN
Relevant CP37-series form
Payment receipts

Common Mistakes to Avoid

Even experienced employers can make errors when handling withholding tax. Below are the most common mistakes that you can avoid.

Not Checking the Residency Status of the Payee

Withholding tax only applies to non-residents, but “non-resident” is defined by tax residency, not nationality. If you skip this check, you might wrongly apply or omit withholding tax. Always confirm the payee’s status using a tax residency certificate or official declaration.

Paying the Full Invoice without Deducting Withholding Tax

Once payment is made in full to the non-resident, it can be difficult to recover the tax portion from them. This means your company will have to bear the withholding tax out of pocket, unnecessarily increasing costs.

Ignoring the Double Taxation Agreement (DTA) Rates or Not Applying for Relief

DTAs can reduce the withholding tax rate, but you must have the payee’s tax residency certificate and meet all treaty conditions. If you ignore this, you might overpay or underpay tax. Either way, it could trigger disputes or audits.

Late or Missing Submission of the CP37 Form

The CP37 series form must be submitted with the payment to LHDN within one month of paying or crediting the non-resident. Missing the deadline can lead to a 10% penalty and disallowance of the expense in your tax computation until the tax is paid.

What It Means for Malaysian Businesses

Treat withholding tax as part of your vendor onboarding and contract review. Identify payment types that may attract WHT, budget for it, and build the workflow: check residency, pick the correct section and form, calculate and remit within the one‑month window, and file everything neatly. For treaty situations or complex structures, seek professional review before payment. Clean processes reduce cost, avoid penalties, and keep your standing with LHDN strong.

FAQs

Do I need to pay withholding tax for services provided online by foreign companies?

If the payment falls under special classes of income or royalties and is derived from Malaysia, WHT can apply even when services are arranged online. Classify the payment correctly, then apply the matching rate or any DTA rate supported by documents.

Can I get a reduced withholding tax rate due to tax treaties (DTA)?

Yes, if a DTA applies and the payee provides a tax residency certificate and meets the treaty conditions. Keep the certificate and evidence on file.

What happens if I forget to deduct withholding tax?

LHDN can add 10% to the unpaid amount, and the original expense may be disallowed in your tax computation until the tax (and the increase) is paid. Legal recovery is also possible.

How do I know if a foreign company is considered non‑resident?

Non‑resident status is a tax residence question. When applying DTA relief or confirming status, ask the vendor for their tax residency certificate and record it in your file.

Can withholding tax be claimed back by the non‑resident?

The non‑resident may seek treaty relief or bilateral credit in their home country. Where WHT was paid at a higher domestic rate and a treaty provides a lower rate, applications for refund or credit can be made following LHDN procedures, supported by the residency certificate, proof of payment, and evidence the treaty conditions are met.

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