What Do I Need to Know About Withholding Tax?
- Chow Ping
- Jun 29
- 6 min read
You hire a foreign consultant to help with your business.
They do the work. You pay the invoice. Everyone's happy.
Then your accountant calls.
"Did you withhold tax on that payment?"
Huh what?
I’ve got you.
Welcome to withholding tax. Let's get you up to speed.
What is witholding tax?
Withholding tax is exactly what it sounds like. You withhold a portion of the payment you're making, and hand that portion to LHDN instead of the person you're paying.
Think of it as LHDN's way of making sure they collect tax on income earned in Malaysia, even when the person earning it is sitting in another country and has no plans to file a Malaysian tax return.
The mechanics of withholding tax:
You are the payer — a business operating in Malaysia making payments for certain types of services or income
They are the payee — typically a non-resident individual or company receiving that payment
LHDN gets the withheld portion, which must be remitted within one month of the payment date
Miss that one-month deadline, and the fun begins. More on that shortly.
Who does withholding tax apply to?
Mostly non-residents. If you're paying a foreign company for services, interest, royalties, or certain other types of income, and that income comes from Malaysia, withholding tax likely applies.
This catches a lot of Malaysian businesses off guard, because the foreign party often has no idea they're being taxed. They invoice you for RM100,000. You pay them RM90,000. The remaining RM10,000 goes to LHDN. The withholding tax is your responsibility to calculate, deduct, and remit — not theirs.
The question isn't whether the foreign company is filing taxes in Malaysia. The question is whether the income they earned came from Malaysian sources. If it did, you have an obligation.
What types of payments are subject to withholding tax?
Not every payment to a non-resident triggers withholding tax, but more of them do than most business owners realise.
Contract payments to non-resident contractors
If you hire a non-resident to perform services under a contract in Malaysia: 10% on the service portion (on account of the contractor's tax) and 3% on the service portion (on account of the contractor's employees). Form CP37A.
Interest payments to non-residents
Interest paid to a non-resident is subject to 15% withholding tax. This is a final tax. Form CP37.
Royalty payments to non-residents 10% on the gross royalty amount. Also a final tax. Form CP37.
Royalties cover a wider range than most people expect. We're talking copyrights, patents, trademarks, software, films, know-how, technical formulas, and even visual images transmitted via satellite or fibre optic. If you're paying a foreign party for the right to use something they own, it's probably a royalty.
Special classes of income 10% on payments to non-residents for:
Technical advice, assistance, or management services
Services rendered in connection with the use of their property or installation of machinery
Rental of movable property (like equipment or machinery)
Non-resident public entertainers
That Korean act you're bringing in for your corporate dinner? 15% withholding tax. The sponsor pays this before LHDN will even clear the entry permit. Form CP154.
Income under Section 4(f) A catch-all category for income not covered elsewhere — guarantee fees, certain assistance fees, and similar payments to non-residents. 10% withholding tax. Form CP37F.
The one that surprises most Malaysian businesses: Google and Facebook ads
Yes, really.
When you pay for Google Ads or Facebook advertising, you are paying a non-resident company for the right to use their self-service advertising platform. LHDN classifies this as a royalty — because you're paying for the use of their software and platform, not for a human being to perform a service for you.
That means withholding tax applies. The rate depends on the Double Taxation Agreement (DTA) between Malaysia and the country where Google or Facebook is registered.
Because there is a DTA with Singapore (where Google is registered for these purposes), the rate can drop to 0%. For Facebook Ireland, there's no full DTA benefit, so the royalty rate of 8% applies.
The formula for calculating WHT when the invoice doesn't have it built in:
Withholding tax = Invoice amount ÷ 0.92 × 0.08
So if Facebook invoices you RM10,000, your withholding tax is RM10,000 ÷ 0.92 × 0.08 = RM869.57.
A lot of businesses have been paying their Facebook bills for years without doing this. LHDN notices.
What about Double Taxation Agreements (DTAs)?
Malaysia has concluded over 70 Double Taxation Agreements with countries around the world. These treaties often allow for reduced withholding tax rates, sometimes significantly lower than the domestic rate.
A few examples of reduced rates under specific DTAs:
Singapore: Royalties at 8%, technical fees (special classes of income) at 5%
Germany: Interest at 10%, royalties at 7%
Hong Kong: Interest at 10%, royalties at 8%, technical fees at 5%
UAE: Interest at 5%
To claim a DTA rate, the non-resident payee must provide a Tax Residency Certificate from their home country's tax authority. You keep this on file. LHDN may ask for it during an audit.
Where there is no DTA, Malaysia's domestic rates under the Income Tax Act 1967 apply in full.
What happens if you don't pay?
Late payment: 10% penalty
If you remit withholding tax after the one-month deadline, LHDN imposes a 10% penalty on the unpaid amount. So if you owed RM20,000 and paid late, you now owe RM22,000.
Non-payment: your expense gets disallowed
If you fail to pay withholding tax entirely, LHDN will disallow the underlying expense in your tax computation. The payment you made to the non-resident, which you were counting on as a deductible business expense, gets stripped out.
In plain terms: you spent the money, but you can't claim it.
If you later pay the withholding tax (plus the penalty), the expense can be reinstated. But by then, you may have already filed your tax return incorrectly.
Claiming the deduction before paying the WHT: separate penalty
Some businesses try to claim the expense deduction in their tax return while planning to pay the WHT later. LHDN treats this as an incorrect return under Section 113(2) of the Income Tax Act 1967. The penalty here can reach the full amount of the tax undercharged. Meaning you could end up paying a penalty equal to your entire tax liability on that income.
The three scenarios in numbers, using a company that paid RM1 million in royalties to a non-resident:
No WHT paid: company moves from a RM500k loss to a RM500k taxable income, creating a RM120,000 tax bill from nothing
WHT paid late: total WHT and penalty = RM110,000, but expense is deductible and no income tax triggered
Deduction claimed, WHT paid later: WHT plus penalty plus penalty for incorrect return = RM350,000 total cash outflow
The lesson: Pay the withholding tax on time.
Small-value transactions: some flexibility exists
If you're making recurring small payments to non-residents and the withholding tax per transaction doesn't exceed RM500, you may be eligible to defer and batch your payments. Think monthly software subscriptions or small royalty payments.
The two permitted payment windows are:
By 30 June — for transactions from 1 December of the prior year to 31 May
By 31 December — for transactions from 1 June to 30 November
This applies to interest, royalties, and special classes of income under Sections 109 and 109B. Use Forms CP37S (interest and royalties) or CP37DS (special classes of income) for these.
How to pay withholding tax
You have two options:
Online via LHDN's MyTax portal using e-TT (Electronic Telegraphic Transfer) or FPX (ByrHasil) — the faster and recommended method
Manual via bank draft at the Revenue Management Centre payment counter
All payments must come with the correct form, a generated bill number, a copy of the non-resident's invoice, and proof of the payment date. Keep all documentation. LHDN won't ask for it upfront, but they will ask for it if you're audited.
In conclusion
Withholding tax is one of those compliance areas that feels invisible... until it isn't.
The good news is that once you know which payments are in scope, the mechanics are simple. Identify the payment type, apply the right rate (factoring in any applicable DTA), deduct, remit within one month, and keep your paperwork.
Too much? No problemo. We've got you.
Focus on your business while we manage the boring paperwork for you.
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