5 Withholding Tax Malaysian withholding tax ( WHT ) is an effective tax collection mechanism for the Malaysian tax authority to levy tax on non-residents who receive certain income from a payer based in Malaysia generally. The WHT rate is provided for in the Malaysian Income Tax Act Common type of payments made by Korean businesses in Malaysia to non-residents which may attract WHT include construction fee made to foreign subcontractors, rental of equipment paid to foreign lessor, loan interest and guarantee fee paid to foreign bank, technical and management fee paid to head office, etc. In this connection, we are pleased to provide you with an overview of Malaysian WHT rules for your better understanding, aiming at assisting the Korean businesses to be in full compliance with the Malaysian WHT requirements. Overview of Withholding Tax ( WHT ) Rules in Malaysia 1 What is WHT? 2 Who should withhold? WHT is a tax collection mechanism introduced by the Malaysian tax authority ( IRB ) requiring a payer in Malaysia to withhold tax on certain payments made to non-resident. The person who makes payments that are subject to WHT is liable to withhold tax on the payments made. Person includes individual, a company, a body of persons, a limited liability partnership and a corporation sole. 3 When to remit the WHT? WHT is to be deducted and remitted to the IRB within one (1) month from the date the payment is made to non-resident. 4 Who should remit the WHT? It is the payer s responsibility to remit the WHT deducted to the IRB. 5 Payments subject to WHT and the applicable rate Type of Payments Relevant Section of Act WHT Rate Form to be used 1) Interest (e.g. loan interest) Section 15, % CP37 2) Royalty (e.g. software license fees, franchise fees and sale of proprietary products) Section 15, % CP37 3) Dividends / branch profit remittance Malaysia does not levy WHT on dividends. 4) Other income (e.g. commission, agency fees and guarantee fees) Section 4(f), 15B, 109F 10% CP37F
6 5) Special classes of income: i) Services in connection with the use of property or rights, or the installation of operation of any plant, machinery or other apparatus performed in Malaysia. Section 4A, 15A, 109B 10% CP37D ii) iii) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme performed in Malaysia Rent or other payments made under any agreement or arrangement for the use of any movable property 6) Contract payments (e.g. payment for construction services) Section 107A 10% + 3% CP37A Note 1 Item 5(i)/(ii) may overlap with item 6. Under such circumstances, in practice, if the non-resident has a permanent establishment in Malaysia, item 6 will prevail whereby 13% WHT under Section 107A would be applicable. Otherwise, 10% WHT under Section 109B would apply.
7 Note 2 All of the above WHT are final tax except for WHT under Section 107A which is an advance tax. 13% WHT under Section 107A consists of 10% and 3% elements. 10% WHT is used to set off against the corporate income tax. If the final tax liability is higher than 10% WHT paid, the shortfall would have to be paid. If the final tax liability is lower than the WHT paid, the excess would be refunded. 3% WHT for personnel is refundable when the expatriate employees have fully settled their personal taxes. Penalty for Offences 1 Late Payment of WHT 2 Deductibility of Expenses 3 Incorrect Return 10% on the amount of unpaid tax. The payment subject to WHT is not allowable unless the WHT is remitted to IRB before the due date for submission of the return. If the incorrect tax return is submitted (i.e. claiming without remitting WHT to IRB), penalty ranging from 10% to 100% may be charged.
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