Withholding Tax Malaysia — What SMEs Need to Know When Paying Service Fees (2025)

What Is Withholding Tax — and Why You're the One Who Pays

Most taxes work like this: you earn income, you pay tax on it. Withholding tax flips that entirely.

When a Malaysian company pays a non-resident for certain types of income, LHDN requires the payer to collect the tax. You deduct the tax from the payment, send the balance to your supplier, and remit the withheld portion directly to LHDN. Your supplier gets their net. LHDN gets the tax. The obligation is yours — not theirs.

In practice: you owe a Singapore consultant RM10,000 for a project. You pay them RM9,000. You remit RM1,000 (10%) to LHDN via MyTax. Done correctly, nobody gets penalised and your consultant receives their agreed-upon net.

Done incorrectly — meaning you pay the full RM10,000 without withholding — LHDN comes to you. Not to the Singapore consultant sitting across the Causeway. They bill you for the RM1,000 you should have deducted, plus a 10% penalty on top. The fact that your supplier already received the full amount and has no Malaysian presence to chase is entirely your problem.

This is why withholding tax catches Malaysian SMEs off guard. The assumption that "my supplier's tax is their problem" is factually wrong under Malaysian law. LHDN has no enforcement jurisdiction over a non-resident overseas. So they make the Malaysian payer the collection agent by default.

Who Must Withhold Tax in Malaysia

Not every cross-border payment triggers withholding. Three conditions must all be met:

• The payer is a Malaysian-resident company or individual carrying on a business in Malaysia
• The payee is a non-resident — a company incorporated and tax-resident outside Malaysia, or an individual not ordinarily resident in Malaysia
• The income type is listed in the ITA 1967 — services, royalties, interest, contract payments, or special classes of income under the relevant sections

Payments between two Malaysian-resident companies are not subject to withholding. Neither are payments to foreigners who are tax-resident in Malaysia — for example, an expat director who has been living and working in KL for over 182 days. They file a normal Malaysian tax return; withholding rules don't apply to them.

The non-resident's currency of payment or bank account location is irrelevant. A Singapore-incorporated company receiving RM into a Malaysian bank account is still a non-resident. Withholding still applies.

Withholding Tax Rates in Malaysia 2025

These are the standard domestic rates under ITA 1967. Double Taxation Agreements (DTAs) can reduce these rates — but only if you meet the DTA requirements before payment.

Income Type	ITA Section	Standard Rate	Form to Use	DTA Can Reduce?
Professional, technical & management fees (services rendered outside Malaysia)	Section 109B	10%	CP37	Yes — varies by treaty
Royalties (use of IP, software licences, patents, trademarks)	Section 109A	10%	CP37A	Yes — commonly 8–10%
Interest payments to non-residents	Section 109	15%	CP37A	Yes — commonly reduced to 10%
Contract payments — non-resident contractor performing work IN Malaysia (contractor's portion)	Section 107A	10%	CP37D	Sometimes
Contract payments — employees of non-resident contractor working in Malaysia (employees' portion)	Section 107A	3%	CP37D	No
Dividends (single-tier system)	Section 108	0%	N/A	N/A — exempt

The most common confusion is between Section 107A and Section 109B. They cover fundamentally different scenarios — and filing the wrong form means incorrect rates and potential LHDN rejection.

Section 107A vs Section 109B — Getting the Category Right

Section 107A covers contract payments for work performed physically in Malaysia by a non-resident contractor. A Hong Kong engineering firm sends a team to Penang to commission equipment. A Chinese construction company builds a factory extension in Johor Bahru. The contractor physically comes here. The work happens here. Section 107A applies — Form CP37D. The rate splits: 10% on the contractor's portion and 3% on the wages of their employees who came to Malaysia.

Section 109B covers special classes of income for services rendered outside Malaysia — but where the Malaysian company receives the benefit. A Jakarta software house builds an app for a KL startup. A London accountant provides tax advisory remotely. A Singapore branding agency sends design files by email. They never step foot in Malaysia. The services still trigger Section 109B withholding because the Malaysian company is the beneficiary. Form CP37, 10%.

For most Malaysian SMEs that outsource to overseas contractors, Section 109B is the relevant section — your suppliers are remote. Section 107A applies when you physically bring a foreign team to your site in Malaysia to perform the contract.

Real Scenarios Malaysian SMEs Get Wrong

These are the situations that trip up Malaysian companies most often — from KL tech startups to Penang manufacturers.

Paying a Singapore design agency RM20,000 for a brand refresh. Professional service fee. Section 109B. Standard rate: 10%. You pay the agency RM18,000 and remit RM2,000 to LHDN on Form CP37. Malaysia's DTA with Singapore may reduce the applicable rate — but only if the agency provides a valid Certificate of Residence from IRAS before you pay. Without it, 10% is non-negotiable.

Monthly SaaS subscriptions — Salesforce, Adobe Creative Cloud, HubSpot. Payments for SaaS may qualify as royalties (right to use software under Section 109A, 10%) depending on how the licence is structured. If the DTA between Malaysia and the provider's country classifies the payment as business income rather than royalties, withholding may not apply — but you need a documented tax position to rely on this. Get a ruling from your tax agent if annual subscription spend exceeds RM50,000.

Outsourcing development to a freelancer in Indonesia. Indonesia has a DTA with Malaysia. Technical service fees normally attract 10% under Section 109B. Under the Malaysia-Indonesia DTA, if the service is rendered in Indonesia and the Indonesian freelancer has no Malaysian presence, the DTA business profits article may eliminate Malaysian withholding entirely. But only with a Certificate of Residence from DJP. Without it: remit 10% on Form CP37.

Paying a UK consultant RM50,000 for a remote 6-week project. Section 109B: 10% standard. UK-Malaysia DTA provides reduced rates on technical and management fees for qualifying cases. Secure the HMRC-issued COR before payment. Without it: RM5,000 to LHDN via CP37 within 1 month of the payment date.

What about dividends? Malaysia uses the single-tier dividend system — dividends are paid from already-taxed corporate profits and are exempt from withholding in the hands of all recipients, resident or non-resident. No withholding, no form required.

How to Remit Withholding Tax via MyTax (Step by Step)

Remittance must happen within 1 month from the date of payment to the non-resident. The clock starts on the date funds leave your account — not the invoice date, not the contract signing date.

1. Log in to MyTax at mytax.hasil.gov.my using your company's tax ID and password
2. Navigate to e-WHT under the Services menu
3. Select the relevant form: CP37 (Section 109B services), CP37A (royalties or interest), or CP37D (Section 107A contract payments)
4. Key in payment details — payee name, country of residence, gross payment amount, income type, WHT rate applied
5. Upload supporting documents — the invoice, contract summary, and Certificate of Residence if claiming a DTA-reduced rate
6. Review, confirm, and submit — save the LHDN acknowledgement reference number
7. Generate the payment slip and settle via FPX or bank transfer before the 1-month deadline

Form	Income Type Covered	ITA Section	Remittance Deadline
CP37	Professional, technical, management fees (services outside Malaysia)	109B	Within 1 month of payment date
CP37A	Royalties and interest	109A, 109	Within 1 month of payment date
CP37D	Contract payments (non-resident contractor physically in Malaysia)	107A	Within 1 month of payment date

The 1-month rule is strict and LHDN does not grant discretionary extensions for administrative delays. If you pay your supplier on the 5th, your WHT remittance is due by the 5th of the following month. Build this into your accounts payable workflow — set a calendar trigger the moment you process any cross-border payment.

Double Taxation Agreements — Your Legitimate Rate Reducer

Malaysia has DTAs with over 70 countries — including Singapore, the UK, China, Japan, the US, Indonesia, Australia, and most of Malaysia's major trading partners. A DTA is a bilateral tax treaty that can reduce or eliminate Malaysia's withholding tax rates on specific income types.

The key rule: you must establish the DTA benefit before you remit. Here is the practical checklist:

1. Confirm a DTA exists between Malaysia and the payee's country — check the LHDN website or ask your tax agent
2. Identify the relevant DTA article — "Royalties", "Interest", "Technical Fees", or "Business Profits" depending on the income type
3. Request a Certificate of Residence (COR) from the payee — they must obtain it from their home country's tax authority (IRAS for Singapore, HMRC for UK, DJP for Indonesia, STA for China)
4. Retain the COR before payment — LHDN requires it as supporting documentation when you remit at the reduced rate
5. Submit your CP37/CP37A with the reduced DTA rate and attach the COR to your filing

Under some DTAs — particularly the Business Profits article — services rendered by a non-resident company with no Permanent Establishment (PE) in Malaysia may attract zero withholding. A company with no physical presence, no employees, and no fixed place of business in Malaysia has no PE. If the DTA Business Profits article applies and there is no PE, no Malaysian WHT is due. But you still need the COR and a documented tax position in writing before relying on this exemption.

Critical rule: remitting at a DTA-reduced rate without a valid COR on file exposes you to LHDN demanding the standard domestic rate plus penalties on the shortfall. Get the COR first — even if it delays payment by a week.

Penalties for Failing to Withhold

Section 107C ITA 1967 is clear: if you fail to withhold and remit, the payer company is liable for the full WHT amount. Not the foreign supplier. You.

In practice, this means:

• You paid your Singapore agency the full RM20,000 without withholding RM2,000
• LHDN identifies the gap during a Form C audit — they check whether your service expense deductions tie out to WHT remittance records
• LHDN bills you RM2,000 (the WHT you should have withheld) + RM200 (10% penalty under Section 107C) = RM2,200
• Your agency already spent their RM20,000. You cannot recover it from them retroactively.

If the non-withholding spans multiple payments or years, compound penalties and interest can accumulate quickly. The 10% penalty is per instance, not per year — but a full LHDN audit can surface multiple instances at once.

You can negotiate with your non-resident supplier to "gross up" the contract — meaning you absorb the WHT cost and pay a higher gross amount so they receive the agreed net. This makes commercial sense if the relationship matters. But it increases your cost. Build this into your overseas vendor contracts upfront, before work begins.

For how withholding tax expenses connect to your overall tax computation, read our guide on corporate tax for Malaysian SMEs. For the full Form C filing process where your WHT records will be reviewed, see our company tax return e-filing guide.

Frequently Asked Questions