Comprehensive Overview of Withholding Tax on Foreign Service Providers in Malaysia

Malaysia withholding tax may apply to payments made to non-residents, including foreign service providers, depending on the nature of the payment and whether the income is treated as derived from Malaysia under the Income Tax Act 1967. The Malaysian payer is responsible for withholding and remitting the tax to the Inland Revenue Board of Malaysia. Failure to comply may result in penalties and disallowed tax deductions. In certain cases, double taxation agreements may reduce the applicable withholding tax rate.

Malaysia’s e-commerce sector continues to expand, supported by strong digital adoption and cross-border trade activity. While the COVID-19 pandemic accelerated early growth, the market is now driven by long-term structural changes in consumer behaviour and online business models.

This change isn’t limited to e-commerce players but also to traditional businesses, many of which have started to embrace technology in their operations, such as social media marketing and cloud-based accounting software.

In 2017, the Inland Revenue Board Malaysia or Lembaga Hasil Dalam Negeri Malaysia (LHDN), expanded the scope of withholding tax in Malaysia to capture services performed in the e-commerce industry. This includes services performed by foreign providers outside of Malaysia. Therefore, many parties have suddenly started asking what is withholding tax in Malaysia all about?

This article explains how Malaysia’s withholding tax on service fees applies, particularly for foreign service providers operating across borders

What is Withholding Tax (WHT) in Malaysia?

In Malaysia, the withholding tax is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee). This amount has to be paid to LHDN.

In simpler terms, if you are paying non-local (foreign) vendors, you need to withhold a certain percentage (%) of the invoiced amount and pay to LHDN as a form of tax, with the remaining balance to be paid to your foreign vendor.

The withholding tax in Malaysia is not new and has been in existence since the Income Tax Act 1967 (ITA), and it covers payments such as:

• Contract payment
• Interest
• Royalty
• Special classes of income: Technical fees, payment for services, rent/payment for use of movable property
• Interest (except exempt interest) paid by approved financial institutions
• Income of non-resident public entertainers

Each type of payment will have different withholding tax rates and may enjoy a preferential tax rate if there is a double tax agreement between Malaysia and the country where the non-resident (foreign party) is a tax resident. The table below details the relevant forms for different payments for the withholding tax in Malaysia.

Does Malaysia’s WHT apply to services rendered outside the country?

Prior to 2017, the WHT in Malaysia applied only to services rendered in Malaysia by non-local vendors. From 17 January 2017, the scope of withholding tax was expanded to cover certain payments to non-residents, including cases where services are rendered outside Malaysia, subject to how the income is characterised under Malaysian tax law.

This immediately affected many services provided by foreign providers, such as Facebook, Google Ads, Stripe, GoDaddy, etc., and the fees paid to overseas service providers.

For this publication, we will focus on two types of payments under the WHT in Malaysia:

• Royalty Income under paragraph 4(d) of the Income Tax Act 1967;
• Special classes of Income under paragraph 4A of the Income Tax Act 1967;

These two types of income usually involve services from foreign service providers.

Understanding Royalty Income in Malaysia and WHT implications

As per LHDN, royalty is defined as any sums paid as consideration for the use of or the right to use:

• Copyrights, artistic or scientific works, patents, designs or models, plans, secret processes or formulae, trademarks or tapes for radio or television broadcasting, motion picture films, films or video tapes or other means of reproduction where such films or tapes have been or are to be used or reproduced in Malaysia or other like property or rights;
• Know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill; or
• Income is derived from the alienation of any property, know-how, or information mentioned in the above paragraph of this definition.

Based on the GUIDELINES ON TAXATION OF ELECTRONIC COMMERCE TRANSACTIONS released by the LHDN on 13th May 2019, the LHDN considers payments made to Facebook, Google, and the like to be similar to payments for the use and right to use the platform.

Special Classes of Income in Malaysia: What You Need to Know

As per LHDN, the income of a non-resident from the following special classes of income is subject to tax in Malaysia if it is derived from Malaysia:

• Amounts paid in consideration of services rendered by the non-resident person or his employee in connection with:
  • the use of property or rights belonging to him; or
  • the installation or operation of any plant, machinery or other apparatus purchased from him [paragraph 4A(i) of the ITA];
• Amounts paid to a non-resident person in consideration of any advice given or assistance or services rendered in connection with the management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme [paragraph 4A(ii) of the ITA]; or
• Rent or other payments made under any agreement or arrangement to a non-resident person for the use of any moveable property [paragraph 4A(iii) of the ITA].

This usually happens when you hire non-resident contractors to perform work for you, e.g. software development, or engage an overseas marketing agency to manage your social media marketing accounts.

Royalty Income vs Special Classes of Income in Malaysia: Key Differences

This is due to different preferential withholding tax rates, which may be available for different types of payments under Double Taxation Agreements with different countries. For example:

Assuming that the foreign service provider is based in Singapore, if the service is considered under Special Classes of Income (e.g. Technical Fees), it will be withheld at 5% rather than 8% (% to be withheld if it is considered as “Royalty”).

This is one of the most common areas of confusion, particularly when engaging foreign service providers across borders.

Are payments to Non-Residents in Malaysia subject to WHT under Special Classes of Income?

With effect from 6 September 2017, an exemption order may apply to certain payments under Special Classes of Income where services are performed outside Malaysia, subject to meeting the conditions set by the authorities.

These rules are governed under Malaysia’s Income Tax Act 1967 and administered by the Inland Revenue Board of Malaysia.

How to Calculate Withholding Tax for Foreign Service Providers in Malaysia

In the past, the payer was required to calculate the withholding tax in Malaysia based on the gross method.

 Formula:  Withholding Tax Due     =    (Fee Charged  X Tax Rate) / 1−Tax Rate

Example:

However, with the LHDN announcement on December 5, 2018, WHT is to be computed on the gross amount paid to a non-resident.

Example:

Practical Examples of Withholding Tax in Malaysia

• A Malaysian company engages a Singapore-based consultant to perform services in Malaysia. Withholding tax may apply as the services are performed locally.
• A Malaysian company pays an overseas IT provider for services delivered entirely outside Malaysia. Withholding tax may not apply, depending on how the services are structured.

How to Pay the Malaysian Withholding Tax and Penalties for Late Payment

The payer must, within one month after the date of payment to the non-resident, remit the withholding tax to LHDN. Failing to do so, you may face the potential risks of:

• 10% late WHT payment penalty
• Ineligibility to claim advertising costs as your business expenses in your annual return (if your advertising costs are from foreign providers such as Facebook and Google)
• Penalties may also be imposed under the Income Tax Act 1967 for non-compliance, depending on the circumstances of the case.

Key Considerations for Businesses Engaging Foreign Service Providers

When working with foreign vendors or regional service providers, businesses should assess:

• Whether the services are performed in Malaysia
• The applicable withholding tax rate
• Whether a double taxation agreement applies
• The responsibility for withholding and remittance

Incorrect classification may result in penalties or disallowed tax deductions during tax filing.

Understanding whether withholding tax applies is not always straightforward, particularly for cross-border service arrangements. A short discussion can help clarify your obligations and reduce the risk of misclassification or penalties.

To sum up, you must be well aware of the ongoing changes in the withholding tax in Malaysia for your business. At InCorp Global Malaysia, we ease your load through our comprehensive tax advisory services. So what are you waiting for?

Please note that this publication is based on publicly available information. As tax policies may change from time to time, you may need to consider the latest tax developments when planning your withholding tax. Further, the above examples are for illustration purposes only and should not constitute tax consultation.

Update date: 23 April 2026