Do I need to withhold tax when I pay an overseas freelancer, consultant or software provider?

Paying overseas freelancers or software vendors raises withholding tax questions, because the rules look at the nature of the payment.

Questions to ask

1. Where was the service performed? The 10% s.109B tax covers advice, assistance and management or technical services, and services connected with plant, machinery or property (s.4A(i) and (ii)), when paid by a Malaysian resident or charged to a Malaysian business. The Income Tax (Exemption) (No. 9) Order 2017 [P.U.(A) 323/2017] exempts these services when they are rendered and performed wholly outside Malaysia, and s.109B does not apply to them. If part is performed in Malaysia, the contract value should be reasonably apportioned. Keep records showing where the work was done.
2. Is it a royalty? Payments for the right to use intellectual property, including some software licences, can be royalties under s.109 at 10%. A pure service subscription is analysed differently, and the answer turns on the contract terms.
3. Is it a contract payment for work in Malaysia? Then s.107A applies at 10% plus 3%.
4. Is there a treaty? The payee's country may have a lower rate, with documents needed.
5. Rental of movable property? This also falls under s.109B at 10%.

Related tax: foreign providers of digital services to Malaysian customers may have to charge Malaysian service tax, which is a different regime.

Deduction risk: if tax should have been withheld and was not, the expense may be disallowed (s.39(1)(f), (i) and (j)).

Because the line between service and royalty is fine, get written advice on large or recurring payments.