Malaysia Double Tax Agreements


Double Tax Agreements 

A double tax agreement (DTA) is a contract signed by two countries to minimize or eliminate double taxation of the same income. It is also known as a double tax treaty and is categorized as part of international taxationIt usually overrides domestic tax laws in cases when domestic tax laws and DTAs are in conflict. 

Should you encounter any difficulties with the management of your tax affairs, we at Paul Hype Page & Co will provide you with services which will ease the process for you. We will help you understand details such as tax resident status as well as specific ways by which you may benefit from a DTA. Through our services, you will be able to significantly reduce your tax burden. 

When anyone engages in any cross-border business transactions, it would benefit such people essential to have a working knowledge about DTAs. These people could then put their knowledge of DTAs to use by determining which DTA is applicable to a situation as well as the specific clauses of the DTA which would go into effect. 


Double Taxation in Malaysia 

In Malaysia, double taxation usually occurs when any taxpayer of Malaysia engages in international or cross-border business transactions within the territory of another country. DTAs provide mutual understanding of how income or profits earned outside Malaysia by Malaysian citizens or within Malaysia by the citizens of the other country involved are to be treated. 

In the absence of a double taxation agreement, tax relief may be available through foreign tax credit. Should a DTA be in force, the credit available is the entirety of the international tax paid or the Malaysian tax levied, depending on which is lower. However, when there is no DTA, the credit available is restricted to half of the foreign tax paid. 


Most DTAs in which Malaysia is involved include the following details:  

  • Persons/taxes/income type covered
  • Methods for double taxation elimination
  • Punishments for violations of the DTA
  • Information on fixed bases 

Although Malaysia is not a member of OECD (Organization for Economic Co-operation and Development), most of the DTAs of which Malaysia is a part conform to the DTA criteria of the OECD. 

Why Double Taxation Is Imposed 

The primary reason why countries impose double taxation is that of discouragement ofinternational trade. This is because the country’s government might believe that the business expertise that could have been involved in business transactions in the country is being exported abroad. Another possible reason occurs when the two countries involved do not have a peaceful relationship with each other. 


Malaysia’s Double Tax Agreements 

Malaysia’s double tax agreements are intended to provide a more conducive tax environment. This is because they serve to allow taxpayers who earn income to either minimize or avoid the double taxation which they would otherwise have suffered. Some of Malaysia’s DTAs also provide beneficiaries with preferential tax rates. 

Malaysia is a part of DTAs involving countries located in every continent of the world. It also has restricted agreements with certain other countries. There are also some countries for which ratification of a DTA involving Malaysia is pending. 


Features of Malaysia’s Double Tax Agreements 

In Malaysia, DTAs generally apply to the taxes of both the taxpayers of Malaysia and the other country involved. These taxes may be related to the taxpayers’ total income or elements of income. This is inclusive of taxes derived from gains earned from the alienation of property.  

In specific cases, there are other taxes apart from personal income tax to which the provisions of Malaysia’s DTAs apply. Some of these taxes include corporate tax, petroleum income tax, and capital gains tax. 


Permanent Establishments and DTAs 

Permanent establishments also play important roles within Malaysia’s DTAs. In a DTA, a permanent establishment may be defined as a fixed business location through which an enterprise’s business activities may be partially or completely performed. After the setup of a permanent establishment of Malaysia, it will only experience taxation on its income earned in Malaysia. 

However, certain activities conducted by a permanent establishment do not fall under the purview of the official definition. These activities include the following: 

  • Maintenance of stocks of goods or products owned by the permanent establishment for the purposes of delivery, storage, or display
  • Use of facilities for the purposes of delivery, storage, or display of goods belonging to the enterprise
  • Maintenance of stocks of goods or products owned by the enterprise which will solely be used by another enterprise for processing
  • Maintenance of a fixed business location solely for either the purpose of purchasing merchandise or collecting information for the enterprise
  • Maintenance of a fixed business location solely for the performance of any activity of a preparatory or auxiliary character
  • Maintenance of a fixed business location solely for any combination of activities which have been mentioned if the primary business activity of the location in question is of a preparatory or auxiliary character 

Agency permanent establishments are also important elements of some of the DTAs which include Malaysia. In certain instances, Malaysia might have a representative of one of its companies which is based in its treaty partner. This representative might receive instructions from Malaysia, enter into sales and contracts on behalf of a Malaysian company, and report to authorities in Malaysia. When such is the case, Malaysia is deemed to have an agency permanent establishment in the treaty partner. 


Functions of DTAs 

DTAs have served to facilitate the international flow of investment, trade, financial activities, and technical knowledge between Malaysia and other countries. This therefore allows both countries involved to benefit in ways which are not directly related to taxation. Thus, Malaysia and countries with which they are part of a DTA have become more interdependent. This is not only true economically; it may sometimes apply to social aspects as well. 

DTAs also play a role in clarifying any difficulties related to tax residency. Should a taxpayer fulfill the tax resident requirements of both countries involved in the DTA, the taxpayer will be regarded as a tax resident of the country in which the taxpayer primarily resides. Should the taxpayer’s residency remain inconclusive, the relevant center of interest will be taken into consideration in order to arrive at a decision. 


Termination of a DTA 

Malaysia’s DTAs with other countries are to remain in effect indefinitely unless they are terminated. A DTA may be terminated if one of the countries involved provides the other country with a written notice of termination on or before a specific date which is stated within the DTA. 


DTAs and Taxes on Dividends 

Taxes on dividends paid by a resident company of Malaysia’s treaty partner to a resident company of Malaysia may be taxed in the other countrySuch companies might also be subject to tax in Malaysia if the company which is paying the dividends is a resident there, However, if the recipient of the dividend fulfills certain criteria as specified in the DTA, the tax which is charged will be reduced. In such cases, the tax which is charged must not exceed:  

  • 5% of the gross amount of the dividends if the recipient is a company which directly owns a minimum of 25% of the capital of the company which is paying the dividends
  • 10% of the gross amount of the dividends in all other cases 

In any case, if you would like any assistance regarding any matter related to taxation in Malaysia, we at Paul Hype Page & Co will serve your needs in such areas. Our tax experts are equipped with much knowledge about the tax system of Malaysia and will be able to cater to your tax requirements as per your request.