Contract Payments to Non-Residents: Withholding Tax Rates (s.107A)

Introduction

Your company pays a foreign contractor for a project or services. Do you need to deduct tax from that payment? In certain circumstances, yes — under section 107A of the Income Tax Act 1967 (ACP).

This article explains the withholding tax obligation on contract payments to non-residents: the rates, the form used, and the period for payment to LHDN.

What is s.107A withholding tax?

Withholding tax means the payer deducts tax at source from payments made to the recipient, then pays the deducted tax to the Director General of Inland Revenue (DGIR).

For contract payments to non-residents — for example a contractor or service provider who is not resident in Malaysia — the applicable provision is s.107A ACP. This differs from withholding tax on interest/royalties (s.109) or other special classes (s.109B).

Rates: 10% and 3%

According to the official HASiL withholding tax schedule, contract payments to non-residents are subject to s.107A withholding tax at rates 10% and 3% — the rate depends on the type of payment.

Do not state which rate applies to a particular type of contract until the full s.107A text or the detailed schedule is verified.

Form CP 37A

The payer must use Form CP 37A (Pin. 1/2024) to make s.107A withholding tax payments to HASiL.

Remittance period: within one month

The payer must deduct tax from the payment and pay it to the DGIR within one month after the payment is made (general withholding tax practice).

Rates can be reduced under DTA

If the recipient is resident in a country that has an agreement with Malaysia, the withholding rate can be reduced under the Double Taxation Avoidance Agreement (DTA) — covering 75 countries.

Recipient's obligations

The recipient (non-resident) still needs to report gross income; the tax deducted is taken into account in the recipient's assessment.

Warning: do not confuse with other withholding taxes

• s.109 — withholding tax on interest, royalties, and certain other payments.
• s.109B — withholding tax on special classes of income.
• s.109A — withholding tax on payments to public entertainers (15%).

This article is specifically about s.107A contract payments. Do not mix up this treatment.

Frequently Asked Questions (FAQ)

Q. Do I need to deduct tax for royalty payments to a foreign company? A. Not in the context of this article — royalties fall under s.109 withholding tax, not s.107A. These are separate provisions.

Q. When do I need to submit Form CP 37A? A. The payer must deduct tax from the payment and pay it to the DGIR within one month after the payment is made.

Q. Which rate applies to my contract: 10% or 3%? A. The exact 10% vs 3% situation is still this item still awaits official confirmation from HASiL — check again with HASiL before deciding. — the HASiL schedule lists two rates, but the contract-type detail has not been fully extracted. Confirm with HASiL or a tax adviser.

Q. Can the rate be reduced if the foreign contractor is in a country that has an agreement with Malaysia? A. Yes — the rate can be reduced under the DTA if the recipient is resident in a treaty country (R3).

Glossary

• Withholding tax — tax deducted at source from payments to a recipient.
• Non-resident — an individual/company that is not tax resident in Malaysia.
• DGIR — Director General of Inland Revenue.
• DTA/PPPDK — Double Taxation Avoidance Agreement.
• CP 37A — form for s.107A withholding tax payment.
• s.107A — provision of ACP 1967 on withholding tax on contract payments to non-residents.