Royalties and intellectual property: how are they taxed?

What is a royalty?

A royalty is a payment made for the use of, or the right to use, intellectual property — for example copyright, artistic/scientific works, patents, designs, models, plans, secret processes, formulas, trademarks, radio/TV broadcast tapes, films, know-how, and technical/industrial/commercial/scientific information. This includes income from the disposal of such property or rights.

Source: Income Tax Act 1967 (see Official sources section).

Income class: section 4(d)

In the ITA 1967, royalties (together with rents and premiums) are one of the classes of chargeable income under section 4(d).

For resident recipients, royalties received are reported as other income in Form BE/B (together with other income sources).

Source: Income Tax Act 1967; HASiL — Withholding Tax Information Page.

Withholding tax: royalties to non-residents

When a business pays royalties to a non-resident recipient in Malaysia, the payer has a withholding tax obligation:

• Rate: 10% of the royalty paid/credited (official HASiL schedule; Form CP37).
• Period: deduct the tax and pay it to the Director General of Inland Revenue (DGIR) within one month.
• Penalty: if payment fails within that period, the tax is increased by 10% of the amount that failed to be paid (subsection 109(2) of the ITA).

Source: HASiL — Withholding Tax Information Page; HASiL — Form CP37.

Do not confuse with other payments

There are other payment types with different withholding rates — do not combine the rates:

• Royalties — section 109 — 10%;
• Interest — 15%;
• Contract payments — section 107A(1)(a)/(b) — 10% + 3%;
• Special classes (technical/service fees/rent of movable property) — section 109B — 10%;

Source: HASiL — Withholding Tax Information Page (official schedule).

Double Taxation Avoidance Agreements (DTA)

Withholding rates can be reduced under Double Taxation Avoidance Agreements (DTA/PPPDK) between Malaysia and other countries.

Source: HASiL — Withholding Tax Information Page.

Exemption for resident individuals

Source: Schedule 6 of the ITA and official HASiL sources for the exact exemption amounts.

Form CP37

The form used to report tax deductions from royalty and interest payments to non-residents is Form CP37 (Account of Deduction from Royalty and Interest Payments to Non-Residents). Submission of the account must be accompanied by document evidence.

Source: HASiL — Form CP37 (official PDF).

Simple examples

Kedai Buku Intan pays royalties of RM5,000 to a foreign writer (non-resident of Malaysia). Kedai Buku Intan must withhold 10% (RM500) and pay it to the DGIR within one month. If not, the tax is increased by 10% of the amount that failed to be paid (subsection 109(2)).

Amir, a resident Malaysian writer, receives royalties from a local publisher. These royalties are income under section 4(d) and must be reported in Form BE as other income. The exemption under Schedule 6 may apply depending on the category of work; verify with HASiL.

(Illustrative examples to show concepts — not specific tax advice.)

Frequently Asked Questions (FAQ)

Q. Are my royalties as a writer taxed? A. Yes — royalties are a class of chargeable income under section 4(d) of the ITA. The treatment depends on your residence status and whether a Schedule 6 exemption applies; verify with HASiL.

Q. My business pays royalties to an overseas company — what must I do? A. You must withhold 10% tax and pay it to the DGIR within one month. Failure to do so increases the tax by 10% of the amount that failed to be paid. The final rate may be reduced under a DTA if applicable.

Q. I receive royalties from outside Malaysia — how does it work? A. The treatment depends on your residence status and the applicable provisions. Verify your specific situation with HASiL or a tax advisor.

Q. Are technical service payments the same as royalties? A. No — technical service payments fall under section 109B with their own withholding rate. Do not combine rates. Make sure your payment classification is correct.

Glossary

• Royalty — a payment for the use/right to use intellectual property.
• Withholding tax — tax deducted by the payer and paid to the DGIR.
• DGIR — Director General of Inland Revenue.
• PPPDK — Perjanjian Pengelakan Pencukaian Dua Kali (Double Taxation Avoidance Agreement).
• ITA 1967 — Income Tax Act 1967 (Act 53).
• Intellectual property — copyright, patents, trademarks, designs, etc.