Inland Revenue Board (IRB) of Malaysia Guidelines on Tax for Copyright and Software Payments to Non-Residents

Practice Note No. 3/2023, issued by the Inland Revenue Board (IRB) of Malaysia on December 5, 2023, establishes guidelines for cross-border transactions involving software and Intellectual Property (IP). This particular practice note provides comprehensive explanations into the tax considerations related to payments for copyrights and software made by distributors and resellers to non-resident entities.

The term “royalty” is defined in accordance with subsection 2(1) of the Income Tax Act 1967 (ITA), whereas the allowance for tax deductions related to royalty payments is stipulated in section 109 of the ITA.

Royalty payments and copyrighted material are intrinsically connected. When individuals or organizations seek to use someone else’s protected work, they must obtain permission from the copyright owner. This permission is granted in exchange for a fee called a royalty payment. By facilitating this transaction, royalty payments enable the lawful usage of copyrighted material while ensuring that the original creator is appropriately compensated for their intellectual property. Understanding the intricacies of royalty payments and their significance in the world of copyrighted material is crucial for both creators and users of such content.

Remittances for software and copyright to a non-resident lacking a permanent establishment or business location in Malaysia are deemed as royalty and are subject to withholding tax pursuant to section 109 of the Income Tax Act (ITA). This holds true irrespective of the rights conferred upon the distributor or reseller by the software/copyright owner. Nevertheless, it is important to note that variations in the definitions of “royalty” and “permanent establishment” may arise. In the event of any discrepancies, it is advisable to refer to the Double Taxation Avoidance Agreement (DTA) agreed upon by the respective contracting countries.

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