Malaysia consults on how software paid to foreign vendors is taxed

Malaysia consults on how software paid to foreign vendors is taxed

23 October 2026: The Inland Revenue Board of Malaysia (IRBM, also known as LHDN or HASiL) has opened a 14-day consultation on a draft Public Ruling on the tax treatment of royalties on software payments to non-residents. It decides when a Malaysian business that pays a foreign software vendor must withhold tax, and comments are open from 23 October until 5 November 2026.

Not yet independently verified. We read the draft in Bahasa Melayu, the only language IRBM has published it in, and have not worked through every example; in particular we have not confirmed which zone a typical SaaS subscription falls into. The ruling is a draft with no issue date and may change after the consultation. We will update this when it can be confirmed, and remove this note.

The draft is published only in Bahasa Melayu. Comments go to kufeedback@hasil.gov.my, and IRBM warns that the views it receives may be made public.

Rights granted decide the answer

The draft starts from section 109 of the Income Tax Act 1967: a royalty derived from Malaysia and paid to a non-resident is subject to withholding tax at 10 percent of the gross amount. The question for software is when a payment is a royalty at all.

IRBM's test is the rights the arrangement grants. Substantive rights point to a royalty: the right to reproduce the software, distribute it, communicate it to the public, adapt it, rent it out commercially, make derivative works or authorise others to do any of those. Non-substantive rights do not. These are personal, non-business use, or use by a company solely for administrative, ancillary, internal management or support functions.

The draft applies substance over form. The name of the contract, the form of the invoice, the way the software is delivered and the location of the server do not by themselves decide the treatment. A vendor cannot turn a distribution licence into a service fee by calling it a subscription.

Green, red and yellow zones

To make the test usable, the draft sorts arrangements into three zones. Green covers royalties that qualify for an exemption under an Income Tax Order. Red covers royalties that are subject to withholding tax. Yellow covers arrangements that need a closer look before the answer is clear.

Its worked examples are close to everyday purchases. One is a Malaysian training company that uses cloud software for documents, internal communication and payroll, with end-user rights only. Another is a Malaysian distributor of a non-resident cloud platform, where the end-user licence is signed directly between the foreign vendor and the customer. The draft also deals with advance payments and deposits, how withholding is paid, double tax agreements and Income Tax Orders, and it mentions a late-payment penalty of 10 percent.

Who should comment before 5 November

The ruling matters most to two groups. Finance teams that buy foreign software, from design tools to enterprise platforms, will want to map each contract to a zone before the ruling is final, because the payer carries the withholding duty. Resellers and distributors of foreign software are the clearest case for the red zone, since their agreements usually grant distribution rights.

Vendors selling into Malaysia have a reason to read the examples too: where a licence grants only end-user rights, the draft supports the view that no withholding applies, and a contract that says so plainly will be easier for a Malaysian customer to defend. The consultation ends on 5 November; IRBM has not said when the final ruling will be issued.

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Sources

• IRBM (HASiL): Public consultation on Public Ruling, announcement, 23 October 2026
• IRBM (HASiL): Draft Public Ruling, Layanan Cukai ke atas Royalti bagi Bayaran Perisian kepada Bukan Pemastautin (PDF), 23 October 2026