MALAYSIA Law and Practice Contributed by: Will Fung, Penelope Gan and Kee Shao Yee, Richard Wee Chambers
Sales and Service Tax (SST) Interest and profit payments are generally treated as exempt financial services under the SST regime and are therefore not subject to service tax. However, cer - tain ancillary fees such as arrangement or structur - ing fees may attract SST if they are characterised as taxable services provided or consumed in Malaysia. Foreign lenders without a local presence generally do not bear SST directly, although Malaysian borrowers may be required to account for SST on imported ser - vices under reverse-charge mechanisms. Income Tax and Permanent Establishment Risk Foreign lenders without a permanent establishment in Malaysia are generally not subject to Malaysian corporate income tax, although Malaysian-sourced interest remains subject to withholding tax. However, the existence of a local presence, dependent agent, or extended onshore activity may give rise to permanent establishment risk, bringing interest income within the Malaysian tax net. Registration Fees and Other Costs Registration fees and other administrative costs arise in connection with the perfection of security, including filings with the corporate registry and, where appli - cable, land offices. These fees are generally admin - istrative in nature and, while typically not material compared to stamp duty or financing costs, may vary depending on the type of security and relevant state requirements. Legal, notarisation, and enforcement costs are also relevant but are not taxes. 4.3 Tax Concerns for Foreign Lenders Foreign private credit lenders commonly face tax considerations relating to withholding tax, permanent establishment risk, stamp duty and borrower-side tax constraints. These issues do not prevent lending but can affect net returns and pricing if not structured carefully. Interest paid to non-residents is generally subject to withholding tax, and certain fees may also fall within the regime depending on their character. Withholding tax exposure is typically mitigated through Malaysia’s network of double taxation agree - ments, which may reduce the applicable rate on inter - est. Lenders often structure through treaty jurisdic - tions and ensure proper tax residency and commercial
viders is generally subject to withholding tax at 15%, unless a reduced rate or exemption applies under an applicable double taxation agreement. Other payments, such as arrangement fees, com - mitment fees, or break costs, may also attract with - holding tax if they are characterised as interest or fall within prescribed categories of income. In Shariah- compliant financings, profit payments that are eco - nomically equivalent to interest are treated similarly for withholding tax purposes. Common Mitigation and Structuring Approaches Private credit providers commonly manage withhold - ing tax exposure through treaty planning and contrac - tual allocation of risk. Malaysia’s extensive tax treaty network is frequently relied upon to reduce the effec - tive withholding tax rate on interest. A common approach is to lend through an intermedi - ate holding or financing entity established in a trea - ty-favourable jurisdiction, supported by appropriate substance and tax residency documentation. Facility agreements also typically include gross-up clauses, shifting the economic burden of withholding tax to the borrower while preserving lender returns. 4.2 Other Taxes, Duties, Charges or Tax Considerations Beyond withholding tax, private credit lenders mak - ing loans to or taking security from Malaysian enti - ties must consider several transaction-related taxes and charges, including stamp duty on financing and security documents. Malaysia does not impose val - ue-added tax (VAT) or goods and services tax (GST) on pure lending activities, operating instead under a sales and service tax regime (SST), although certain fee-based services may fall within the scope of SST depending on their nature. Stamp Duty Stamp duty is the most significant non-income tax consideration and applies to facility agreements, security documents, and guarantees. While typically borne by the borrower as a matter of commercial practice, stamp duty must be paid for the relevant documents to be admissible in evidence and enforce - able under Malaysian law.
137 CHAMBERS.COM
Powered by FlippingBook