Malaysia’s DTAs

What is a Double Tax Avoidance Arrangement (DTAA)?

A DTAA is a bilateral treaty that sets out agreed rules on how certain types of income—such as business profits, dividends, royalties, or capital gains—are to be taxed when two jurisdictions could both lay claim.

Contributing Advisor

Quinn Lu

Senior Associate, International Business Advisory

These treaties, while often modeled on the OECD Model Tax Convention, are not adopted wholesale.

Malaysia has gradually tailored its treaty provisions, at times borrowing language from the United Nations Model Tax Convention to better reflect its domestic tax policies or to accommodate the circumstances of its treaty partners. This means no two DTAAs are identical: each is negotiated to strike a balance between protecting Malaysia’s tax base and encouraging cross-border trade and investment.

Malaysia’s DTAAs come in two main forms:

• Comprehensive agreements, which cover nearly all categories of income.
• Limited agreements, which apply only to specific income streams, such as revenue from shipping or air transport.

These treaties are legally binding only once both Malaysia and its partner country complete their internal ratification processes. Typically, this involves legislative approval, the exchange of diplomatic notes, or formal ratification instruments. After entry into force, the treaty’s provisions enter into effect from the dates specified in the agreement.

Countries with signed DTAs with Malaysia

Benefits of DTAA for investors and multinationals

The core purpose of a Double Taxation Avoidance Agreement (DTAA) is to prevent the same income from being taxed twice, which can otherwise make cross-border operations costly and complex. By clearly defining where taxes should be paid and at what rate, DTAAs deliver several strategic benefits:

• Encourage foreign direct investment by providing clarity and predictability for cross-border operations.
• Reduce overall tax burdens, including withholding taxes, freeing up capital for reinvestment and expansion.
• Improve tax certainty and align with international standards, minimizing the risk of disputes and prolonged legal uncertainty.
• Enable use of domestic incentives such as participation exemptions in combination with treaty benefits.

Malaysia’s DTAA network is extensive and strategically important. The country has signed 73 comprehensive agreements with jurisdictions across Asia, Europe, the Middle East, and the Americas, along with several limited treaties covering specific income types. These agreements govern the taxation of business profits, dividends, interest, royalties, and other income streams, ensuring consistent treatment between partner countries.

Key advantages include lower withholding tax rates—which otherwise stand at 15 percent for interest and 10 percent for royalties—reduced under many treaties to as low as 5 percent. DTAAs also define when a foreign company is considered to have a taxable presence (permanent establishment) in Malaysia and provide mechanisms such as tax credits or exemptions to eliminate double taxation.

Together, these features make DTAAs a powerful tool for improving post-tax returns and strengthening Malaysia’s position as a competitive base for regional headquarters and production hubs.

How DTAs work in practice for foreign investors

Malaysia offers two primary mechanisms to relieve double taxation:

• Bilateral Tax Credit: When a DTAA exists between Malaysia and the investor’s home country, the foreign tax paid can be credited against Malaysian tax on the same income. The credit is limited to the lower of the foreign tax paid or the Malaysian tax payable on that income.
• Unilateral Tax Credit: For jurisdictions without a DTAA, Malaysia still provides relief under domestic law. In such cases, a unilateral credit is granted, typically capped at 50 percent of the foreign tax paid, ensuring some mitigation even in the absence of a treaty

To claim these credits, taxpayers must meet strict compliance standards:

• Proof of foreign tax paid, such as official tax receipts or assessments from the foreign jurisdiction.
• Timely filing: Claims must be submitted within two years from the end of the relevant assessment year.
• Supporting documents: Certificate of residence, income statements, and any documentation requested by the Inland Revenue Board (IRB).

How to apply for DTA benefits in Malaysia

• Verify that a Double Taxation Avoidance Agreement (DTAA) exists between Malaysia and the investor’s home country.
• Review the treaty provisions to understand applicable withholding tax rates and conditions.
• Secure an official Certificate of Residence from the home-country tax authority to prove tax residency status.
• Complete Malaysia’s prescribed DTA application forms (available via the Inland Revenue Board of Malaysia, IRB).
• Attach the Certificate of Residence and any supporting documents requested by the IRB.
• Submit the application before the taxable payment is due or within the IRB’s stipulated timeframe.
• Timely submission ensures the treaty rate applies at source, reducing withholding tax immediately.
• If forms are late or incomplete, the default domestic withholding tax rate will apply.
• Retroactive adjustments are generally not guaranteed, so compliance with deadlines is critical.

Mutual Agreement Procedure

When cross-border tax friction arises, Malaysia leans on the Mutual Agreement Procedure (MAP) embedded in its double tax agreements to broker practical, negotiated solutions rather than leaving taxpayers trapped between contesting jurisdictions. The Malaysian Inland Revenue Board (IRB or LHDN) treats MAP as a central, taxpayer-facing channel: it accepts MAP requests where a treaty partner’s action (or inaction) produces double taxation or otherwise frustrates the treaty’s intent, and it actively engages the foreign competent authority to seek an agreed outcome.

Procedurally, MAP in Malaysia is designed to be accessible and to cover the full range of treaty disputes — including transfer-pricing and attribution cases — provided the taxpayer’s case falls within the scope and time limits of the relevant treaty. In practice, that means taxpayers typically invoke MAP after exhausting domestic remedies (or in parallel where treaties allow), and the Malaysian competent authority coordinates with its counterpart(s) to resolve the issue by negotiation, arbitration (where the treaty contains a binding arbitration clause), or by crafting an administrative solution that removes the double charge. The IRB’s MAP Guidelines and recent FAQs clarify filing steps, documentation expectations and that many Malaysia treaties impose a three-year time limit to submit a MAP request unless the treaty specifies otherwise.

MAP is not just for reactive dispute resolution; it is also the natural complement to advance certainty mechanisms — most notably Advance Pricing Arrangements (APAs). Malaysia’s MAP framework expressly contemplates that APAs can be negotiated bilaterally or multilaterally through the competent authorities under treaty MAP provisions. In other words, where a multinational group seeks price certainty up front for intercompany transactions touching multiple treaty partners, Malaysia can coordinate with other jurisdictions to deliver matching rulings, reducing the risk of later transfer-pricing adjustments that would trigger MAP disputes.

The IRB replaced prior APA rules with the Income Tax (Advance Pricing Arrangement) Rules 2023 and published updated APA Guidelines in April 2024, tightening process requirements while clarifying timelines, fees and documentation standards for unilateral, bilateral and multilateral APAs.