Other BriefingsDividends, Royalties, or Fees: Profit Repatriation in Malaysia
For foreign investors operating in Malaysia, profit repatriation is not a discretionary tax planning exercise. The Inland Revenue Board of Malaysia evaluates outbound payments based on how value is created within the Malaysian business and how that value is recognized across the group. The chosen structure determines withholding tax exposure, transfer pricing scrutiny, audit intensity, and the predictability of extracting cash over time.
The central decision is whether profits earned in Malaysia should be treated as returns on equity, payments for intellectual property, or compensation for offshore services.
How Malaysian tax authorities classify outbound payments
Malaysia applies distinct legal and tax treatment to dividends, royalties, and service fees. Dividends are distributions of after-tax profits to shareholders. Royalties compensate for the use of intellectual property owned outside Malaysia. Service fees remunerate services performed outside Malaysia for the benefit of the Malaysian entity. Inland Revenue Board reviews focus on whether the legal form of a payment aligns with the Malaysian entity’s actual functions, assets, and risk profile.
Where legal characterization diverges from economic reality, recharacterization risk arises regardless of contractual wording.
Malaysia’s default expectation on extracting profits
Absent offshore intellectual property or services that directly drive Malaysian revenue, Malaysian authorities generally expect profits to be repatriated through dividends. This default expectation frames audit behavior and determines how alternative structures are assessed. Royalties and service fees are treated as exceptions that must be positively justified, not as interchangeable substitutes for dividends. Once profits are extracted through non-dividend channels, the burden of proof shifts to the taxpayer to demonstrate commercial substance.
Dividends as the baseline and lowest-risk route
Dividends are the most defensible repatriation mechanism where the Malaysian entity conducts core operations, bears commercial risk, and generates profits independently. Under Malaysia’s single-tier tax system, dividends paid by Malaysian companies are not subject to withholding tax at the company level. Since January 1, 2025, individuals have been subject to a 2 percent tax on chargeable dividend income exceeding RM100,000 (US$24,000), which applies at the recipient level and does not change the absence of dividend withholding tax in Malaysia.
While dividends limit flexibility in timing and amount, they carry the lowest audit risk and form the benchmark against which all alternative structures are judged.
Royalties and the role of offshore intellectual property
Royalty payments are sustainable only where intellectual property owned outside Malaysia plays a direct and identifiable role in generating Malaysian revenue.
In Malaysia, royalties paid to non-residents are generally subject to withholding tax at a statutory rate of 10 percent, before any treaty relief. Inland Revenue Board scrutiny focuses on legal ownership, economic control, and actual deployment of the intellectual property within Malaysia. Royalties must reflect arm’s-length pricing and be supported by transfer pricing documentation that clearly links the IP to local income.
Where intellectual property is peripheral, locally developed, or inconsistently documented, royalty deductions are commonly challenged.
Service fees and offshore functional support
Service fees are appropriate where services are genuinely performed outside Malaysia and provide a measurable benefit to the Malaysian entity. Payments for technical, management, or consultancy services to non-residents are generally treated as special classes of income and subject to withholding tax at 10 percent under Malaysian tax rules, unless reduced by treaty. Audit reviews focus on whether services are duplicative of local functions, whether the Malaysian entity could reasonably perform them itself, and whether pricing reflects arm’s-length principles.
While service fees offer flexibility and recurring cash flow, they attract heightened scrutiny and are frequently recharacterized where operational evidence is weak.
Withholding tax timing and compliance reality
For both royalties and service fees, withholding tax is generally required to be remitted to the Inland Revenue Board of Malaysia within 1 month of paying or crediting the non-resident. Failure to comply can delay deductibility and escalate audit attention. While tax treaties may reduce withholding tax rates, treaty relief does not override failures in substance or transfer pricing.
Malaysian audits increasingly test consistency across corporate income tax filings, withholding tax submissions, transfer pricing reports, and financial statements, rather than assessing each payment in isolation.
How Malaysian audits commonly recharacterize payments
In practice, Malaysian audits frequently recharacterize service fees as disguised profit distributions where services cannot be substantiated or deny royalty deductions where intellectual property does not clearly drive revenue. These adjustments are often applied retrospectively, increasing tax exposure and undermining cash-flow predictability. For boards, this enforcement pattern reinforces the importance of selecting a structure that can withstand repeated audit cycles rather than relying on aggressive optimization.
Making A defensible repatriation decision in Malaysia
A defensible repatriation structure in Malaysia turns on where value is created. Where profits arise locally, dividends are the expected and lowest-risk route; royalties or service fees are viable only where offshore intellectual property or services clearly drive revenue. For boards, the right choice is the structure that delivers predictable cash extraction and withstands audit scrutiny, not one that minimizes tax in a single year.
About Us
ASEAN Briefing is one of five regional publications under the Asia Briefing brand. It is supported by Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm that assists foreign investors throughout Asia, including through offices in Jakarta, Indonesia; Singapore; Hanoi, Ho Chi Minh City, and Da Nang in Vietnam; and Kuala Lumpur in Malaysia. Dezan Shira & Associates also maintains offices or has alliance partners assisting foreign investors in China, Hong Kong SAR, Mongolia, Dubai (UAE), Japan, South Korea, Nepal, The Philippines, Sri Lanka, Thailand, Italy, Germany, Bangladesh, Australia, United States, and United Kingdom and Ireland.
For a complimentary subscription to ASEAN Briefing’s content products, please click here. For support with establishing a business in ASEAN or for assistance in analyzing and entering markets, please contact the firm at asean@dezshira.com or visit our website at www.dezshira.com.
