# Withholding Tax on Cloud, SaaS, Ad Spend and Marketplace Fees

> Whether your monthly software, advertising and platform payments to foreign providers carry withholding tax — and why that is a different question from imported-service SST.

- Category: taxation
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/taxation/withholding-tax-digital-services

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A Malaysian SME pays a foreign hosting bill, a design-tool subscription, an ad
platform and a marketplace commission every month, and withholds nothing on any of
them. Then a tax audit lands and the question is not whether tax was due — it is
which of two entirely separate taxes was due, because the answer is often both.

## Two taxes, two Acts, two regulators

Almost every page ranking for this question answers one and silently drops the
other. Keep them apart.

| | Withholding tax | Imported-service SST |
| --- | --- | --- |
| Statute | Income Tax Act 1967 | Service Tax Act 2018 |
| Regulator | LHDN | RMCD |
| Whose tax | The **non-resident's** income tax, which you deduct | **Yours**, self-accounted |
| Charging provision | ss.109, 109B | s.7(b), s.26A |
| Rate | 10% royalty, 10% s.4A, 15% interest | 8% standard, 6% for listed services |
| Threshold | None | None — the first ringgit counts |
| Trigger | Paying or crediting | Payment or invoice, whichever is earlier |
| Deadline | One month after paying or crediting | Last day of the following month |
| Form | CP37 or CP37D | SST-02A if not registered, SST-02 if registered |

They do not offset and they do not substitute. A cloud invoice can be royalty under
s.109 and an imported taxable service under s.7(b) at the same time.

## When is a digital payment a royalty?

The pivot is in the s.2 definition of royalty in the Income Tax Act 1967, which
covers sums paid for “the use of, or the right to use in respect of, any
copyrights, **software**, artistic or scientific works, patents, designs or models,
plans, secret processes or formulae, trademarks or other like property or rights”.

LHDN's e-commerce guidelines para 7.2 confirm that “software” was added with effect
from YA2017, and the examples are unambiguous:

- **Example 4** — a manufacturer buys an accounting software solution for RM70,000
  from a foreign vendor plus a RM3,000 annual licence fee. Both amounts are
  royalty and both carry s.109 withholding tax.
- **Example 5** — an online seller pays a foreign marketplace a monthly
  subscription and a per-transaction fee. The agreement ties the subscription to
  the right to use the platform's application, so the **subscription is royalty**.
  The transaction fee is for services and falls under s.4A — and, because those
  services were performed outside Malaysia, it is not taxed.

That single example is the shape of most SME software stacks: a licence component
that is royalty and a service component that usually is not taxable.

## Advertising: the Practice Note 1/2018 test

Practice Note 1/2018 is two pages long and decides more cases than anything else
in this area. Its structure:

1. **Does the non-resident have a permanent establishment where a treaty applies,
   or a business presence where none does?** If yes, the payment is business income
   derived from Malaysia, taxed under s.4(a), and **no withholding tax applies**.
2. If no, route on the nature of the payment:
   - **s.109** if the payment is for the purchase or use of an application that
     allows the payer to **create their own advertisement campaign**;
   - **s.109B** if there is no application, merely the provision of a service, and
     the payer “solely relies on the service provider to deal with all aspects of
     digital advertising”.

The e-commerce guidelines Example 3 applies limb one directly: a company that uses
a social media platform to build its own campaign makes a royalty payment subject
to s.109.

Note what this means in practice. Self-serve ad platforms — where you log in, set a
budget and build the creative — sit on the royalty side. A foreign agency that runs
the whole campaign for you sits on the s.4A side, where the offshore-performance
exemption is available. Most SMEs use the former.

## Why the offshore exemption does not save royalty

For s.4A(i) and (ii) income, P.U.(A) 323/2017 exempts the portion performed
outside Malaysia from 6 September 2017 — which is why the marketplace transaction
fee in Example 5 escapes.

**There is no equivalent for royalty.** Section 15 deems interest and royalty
derived from Malaysia on a payer test: responsibility for payment lies with a
resident, or the royalty is charged as an outgoing or expense against income
accruing in or derived from Malaysia. Where the software sits, where the servers
are, and where the vendor is have no bearing on it. Booking the subscription as an
expense in a Malaysian business is enough.

This is the single largest exposure in the typical SME software stack, and the one
that “but it's all overseas” does not answer.

## The SST side of the same invoice

Service tax on imported taxable services is charged by s.7(b) of the Service Tax
Act 2018 on any taxable service acquired from a person outside Malaysia. Section
26A puts the obligation on **any person other than a taxable person** who acquires
such a service in carrying on business — so being unregistered, and having no
prospect of ever registering, is not a defence. There is no threshold.

The one relief that matters here is the digital-services interaction. Where a
foreign provider is registered under the digital services regime and has charged
you digital service tax, item 3 of P.U.(A) 380/2018 exempts you from self-accounting
under s.26/s.26A — but the condition is that you **hold the provider's invoice**.
The invoice is the entitlement. If the provider is not registered, or is registered
but did not charge, the s.26A obligation revives and lands on you.

Practical consequence: file the invoices that show Malaysian service tax, and
self-account on the ones that do not. See
[imported-taxable-services](/en/taxation/imported-taxable-services) for the
declaration mechanics.

## Making monthly subscriptions administrable

A RM600 monthly SaaS bill produces RM60 of withholding tax. Remitting it monthly
against a one-month deadline is how compliance quietly stops happening.

The small-value deferment exists for exactly this. Where the withholding tax on a
single payment transaction does not exceed **RM500**, and such transactions occur
**more than once** in the relevant six-month period, remittance can be deferred to:

- **30 June**, for payment transactions from 1 December of the previous year to
  31 May; or
- **31 December**, for payment transactions from 1 June to 30 November.

Use **CP37S** for royalty and interest, **CP37DS** for s.4A income. Both conditions
must be met — one isolated small payment in a half-year does not qualify.

## Common mistakes

- **Assuming a foreign invoice with no Malaysian tax on it means no Malaysian
  tax.** The withholding obligation sits on you as payer whether or not the vendor
  has heard of it, and s.26A sits on you as acquirer.
- **Treating the two regimes as alternatives.** Paying imported-service SST does
  nothing for your withholding position, and withholding does nothing for your SST
  position.
- **Applying the offshore exemption to royalty.** It covers s.4A(i) and (ii) only.
- **Deciding the routing from the vendor's product name.** Practice Note 1/2018
  turns on whether you use an application to do the work yourself. Read the terms
  of service, not the marketing page.
- **Ignoring the permanent-establishment limb.** If the provider has a Malaysian
  presence, withholding is the wrong answer entirely.
- **Failing to check for a foreign registered person invoice before
  self-accounting SST.** You may be paying twice.

## What's next

Work through your last three months of card statements and recurring invoices, and
sort each foreign line into royalty, s.4A service or Malaysian-presence. Then run
the same list a second time for imported-service SST, because the sorting is
different. If the review turns up past periods,
[withholding-tax-non-compliance](/en/taxation/withholding-tax-non-compliance)
sets out what the exposure actually is.

## Sources

- Practice Note No. 1/2018 — Tax Treatment on Digital Advertising Provided by a Non-Resident — https://www.hasil.gov.my/wp-content/uploads/PN_NO_1_2018.pdf (LHDN)
- Guidelines on Taxation of Electronic Commerce Transactions, revised 13 May 2019 — https://www.hasil.gov.my/wp-content/uploads/guidelines_e_commerce_13052019.pdf (LHDN)
- Income Tax Act 1967 (Act 53), reprint as at 21 May 2024 — s.2 royalty definition, ss.15, 15A, 109, 109B — https://www.hasil.gov.my/wp-content/uploads/20240521-akta-cukai-pendapatan-1967-akta-53.pdf (LHDN)
- Withholding Tax — https://www.hasil.gov.my/en/perundangan/cukai-pegangan/ (LHDN)
- Public Ruling No. 10/2019 — Withholding Tax on Special Classes of Income — https://www.hasil.gov.my/wp-content/uploads/PR_10_2019.pdf (LHDN)
- Form CP37S (Pin. 1/2025) — Small Value Withholding Tax Payments, Royalty and Interest — https://www.hasil.gov.my/wp-content/uploads/cp37s-pin-1_2025.pdf (LHDN)

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