Guide To The Singapore-Malaysia Double Taxation Agreement
The Avoidance of Double Taxation Agreement between Malaysia and Singapore forms a major pillar supporting the bilateral cross-border flow of investment, trade, technical know-how and financial activities between the two states.
Putting aside the political issues of the past – including the short-lived union between the two nations in the 1960s – both Singapore and Malaysia have made sincere efforts to ensure congenial and mutually beneficial relations endure between them. As the economic relations deepen, these ties have grown stronger in recent years.
Despite acrimoniously separating in 1965, Singapore and Malaysia maintain deep lines of interdependency in economic resources and social ties. Singapore’s small land mass means that it is reliant upon importation of food and water from Malaysia, and Singaporean businesses employ many Malaysians resident in the bordering states. Many of these Malaysian workers retain Singaporean Permanent Residency, and either commute daily to or live within Singapore for work. Equally, Singapore has a long history of investment in Malaysia, and interest in the investment and business interests of the country is always high.
The bilateral relationship continues to flourish in intensity and breadth despite the existence of multiple long-standing disputes between the nations. Both Singapore and Malaysia share a dedication to the furthering of the ASEAN Community as well as the creation of a strong and unified regional market. The governments of both countries strongly believe that their respective peoples would benefit greatly from the strengthening of the regional grouping, enjoying new prosperity and growth. It is the policy of both governments that the prospects of a beneficial regional grouping increase through enhanced economic cooperation.
To assist with the cross-border flow of investment, trade, financial activities and technical know-how between Malaysia and Singapore, their respective governments have signed an Avoidance of Double Taxation Agreement (DTA). Ottavia provides this guide to the DTA as an overview of its provisions.
Understanding the Singapore-Malaysia DTA
A new DTA between the Government of Malaysia and the Government of the Republic of Singapore was concluded on 5 October 2004 and came into effect on 1 January 2007. This agreement supersedes a previous DTA signed in 1968.
|Nature of Income||Normal Withholding Tax Malaysia||Normal Withholding Tax Singapore||Treaty Rate|
|Technical Fees||Prevailing corporate tax rate (17%)||10%||5%|
|Capital Gains||Nil||Nil||Not discussed|
*Only applicable where the recipient of the dividend payment is a company owning a minimum of 25 per cent of the capital of the paying company.
Scope of application of the agreement
Persons who are resident in one or both Contracting States for the purposes of taxation are covered by the provisions of the double taxation agreement. A ‘person’ refers to an individual or body of persons such as a company that is treated as an entity for tax purposes. All taxes imposed on income by or on behalf of a Contracting State are to be covered by the provisions of the DTA, as well as all taxes imposed on elements of income or total income, including gains derived from the alienation of immovable or movable property, and taxes on the total amount of salaries or wages.
The provisions of the agreement apply to Malaysian income tax and petroleum tax. In Singapore, the agreement only covers income tax.
Any person who is resident in a Contracting State for tax purposes is referred to as ‘a resident of a Contracting State’.
Should an individual be resident of both countries, their tax residency is to be determined by the location of the resident’s permanent home. Should their permanent home be in neither Contracting State, their centre of vital interest is to be the determining factor. Where both the individual’s centre of vital interest and their permanent home are insufficient to determine their tax residency, the individual’s habitual abode is to be considered – should this also be insufficient to establish tax residency, their nationality will be used to determine their tax residency. Should the individual be a national of both or neither Contracting States, the competent authorities are to determine the individual’s tax residency through mutual agreement.
Where a person other than an individual is resident of both Contracting States, the location of the place of effective management shall be used to determine their tax residency. Where doubt arises, the competent authorities of the Contracting State shall take into consideration all relevant factors and determine the person’s residency through mutual agreement.
‘Permanent establishment’ (PE) refers to a fixed place of business through which an enterprise partly or wholly carries on its business. The exact nature of a PE can vary and PE can be used to refer to an office, workshop, factory, plantation, farm, drilling rig or similar installation, a mine, quarry, oil well or similar place of extraction of natural resources. Where a construction, assembly or installation project or building site lasts longer than six months it is to be considered a PE.
Where an enterprise of a Contracting State engages in supervisory activities in the other Contracting State for a period of time exceeding six months in connection with a construction, installation or assembly project or building site located in that other Contracting State, it is to be considered a PE.
Storage facilities retained for certain purposes such as the storage of goods for processing, display, display or other similar purposes are not to be considered Permanent Establishments. Similarly, the maintenance of a fixed place for the sole purpose of carrying on activities considered to be of an auxiliary or preparatory nature are not to be considered a PE.
The engagement of an agent of independent status such as a broker or general commission agent for the purpose of carrying out business in a Contracting State is not to amount to a Permanent Establishment. Where the activities of the agent are almost wholly or are wholly for the benefit of the enterprise engaging them, and where the agent acts on behalf of the enterprise and habitually exercises an authority to conclude contracts or secure orders, or maintains and delivers stocks of merchandise or goods on behalf of the enterprise, then the agent may be considered a PE. Should the activities be auxiliary in nature, the agent shall not be considered a PE.
Where a resident company of a Contracting State controls or is being controlled by a resident company of the other Contracting State shall not solely amount either company a PE of the other.
Important Provisions of the Agreement
Where a resident of a Contracting State receives dividends paid by a company resident in the other Contracting State, the income may be taxed in the first-mentioned State (the State in which the recipient resides). Dividend income may also be subject to taxation in the Contracting Sate in which it arose (in which the paying company resides). Where the recipient of the payment is the beneficial owner and a resident of the other Contracting State, the tax charged is not to exceed:
- 5 per cent of the gross dividend amount where the entity receiving the payment is a company in possession of a minimum of 25 per cent of the capital of the paying company;
- 10 per cent of the gross dividend amount in all other situations.
This provision is not to apply where the recipient has a PE in the same Contracting State in which the paying company is a resident and the dividend payment is effectively connected to that PE. In this situation, income is to be treated as business profit and subjected to the appropriate tax treatment.
Where a company resident in a Contracting State for tax purposes derives income originating from the other Contracting State, that company is not to be taxed by the other Contracting State on any undistributed profits, even where the undistributed profits consist party or wholly of profits arising in the other State. The other State is not to impose any tax on dividends paid by the company to persons who do not reside in the other State.
Because of Singapore’s single-tier tax system, the Inland Revenue Authority of Singapore (IRAS) does not impose a tax on dividends in the hands of recipients. Malaysia similarly does not tax dividends in the hands of recipients due to its own single-tier tax system.
Where interest arises in a Contracting State and is paid to a person resident in the other Contracting State, that interest payment is eligible for taxation in the other State (the State in which the recipient resides). The same interest payment may also be taxed in the Contracting State in which it arose, however, should the recipient of the payment be the beneficial owner of the interest, the tax charged by the State in which the interest arose shall not exceed 10 per cent of the gross interest amount.
Where a Singapore resident derives income an approved loan (as defined in section 2(1) of the Income Tax Act, 1967 of Malaysia), that income is to be exempt from tax in Malaysia.
A Government of a Contracting State shall be considered exempt from taxation by the Other Contracting State on interest payments derived in the other State.
Where the beneficial owner of the interest is in possession of a Permanent Establishment or fixed base in the same Contracting State in which the payer is resident, and the interest payments can be said to be effectively connected with the aforementioned PE or fixed base, then the above provisions are not to apply. Similarly, if interest arises in the Contracting State in which the payer is resident and the payer has a PE in the same Contracting State in which the beneficial owner is resident and the interest paid is connected to an indebtedness relating to the PE, then the interest is considered to have arisen in the other Contracting State.
Should a special relationship exist between the debtor and recipient of the interest payments due to which the interest paid is in excess of what would have otherwise been paid, the provisions of the double taxation agreement are only to apply to the amount of interest that would have otherwise been paid. Any excess amount is to be taxed according to the respective laws of each Contracting State.
Please note that in the absence of the double taxation agreement, foreigners receiving income paid by Malaysian residents are subject to a 15 per cent withholding tax, and Singapore levies a 15 per cent withholding tax on interest paid to non-residents.
Where royalties arise in a Contracting State and are paid to a resident of the other Contracting State, the other Contracting State has the right of taxation. The Contracting State in which the payer is resident determines where the royalties are said to have arisen.
Royalties may also be taxed in the in the Contracting State in which they arise according to the laws of the respective State. Should the recipient be the beneficial owner of the royalties, any tax charged is not to exceed 8 per cent of the gross royalty amount. Royalties encompass any payments received as consideration for the right to use or use of any copyright patent, design or model, plan, trademark, et cetera.
Should a special relationship exist between the payer and the recipient of the royalties, and because of the special relationship the amount of royalties paid is in excess of the amount that would have been paid in the absence of the relationship, the provisions of the double taxation agreement only apply to the amount that would have been paid. Any excess royalties are to be taxed according to the respective laws of each Contracting State.
Should the recipient of the royalty payments maintain a Permanent Establishment or fixed base in the same Contracting State in which the payer resides, and the royalty payments are effectively connected with the aforementioned PE or fixed base, the provisions of the double taxation agreement shall not apply.
The general Singaporean and Malaysian withholding tax rates on royalty payments made to non-residents is 10 per cent.
Technical fees taxation
Technical fees are defined as payments of any kind made to any person who is not an employee of the payer, made in consideration for the rendering of any services of a managerial, consultancy or technical nature.
Where technical fees arise in a Contracting State and are paid to a person resident in the other Contracting State, those fees are eligible for taxation in the other State (the State in which the recipient resides). The Contracting State in which the payments arose may also tax the technical fees. Should the recipient of the fees be the beneficial owner, the tax charged by the State in which the payments arose shall not exceed 5 per cent of the gross amount of the technical fees.
The Contracting State in which the payer is resident and in which the services for which the technical fees are made in consideration of were performed shall determine where the technical fees arose. Where the payer of the technical fees has a Permanent Establishment or fixed base in the same Contracting State in which the recipient resides, and the technical fees are related to the aforementioned PE, then the technical fee is said to arise in the same Contracting State as the recipient.
The provisions of the double taxation agreement do not apply should the recipient of the fees have a Permanent Establishment or fixed base in which the person paying the technical fees is resident, and the payment is effectively connected with said PE or fixed base.
The general Malaysian withholding tax rate on technical fees paid to non-residents is 10 per cent. The prevailing Singapore corporate tax rate of 17 per cent is used as the corresponding withholding tax rate in Singapore.
Income from property
Where a resident of a Contracting State derives income from immovable property located in the other Contracting State, the resulting payments may be taxed in the other State (the State in which the immovable property is situated). This provision also covers income derived from immovable property used for the performance of independent personal services and immovable property owned by an enterprise.
The double taxation agreement covers income that results from the direct use, the letting, or any the use in any other form of immovable property. ‘Immovable property’ as a term refers to properties defined by the respective laws of the Contracting State in which the immovable property is situated. The term is to include any accessories, equipment, rights, livestock and usufruct of the immovable property, as well as rights to any fixed or variable payments made as consideration for the right to work or working of mineral deposits.
Where an enterprise is resident in a Contracting State, its profits are only eligible for taxation in the State in which it resides, unless it carries on business in the other Contracting State through the operation of a Permanent Enterprise. Only the portion of the profit accrued that can be effectively attributed to the PE is eligible for taxation in the other Contracting State.
When determining the profits of the Permanent Enterprise, it is to be allowed all expenses that could be reasonably attributed to it, and all deductions that could be reasonably deductible were it an independent enterprise. The profits of the PE are to be determined as if it were a distinct and separate enterprise that is engaged in the same or similar activities and operating under the same or similar conditions of the enterprise of which it is a PE.
The mere purchase of goods or merchandise by a PE for the controlling enterprise does not render profits attributable to that PE. Unless there is a valid reason to alter it, the method by which profit is attributed to the PE must be the same every year.
The provisions of the double taxation agreement shall not impede the discretion of the competent authority nor the laws of the Contracting State where the information available to the competent authority is inadequate.
Income from Air and Shipping Transport
Where an enterprise of a Contracting State derives income from the operation of aircraft and ships in international traffic, those profits are only taxable in the Contracting State in which it is resident.
The provisions of the double taxation agreement apply to the share of the income derived by the enterprise of the Contracting State from the operation of aircraft or ships through the enterprise’s participation in a pool, international operating agency or join business.
Profits derived from the operation of road vehicles in international traffic for the carriage of passengers by an enterprise of a Contracting State are only to be taxed in that State.
Defining Associated Enterprises
Where an enterprise or persons involved in an enterprise of a Contracting State participate either indirectly or directly in the control, capital or management of an enterprise resident in the other Contracting State, the enterprises are said to be associated enterprises.
The profitability and income of the associated enterprises will be affected by the differing terms and conditions of operations and transactions between the enterprises.
The double taxation agreement provides that in the case of associate enterprises the Contracting States may deem a taxable income that the enterprises would have otherwise accrued had the associated enterprises been independent. This new taxable income will be taxed accordingly.
When a Contracting State taxes the profits of a resident enterprise, and said profits have already been taxed by the other Contracting State, but the State in which the enterprise resides deems such profits would have been accrued had the enterprise not been part of an associated enterprise, it may make appropriate adjustments to the amount of tax levied on the aforementioned profits, pending the agreement of the other State that the adjustment is justified. Where necessary the competent authorities of the Contracting State shall consult each other.
Independent personal services
Where a resident of a Contracting State derives income in respect of activities of an independent character such as professional services, that income is only to be taxed in the State in which they reside, unless the resident maintains a fixed base for the performance of those services in the other Contracting State. The other Contracting State is only entitled to tax the portion of the income effectively attributable to the fixed base.
‘Professional services’ refers to independent artistic, literary, scientific, educational or teaching activities as well as independent activities undertaken by lawyers, accountants, physicians, dentists, engineers and architects.
Dependant personal services
Any remuneration derived by a resident of a Contracting State for employment such as a salary or wage is only eligible for taxation in the State in which they reside, unless the employment was exercised in the other Contracting State. Where the employment was so exercised, any remuneration is eligible for taxation in the other Contracting State. Even where the employment was exercised in the other Contracting State, the recipient is only eligible for tax in the State in which they reside under the following circumstances:
- the recipient was only present in the other Contracting State for 183 days in the aggregate over a single period or multiple periods in the relevant calendar year; and
- the remuneration was paid by or on behalf of an employer resident in the same Contracting State as the recipient; and
- the remuneration was not borne by a Permanent Establishment maintained by the employer in the other Contracting State.
Where a resident of a Contracting State derives income from directors’ fees and other similar payments in their capacity as a member of the board of directors of a company resident in the other Contracting State, that income is eligible for taxation in the other State (the State in which the company is resident).
Sportspeople and artists
Income derived by an athlete or an entertainer such as a theatre, radio, television or motion picture artiste or musician resident in a Contracting State as recognition for personal activities exercised in the other Contracting State are eligible for taxation in the other State. This income may be exempt from taxation where it is accrued for activities exercised in a Contracting State under a mutually agreed upon exchange program, or is substantially supported by the public funds of the Government of a Contracting State, or a political subdivision, statutory body or local authority of the same.
Where the activities are performed in a Contracting State by an enterprise of the other Contracting State, any profits derived from the provision of these activities may be taxed in the first mentioned Contracting State (the State in which the activities were performed).
Annuities and pensions
Where an individual resident in a Contracting State is the recipient of a pension, annuity or other similar remuneration arising in the other Contracting State and paid by or out of funds created by a political subdivision, local authority, or statutory body of the other Contracting State or the other Contracting State itself in consideration of previous employment, that income may be taxed in the other Contracting State (the State in which the income arose).
‘Annuity’ refers to a stated sum payable periodically at state times, either during life or during an ascertained or specified period of time, under an obligation to make the payments in return for adequate and full consideration in money or in money’s worth.
Persons performing Government Services
Remuneration other than a pension such as wages or salaries paid by a political subdivision, local authority, or statutory body of the Contracting State or the Contracting State itself to an individual as recognition for the rendering of services to that state, subdivision, authority or body are to be taxed in that State.
Such remunerations may only be taxed in the other Contracting State where the services for which the payment is made in respect of were rendered in that state and the resident recipient is both a national of the other State and his residency is retained not solely for the purpose of rendering that service.
The provisions of the double taxation agreement relating to personal services and directors’ fees shall apply where the remuneration and pensions for services rendered was in connection with any business or trade carried out by a political subdivision, local authority, or statutory body of the other Contracting State or the other Contracting State.
Trainees and students
Where a student or trainee was a resident of a Contracting State immediately prior to their temporarily being present in the other Contracting State solely for the purpose of training or education, they shall be exempt from taxation in the other state. This exemption shall cover all remittances and grants received by the student or trainee from abroad.
Professors, researchers and teachers
Any individual resident in a Contracting State immediately prior to making a visit to the other Contracting State on invitation for a period of time not to exceed two years solely for the purpose of teaching or research at an education institute in that other Contracting State that exists primarily for the purposes of conducting research such as a university, school or college shall be considered exempt from taxation by that other Contracting State on any remuneration received for such research or teaching. This provision is not to apply where the teaching or research is conducted purely for private interest.
Incomes not expressly mentioned
Incomes not covered by a provision of the double taxation agreement are to be taxed in the Contracting State in which the beneficial owner is resident. It may also be taxed in the other Contracting State should such income be derived from sources in the other State.
Relief from double taxation
The double taxation agreement provides relief from double taxation for residents of one Contracting State where income is subject to taxation in both Contracting States.
For Malaysia, Singaporean tax payable on income derived from Singapore is to be allowed as a credit against Malaysian tax payable on that same income. Equally, Malaysian tax payable on income derived from Malaysia shall be allowed as a credit against Singaporean tax on the same income. Any credit provided is not to the exceed the respective country’s pre-credit tax. Tax payable is not to take into consideration any exemptions, grants or special waivers provided by the respective jurisdictions for the purpose of credit computation, and the tax payable is to take into consideration tax payable in the absence of waivers and reductions.
Where dividend income is paid to a Malaysian company or resident by a Singapore company in which the Malaysian company or resident owns a minimum of 10 per cent voting rights, Malaysian is to take into account Singaporean tax payable by that company in respect of the income out of which it makes its dividend payments. However, the credit is not to exceed the chargeable Malaysian tax, computed prior to the granting of the credit. Correspondingly, a credit equal to any Malaysian tax payable by the company in respect of the income from which the dividend is drawn shall be granted in the case of a Singaporean recipient.
With the ASEAN Community growing in prominence and economic power, the often tumultuous relationship between Singapore and Malaysia is becoming an increasingly prosperous one linked by strong, progressive economic ties. Singapore’s strength of infrastructure, technology, international connectivity and its financial agility and mature enterprise ecosystem combined with Malaysia’s rich labour and natural resources mean global investors and enterprises stand to benefit greatly from strengthening ties. Those targeting the South East Asian economies should consider establishing subsidiary companies in Singapore and leveraging its robust DTA and trade treaty network.
For more details on the specific provisions covered by the Singapore-Malaysia tax treaty, please refer to the website of the Inland Revenue Authority of Singapore.
For a general overview of the double taxation agreements of which Singapore is a party, please refer to Ottavia’s Singapore Double Taxation Agreements (DTA) Guide.
Contact Ottavia for personalised assistance with your personal or corporate income tax.