The Singapore-Malaysia Double Tax Treaty

In order to facilitate the cross-border flow of trade, investment, financial activities and technical know-how between the two countries the governments of Malaysia and Singapore have signed Avoidance of Double Taxation Agreement (DTA).

Singapore and Malaysia have endeavored to foster a congenial relationship despite several issues simmering between the countries as political hot potatoes. After the short-lived forced union and the acrimonious issues that ensued after the separation, the two countries have been sincere in their efforts to sooth the bilateral ties that has grown stronger in the recent years.

Although Singapore separated from Malaysia in 1965, the two countries are significantly interdependent in terms of economic resources and social ties. Singapore’s food imports and water are considerably met through imports from Malaysia and a major section of Malaysian workforce from the bordering states is employed in Singapore. Many Malaysians employed in Singapore are Permanent Residents and lots of them either commute on a daily basis or live in Singapore due to their work commitments. Similarly, Singapore individuals and enterprises have business and investment interests in Malaysia.

Despite several long-standing disputes between the countries, the bilateral relationship has continued to span out well. Both countries share a common vision for a strong unified regional market and are committed towards the establishment of the ASEAN Community. The leaders from both sides believe that their people would enjoy prosperity and growth from such a regional grouping, and the prospects of which will be robust through enhanced economic cooperation between the two countries. In order to facilitate the cross-border flow of trade, investment, financial activities and technical know-how between the two countries, the governments of Malaysia and Singapore have signed an Avoidance of Double Taxation Agreement (DTA). The following is an Overview of the DTA.

Singapore – Malaysia DTA

The Government of the Republic of Singapore and Government of Malaysia concluded a new DTA in 5 October 2004, the agreement is effective since 1 January 2007. Earlier, a DTA signed in 1968 was in effect and it has been replace by the provisions in the new version signed in 2004.

Snapshot

Nature of Income Normal Withholding Tax Malaysia Normal Withholding Tax Singapore Treaty Rate
Dividends Nil Nil 5%* or 10%
Interest 15% 15% 10%
Royalties 10% 10% 8%
Technical Fees Prevailing corporate tax rate (17%) 10% 5%
Capital Gains Nil Nil Not discussed

* Applicable if the recipient is a company, which owns directly at least 25% of the capital of the company paying the dividends

Scope of Application

The provisions of the DTA apply to persons who are residents of one or both of the Contracting States. “Person” includes an individual, a company and any other body of persons, which is treated as an entity for tax purposes. The provisions of the DTA shall be applicable to all taxes imposed on income on behalf of a Contracting State. The provision covers all taxes imposed on total income or on elements of income including taxes on gains from the alienation of movable or immovable property, taxes on the total amount of wages or salaries.

In the case of Malaysia, the provisions shall apply to the income tax and petroleum tax. In the case of Singapore, the agreement covers income tax.

Residency

The term “a resident of a Contracting State” means any person who is resident in a Contracting State for tax purposes of that Contracting State.

In case of an individual, who is a resident of both countries, his tax residency shall be determined by the location of his permanent home, but if permanent home is in both countries or in neither of them then the center of vital interest shall be taken into account. When both permanent home or vital interest factors fail to determine the residency then habitual abode will be considered and if the individual does not have habitual abode in both the countries then the nationality will be taken into consideration and where the individual is a national of both countries or neither of them then the contracting states shall determine the residency through mutual agreement.

If the person, other than an individual, is a resident of both the contracting states then the residency shall be determined by the state in which its place of effective management is situated. In cases of doubt, the competent authorities of the contracting States shall determine the residency through mutual agreement by taking into consideration all relevant factors.

Permanent Establishment

“Permanent establishment” (PE) means a fixed place of business through which the business of an enterprise is wholly or partly carried on. PE includes office, factory, workshop, farm, plantations, installations such as drilling rig, places of extraction of natural resource such as mines, quarry, oil wells etc. Building site or construction, assembly or installation project constitutes a permanent establishment only if it lasts more than six months.

Supervisory activities by an enterprise of a contracting state carried on in the other State for more than 6 months in connection with a building site or a construction, installation or assembly project, which is being undertaken in that other State will constitute a PE.

Storage facilities held for certain purposes, such as storage of goods for the purpose of display, delivery, processing etc., would not amount to a PE. Likewise, maintenance of a fixed place solely for the purpose of carrying on activities that are of a preparatory or auxiliary nature will also not amount to PE.

Engagement of a broker, general commission agent or any other agent of an independent status for carrying out business in one of the contracting state will not amount to PE. If the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise, is acting on behalf of an enterprise and habitually exercises an authority to conclude contracts, secure orders, or maintains and delivers stock of goods or merchandise on behalf of the enterprise in a contracting state, then the agent is deemed to be a PE. However, if the activities carried out by the agent is auxiliary in nature, it will not amount to a PE.

A resident company of a contracting state controlled or being controlled by a resident company of other contracting state shall not by itself amount either company a PE of the other.

Important Provisions

Tax on Dividends

Dividends paid by a resident company of a Contracting State to a resident of the other Contracting State may be taxed in that other State. However it may be subjected to tax in the Contracting State of which the company paying the dividends is a resident. But where the recipient of the dividend is the beneficial owner and resident of the other contracting state, the tax so charged shall not exceed-

  • 5% of the gross amount of the dividends if the recipient is a company which owns directly at least 25% of the capital of the company paying the dividends;
  • 10% of the gross amount of the dividends in all other cases.

This provision shall not apply if the recipient has a PE in the contracting state of which the company paying the dividends is a resident and such dividend received is effectively connected to that PE. Such income from dividends connected to a PE will be treated as a Business Profit and subjected to tax treatment accordingly.

A company resident of a Contracting State deriving income from the other Contracting State, shall not be taxed by the other state on the undistributed profits even if the undistributed profits consist wholly or partly of income or profits arising in such other State. The other State may not impose any tax on the dividends paid by the company to persons who are not residents of that other State.

Singapore does not impose tax on dividends in the hands of the recipient, because of its single tier taxation system. Malaysia also follows single tier taxation therefore dividends in the hands of the recipients are tax-free.

Tax on Interest

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such interest may also be taxed in the Contracting State in which it arises if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount.

Interest derived by a Singapore resident, on approved loans as defined in section 2(1) of the Income Tax Act, 1967 of Malaysia shall be exempt from Malaysian tax.

The Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of interest derived from that other State.

The above provisions shall not be applicable if the beneficial owner of the interest, has a PE or fixed base in the contracting state in which the payer is resident and the interest paid is effectively connected with such PE or fixed base. Likewise interest arises in the contracting state where the payer is resident, however if the payer has a PE in the other contracting state in which the beneficial owner is resident and the interest is paid in connection with an indebtedness related to that PE then the interest is said to arise in the other contracting state.

If, due to the special relationship existing between the payer and the recipient, the interest paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of interest paid will be taxable according to the laws of each Contracting State.

It must be noted that in the absence of the DTA foreigners receiving interest from Malaysian residents will be subjected to 15% withholding tax and Singapore charges a 15% withholding tax on interest paid to Non-residents.

Tax on Royalties

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State.

However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 8% of the gross amount of the royalties. Royalties encompass payments of any kind received as a consideration for the use of, or the right to use, any copyright patent, trade mark, design or model, plan etc.

If, due to the special relationship existing between the payer and the recipient, the royalties paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of royalty will be taxable according to the laws of each Contracting State.

The provisions shall not be applicable if the recipient of the royalty has a PE or fixed base in the contracting state in which the payer is resident and the royalty paid is effectively connected with such PE or fixed base.

The general Withholding tax rate on royalties paid to non-residents in Malaysia is 10% and the corresponding Singapore rate is 10%.

Tax on Technical Fees

Technical fees are payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any services of a technical, managerial or consultancy nature.

Technical fees arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such technical fees may also be taxed in the Contracting State in which it arises if the recipient is the beneficial owner of the fees, the tax so charged shall not exceed 5% of the gross amount.

Technical fees shall be deemed to arise in a Contracting State when the payer is a resident of that State and the services are performed in that State. However, if the payer has a PE in the other contracting state in which the recipient is resident and the fees incurred is related to that PE, then the fee is said to arise in the other contracting state.

The provisions shall not be applicable if the recipient of the fees has a PE or fixed base in the contracting state in which the payer is resident and the fees paid is effectively connected with such PE or fixed base.

The general Withholding tax rate on technical fees paid to non-residents in Malaysia is 10% and the corresponding Singapore rate is the prevailing corporate tax rate, which is presently 17%.

Treatment of Income from Property

Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. Income from immovable property of an enterprise and income from immovable property used for the performance of independent personal services shall also be covered by this provision.

Income from direct use, letting or use in any other form of immovable property shall be covered by the agreement. The term “immovable property” shall comprise of properties as defined by the law of the contracting state in which the property is located. It shall include accessories, equipment, livestock, rights and usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral.

Treatment of Business Profits

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. But only that portion of the profit that can be effectively attributable to the PE can be taxed in the other Contracting State.

For the purpose of determining the profits of the PE, it shall be allowed all expenses and deductions that could be reasonably attributable to the PE and deductible if the PE were an independent enterprise and profits of the PE shall be determined as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE.

A PE’s mere purchase of goods or merchandise for the enterprise shall not render profits attributable to that PE. Profit attribution to the PE must be made by the same method every year unless there is a valid reason for the contrary.

Where information available to the competent authority is inadequate the provisions of the agreement shall not impede the laws of the contracting state or the discretion of the competent authority.

Treatment of Income from Shipping & Air Transport

Profits derived by an enterprise of a Contracting State from the operation of ships and aircraft in international traffic shall be taxable only in that Contracting State.

The provisions applies to the share of the income from the operation of ships or aircraft derived by an enterprise of a Contracting State through participation in a pool, a joint business or an international operating agency.

Profits derived by an enterprise of a Contracting State from the operation of road vehicles in international traffic for the carriage of passengers shall be taxable only in that State.

Treatment of Associated Enterprises

If an enterprise or persons involved in an enterprise of a Contracting State participate directly or indirectly in the management, control or capital of an enterprise of the other Contracting State the enterprises involved are said to be associated enterprises.

The terms and conditions of operations and transactions between the associated enterprise will differ from those made between independent enterprises, thus affecting the profitability and income of the enterprises.

In the case of associate enterprises the DTA provides that the contracting states may deem a taxable income that would have otherwise accrued if the parties were independent and tax the enterprises accordingly.

If a contracting state taxes a resident enterprise on profits, and such profits are already taxed by the other contracting state, but the first mentioned state deems such profits would have accrued to the enterprise if not for the associated enterprise condition, it shall make appropriate adjustment to the amount of the tax charged on those profits, provided the other State considers the adjustment justified.  The competent authorities of the Contracting States shall, if necessary, consult each other.

Treatment of Individual Income

Independent Personal service

Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State unless he has a fixed base to perform the services in the other contracting state. The other state may tax only that portion of the income that can be effectively attributed to that fixed base.

The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

Dependent Personal Service

Salaries, wages and other similar remuneration derived by a resident of a State for employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration may be taxed in that other State. However, even if the employment is exercised in the other Contracting State the recipient shall only be subjected to tax in the first mentioned state in the following circumstances

  • the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and
  • the remuneration is paid by, or on behalf of, an employer who is a resident of the first-mentioned State; and
  • the remuneration is not borne by a PE which the employer has in the other State

Director’s Fees

Directors’ fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

Artists & Sportsmen

Income derived by a resident of a State as an entertainer, such as a theater, motion picture, radio or television artiste, or a musician, or as an athlete, from his personal activities as such exercised in the other State, may be taxed in that other State. However, such incomes shall be exempt from tax if they are accrued for such activities exercised in one of the contracting state under some mutually agreed exchange programs or substantially supported by public funds of the Government, a political subdivision, a local authority or a statutory body of the other Contracting State.

If the activities are performed in a Contracting State by an enterprise of the other Contracting State the profits derived from providing these activities by such an enterprise may be taxed in the first-mentioned Contracting State.

Pensions

Pensions and other similar remuneration and annuity arising in a Contracting State and paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority or a statutory body, to a resident of the other Contracting State in consideration of past employment may be taxed in the first-mentioned State.

The term “annuity” includes a stated sum payable periodically at stated times, during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.

Persons on Government Service

Salaries, wages and other similar remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority or a statutory body to an individual in respect of services rendered to that State, subdivision, authority or body would be taxed by that State.

However such remunerations will be taxable only in the other contracting state if the services are rendered in that state and the resident recipient is a national of the state and his residency is not solely for the purpose of rendering the service.

For remuneration and pensions received for services rendered in connection with any trade or business carried on by a Contracting State or a political subdivision or local authority or statutory body thereof, provisions relating to personal services & Director’ Fees shall apply.

Students and Trainees

Students and trainees who were residents of a contracting state immediately before visiting the other contracting state, for the purpose of training or education and are temporarily present in the other contracting state solely for the purpose of education or training, shall be exempt from tax in the other state. Taxation in the other state shall be exempted on all remittances and grants received from abroad.

Teachers Professors and Researchers

An individual, who is a resident of a Contracting State immediately before making a visit to the other Contracting State, on invitation visits that other Contracting State for a period not exceeding two years solely for the purpose of teaching or research or both at any university, college, school or other similar educational institution, which exists primarily for research purposes or other similar public institution, in that other Contracting State shall be exempt from tax in that other Contracting State on his remuneration for such teaching or research. This provision shall not apply if such teaching or research is purely for private interest.

Incomes not Expressly Mentioned

The incomes not covered in the DTA articles shall be taxed in the contracting state where the beneficial owner is resident and if such income is derived from sources in the other Contracting State, it may also be taxed in that other State.

Elimination of Double Taxation

The DTA provides relief from double taxation where income is subject to tax in both Contracting States.

In the case of Malaysia, Singapore tax payable in respect of income derived from Singapore shall be allowed as a credit against the Malaysia tax payable in respect of that income. The Malaysia tax payable in respect of income derived from Malaysia shall be allowed as a credit against Singapore tax payable in respect of that income. The credit thus provided shall not exceed the respective country’s tax as computed before the credit is given. For the purpose of credit computation the tax payable shall not take into consideration any special waiver, exemptions or grants provided by the respective jurisdictions and take into consideration the tax payable in the absence of such waivers and reduction.

Where it is a dividend income paid by a Singapore company to a Malaysia company or resident owning a minimum of 10% voting rights in the paying company, Malaysia shall take into account Singapore tax payable by that company in respect of its income out of which the dividend is paid, but the credit shall not exceed that part of the Malaysian tax chargeable, as computed before the credit is given. Correspondingly,  in the case of a Singapore recipient a credit equivalent to Malaysian tax payable by the company in respect of its income out of which the dividend is paid shall be taken into account.

Conclusion

With the ASEAN Community nearing reality the love-hate relationship between Singapore and Malaysia is transforming into prop and prosper link inked by progressive economic treaties. Malaysia is rich in natural and labor resources Singapore is strong in terms of technology, infrastructure, financial agility, enterprise ecosystem and international connectivity. Global investors and enterprises targeting the growing South East Asian economies will immensely benefit by establishing subsidiary companies in Singapore and leveraging on its DTA and other trade treaty network.

For more details on the specific provisions covered under the tax treaty between Singapore and Malaysia, please refer to IRAS Website.

For general information on Singapore DTAs, refer to

Singapore Double Taxation Agreements (DTA) Guide.

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