Malaysia-Singapore DTAA: Double Tax Avoidance Agreement

The following categories of taxpayers are addressed by the DTAA:

• Individuals who are subject to taxation of their personal incomes in Malaysia and Singapore;
• Companies considered for taxation of profits and other incomes in Malaysia and Singapore;
• Legal persons, association, and partnerships subject to taxation in Singapore and Malaysia.

The agreement covers the following type of taxes:

In Malaysia

• Income tax
• Petroleum income tax

In Singapore

• Income tax

The Singapore-Malaysia DTAA specifies the tax rates applicable to various types of income when that income flows from one country to the second country. See this table for more information.

For example, in the case of interest income, the specified withholding tax rate in the DTAA is 10%. This means that if a taxpayer resides in Singapore and receives interest income from Malaysia, the withholding tax rate on the income will be 10%. This is important since the rates specified in the DTAA can be different — and often are lower — than the corresponding prevailing tax rates of either country.

According to Article 4 of the DTA, for tax purposes the residency status shall be determined in accordance with the following rules:

1. Location of the permanent home
2. If an individual has a permanent home available to him in both countries, the location of his vital interests (personal and economic relations) is taken into account to determine residency
3. In case the two above-mentioned factors fail to determine the residency status, an individual will be regarded as a resident of the country in which he has a habitual abode
4. If he has a habitual abode in both countries or in neither of them, he will be considered a resident of the country of which he is a national
5. If neither of the above rules resolves residency, the competent authorities of the countries will settle the question by mutual agreement

Please note that if a person other than an individual (company, association, partnership) is a resident of both countries, then it will be considered to be a resident of the country in which its place of effective management of the entity is situated.

The term “Associated Enterprise” can be described as (i) an enterprise, which participates, directly or indirectly, in the management or control or capital of the other enterprise; or (ii) an enterprise, in respect of which one or more persons who participate, directly or indirectly, in its management or control or capital, are the same persons who participate in the management or control or capital of the other enterprise.

If Country A taxes a resident enterprise on profits made in Country B and such profits have already been taxed by Country B, Country A shall make appropriate adjustments to the amount of the tax charged on such profits.

The agreement eliminates double taxation through tax reliefs in one or both countries. In Malaysia, the Singapore tax paid by the taxpayer will be allowed as a credit tax against any similar local Malaysian tax. In Singapore, the Malaysian tax paid by a taxpayer will be granted as a credit tax against similar local Singaporean tax.

However, keep in mind that the credit provided shall not exceed the local country’s tax as computed before the credit is given. In other words, the credit will not exceed the local taxes, otherwise, it would result in a net negative tax in the local country.

Note that for the purpose of this credit computation, the tax payable shall not take into consideration any special waiver, exemptions, or grants provided by the respective jurisdictions. Thus, the taxpayer will continue to enjoy these benefits in the credit computation.

Dividends are traditionally taxed in the country of a recipient's residency. However, in some situations, they may also be taxed in the country of residency of the company that is paying dividends.

If the company is a resident of Country A and the recipient of the dividend is a beneficial owner and is a resident of Country B, the dividend tax charged by country A 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.

However, the above provisions will not be applicable if the recipient has a permanent establishment in the source country of the dividends (i.e. Country A) and such dividends are paid in respect of the shares of the permanent establishment or otherwise effectively connected with that establishment. Such dividend income will be treated as Business Profits or Independent Personal Services and subject to tax treatment in that country i.e. Country A.

Royalties include legally-binding payments made for the ongoing use of any intellectual property (i.e. copyright, patent, trademark, design or model, plan, etc.). Similar to the dividend and interest income, royalties are taxed generally in the country of the recipient's residency.

If such royalties are taxed in the country where they arise and the recipient is a resident of the other country the tax so paid in the country where it arise should not exceed 8% of the gross amount of the royalties. Without the treaty, the general withholding tax rate on royalties paid to non-residents in Malaysia and Singapore is 10%.

These rules are not valid if the recipient of the royalty has a permanent establishment in the country in which the payer resides and this royalty is attributable to that permanent establishment. Such income from royalties will be treated as business profits or independent personal services income.