Malaysia: Domestic Corporate Taxation
Withholding Taxes on Incoming Remittances
Double taxation treaties are the usual means by which withholding taxes can be reduced or altogether eliminated on dividends remitted from a foreign subsidiary to a holding company. For example the double taxation treaty between Holland and Malaysia provides for no withholding taxes to be deducted on dividends, interest or royalties remitted from a Dutch subsidiary to a resident Malaysian holding company.
The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction. Malaysia has more than 60 double taxation treaties in place.
See Malaysian Double Tax Treaties for a listing and analysis of these treaties.
(N.B. If the foreign subsidiary is owned directly by the offshore Labuan company with no resident Malaysian holding company interposed, then the standard rate of withholding taxes (usually 25%) may be levied on dividends, loan interest and royalties remitted from the foreign subsidiary jurisdiction given that as an offshore territory Labuan may not be considered part of Malaysia for double taxation treaty purposes and given that double taxation treaties are usually the only means by which withholding taxes can be reduced on remittances flowing from the foreign subsidiary jurisdiction. Alternatively if the foreign subsidiary was owned directly by a resident Malaysian company with no offshore Labuan connection then although the situation might be favorable with respect to withholding taxes levied in the foreign subsidiary jurisdiction, in respect of other taxes (see below) such an entity would be denied the fiscal advantages enjoyed by the "Malaysian Satay" corporate structure).
In 2005, some of Malaysia's trading partners started to question the application of their double tax treaties with Malaysia to holding company structures involving Labuan.
In April 2009, Malaysia (Labuan) was blacklisted by the OECD as an 'uncooperative' territory in terms of tax transparency. It has since been placed on the OECD's watch list (or 'grey list') after committing to the 'internationally agreed tax standard'). In practice, this means signing up to at least 12 Tax Information Exchange Agreements.