Double Tax Agreement Malaysia and US: Understanding the Basics

For individuals and businesses operating across borders, the tax implications can be complex. In order to avoid double taxation, countries often enter into Double Tax Agreements (DTAs). One such agreement exists between Malaysia and the United States.

What is a Double Tax Agreement?

DTAs are bilateral agreements between two countries designed to prevent double taxation of the same income. They typically cover various types of income including business profits, dividends, interest, royalties, and capital gains. The aim of a DTA is to facilitate cross-border trade and investment by eliminating the tax barriers that could discourage foreign investment.

Double Tax Agreement Between Malaysia and the US

The DTA between Malaysia and the US came into effect in 1976 and was last revised in 2019. The agreement outlines a set of rules for income tax that apply to individuals and businesses in each country. Here are some of the key provisions of the DTA:

1. Taxation of Business Profits

Under the DTA, business profits are taxed in the country where the enterprise is based. However, if the enterprise operates in both countries, the profits are only taxed in the country where the enterprise has a permanent establishment (PE).

2. Dividends, Interest, and Royalties

Dividends, interest, and royalties are generally subject to withholding tax in both countries. However, the rates differ between the two countries. For example, the withholding tax rate on dividends paid to a US resident by a Malaysian company is capped at 10%, while the rate on interest paid to a US resident by a Malaysian company is capped at 15%.

3. Capital Gains

Capital gains obtained from the sale of shares in a company are taxed in the country where the shares are based. However, if the shares derive their value from immovable property located in the other country, that country can also tax the gain.

4. Avoidance of Double Taxation

The DTA contains provisions to ensure that individuals and businesses are not taxed twice on the same income. These provisions include tax credits, exemptions, and deductions.

Conclusion

The Double Tax Agreement between Malaysia and the US provides important guidelines for individuals and businesses operating in both countries. By eliminating double taxation and providing clarity on tax rules, the agreement facilitates cross-border trade and investment between Malaysia and the US. As always, it is important to seek the advice of a tax professional to ensure compliance with all relevant tax laws and regulations.