Foreign Software Withholding Tax: Who Pays 10%?
A foreign CRM or SaaS subscription carries 10% withholding tax that the vendor never deducts. Here is who really pays it, the RM math, and how to file it.
You pay it. When a Malaysian business pays an overseas vendor for software, LHDN treats the fee as a royalty and 10% withholding tax is due, and the vendor's card charge never deducts it. So the 10% comes out of your pocket, on top of the sticker price, with a form to file within a month.
That is the part every foreign pricing page leaves out, and the part most accountants only mention once the subscription is already running. This post walks through the withholding tax on a software subscription in Malaysia the way a business owner needs it: who pays, how much in ringgit, what to file, and what changes when the same tool is billed by a Malaysian company instead.
A subscription paid to a non-resident software vendor is a royalty under the Income Tax Act 1967, so 10% withholding tax applies on the gross amount and it is the Malaysian payer who owes it. On a RM300 a month plan that is RM30 a month, or RM360 a year, that the vendor never bills and LHDN still expects, plus a CP37 filing. The same plan billed by a Malaysian company carries no withholding tax at all, which is why the landed cost of two tools with the same sticker price can differ by hundreds of ringgit a year.
This is a plain-language explainer for business owners. Rates and thresholds are current as of September 2026. Confirm your own position with your tax agent before you file or skip anything.
Is a foreign CRM subscription really subject to withholding tax in Malaysia?
Yes. Since the Finance Act 2017 widened the definition of royalty in the Income Tax Act 1967 to include the use of, or the right to use, software, a payment to a non-resident for a software subscription falls under Section 109. LHDN's draft public ruling on software payments to non-residents (October 2023) describes a royalty as "a payment for the purchase or the use of, or the right to use, an application" (CCS & Co summary of the draft ruling). A monthly CRM plan, a design tool, an AI writing assistant: all of these are the right to use an application.
The rate is 10% of the gross payment. It does not matter that the servers are in Singapore or the United States, or that nobody from the vendor ever set foot in Malaysia. A royalty is taxed on where the payer is, not where the work happens (InCorp Malaysia). That is the difference between royalties and service fees. Service fees under Section 109B only attract withholding tax when the service is performed in Malaysia. Software does not get that escape.
One more distinction. Withholding tax is a direct tax collected by LHDN. It is not the 8% service tax on digital services that the vendor already adds to your invoice and pays to Customs. Those are two different taxes on the same bill, and you owe both.
Who actually pays the 10%, the vendor or you?
You do, in practice, every time. Withholding tax is designed so the payer deducts 10% and sends the vendor the remaining 90%. That design assumes an invoice you can short-pay. A foreign SaaS vendor charges your card the full amount on the first of the month. There is no tick box for "withhold 10%", and the vendor will suspend the account if you try to pay 90%.
So the 10% is paid out of your own funds, on top of the full sticker price, to LHDN. Strictly, LHDN computes the tax on the gross amount paid to the non-resident. If the vendor received RM300, the tax is RM30. Some tax agents gross the figure up on the basis that you have also borne the vendor's tax, which lifts it to about RM33. Either way, it is your cost and not the vendor's.
What happens if you do nothing is the more expensive question. Three things follow:
That last point is the one worth remembering. The withholding tax is not the real penalty. Losing the deduction is.
What does a RM300 subscription really cost, foreign-billed vs Malaysia-billed?
Take a six-person property agency in Puchong paying RM300 a month for a CRM. The sticker price is identical whether the vendor is in Singapore or in Kuala Lumpur. The landed cost is not.
| Line item | Foreign-billed vendor | Malaysia-billed vendor |
|---|---|---|
| Sticker price per month | RM300 | RM300 |
| Service tax at 8% (if the vendor is registered) | RM24, on the invoice | RM24, on the invoice |
| Withholding tax at 10% | RM30, paid by you to LHDN | None |
| Form to file | CP37 monthly, or CP37S half-yearly | None |
| E-invoice (turnover RM1 million and above) | You issue a self-billed e-invoice | The vendor issues the e-invoice |
| Treaty paperwork to lower the rate | Certificate of residence from the vendor | Not needed |
| Landed cost per month | About RM354, plus filing time | RM324 |
| Landed cost per year | About RM4,248 | RM3,888 |
The 8% service tax is a wash. Since 1 March 2024, foreign digital service providers registered with Customs charge 8% to Malaysian businesses, and so does a registered Malaysian IT vendor (BDO, 2024). The gap is entirely the withholding tax and the admin around it: RM360 a year in cash, twelve remittances or two, and a self-billed e-invoice for each payment once the agency crosses the e-invoice threshold.
Multiply that by the tool stack. An agency running a foreign CRM, a foreign design tool and a foreign AI assistant is quietly carrying three withholding tax obligations, each one small enough to ignore and each one capable of knocking out a deduction on audit.
Frequently Asked Questions
How do you file withholding tax on a small software subscription?
Most SME subscriptions fall under the small-value deferment, which turns twelve filings into two. The rule, effective 1 August 2022, covers recurring payments to a non-resident where the withholding tax is RM500 or less per transaction (Bernama, September 2022). On a 10% rate, that is any subscription up to RM5,000 a month.
How to File Withholding Tax on a Foreign Software Subscription in 5 Steps
The certificate of residence step is worth doing for any vendor you will keep for years. Large platforms publish theirs, and the paperwork is a one-time download (Silver Mouse). On a RM300 plan the treaty rate saves RM6 a month. On a RM3,000 plan it saves RM60 a month, which is real money for the price of an email.
When does the self-billed e-invoice step apply?
Only once you are inside the e-invoice mandate. Malaysia raised the exemption threshold from RM500,000 to RM1 million in annual turnover, effective 1 January 2026, and cancelled the phase that would have caught the smallest businesses (Sovos). If you are below that line, there is no e-invoice work on your foreign subscriptions at all. We covered what exempt businesses should do with that time in the guide to the RM1 million e-invoice exemption.
Above the line, the rule is simple and tedious. A foreign vendor does not issue e-invoices through MyInvois, so the Malaysian buyer must issue a self-billed e-invoice to document the expense (ClearTax). That means one self-billed e-invoice per subscription per month, for every overseas tool, on top of the withholding tax remittance. For businesses that came into scope during the phased rollout, the Phase 4 relaxation softened the penalties for a period. It did not remove the obligation.
The practical consequence is that the admin cost of a foreign tool scales with your growth. At RM800,000 turnover the subscription costs you RM360 a year in withholding tax and two filings. At RM1.2 million it costs the same RM360 plus twelve self-billed e-invoices, plus two filings. The Malaysian-billed tool costs the vendor's e-invoice, which is their job and not yours.
What this means when you are choosing software
The sticker price is not the price. That is the contrarian point, and it runs against how almost every SME shortlists a tool. Two vendors at RM300 a month are not tied. One of them costs RM360 more a year and a filing calendar, and the difference is invisible until the first tax computation.
There is a fairer way to compare. Add a line for the vendor's tax residency next to the price. A foreign vendor gets a 10% loading and a filing note. A Malaysian vendor gets neither. Then add the grant and deduction layer, which cuts the other way: the RM50,000 e-invoice tax deduction and the MSME Digital Grant each have their own qualifying rules, and neither depends on where the vendor sits. Read those guides for what qualifies; nothing in this post changes them.
The tax residency of the vendor is usually visible on the pricing page or the invoice. Raion's pricing, for example, is in ringgit and billed by Raion AI Sdn Bhd, a Malaysian company, which is why the plan price and the landed price are the same number. That is a fact about the invoice, not an argument about the software. Compare the tools on what they do first, then price them honestly.
If you are also weighing which processes the tool should automate, our pillar on CRM automation for Malaysian SMEs covers the workflow side, and it is worth reading before the tax side.
The bottom line
Withholding tax on a foreign software subscription in Malaysia is 10% of the gross fee, paid by you and not the vendor, due within a month or half-yearly under the RM500 small-value deferment. Skipping it costs more than paying it, because the expense stops being deductible until the tax and a 10% increase are settled. When two tools carry the same sticker price, the one billed by a Malaysian company lands cheaper by the whole 10% and by every form you never have to file.
