Malaysia issued a draft public ruling regarding software royalties paid to non-residents

The draft public ruling introduces a comprehensive operational framework to clarify how software-related payments to non-residents are treated under the Malaysia Income Tax Act 1967 (MITA):

• A three-zone classification framework:
  • Green Zone covers payments involving non-substantive rights used strictly by individuals for personal purposes, or by businesses purely for internal administrative, management, or support functions. These can qualify for withholding tax exemption under existing Income Tax Exemption Orders.
  • Red Zone covers payments involving substantive rights utilised directly in core income-generating business activities. These are subject to withholding tax under MITA.
  • Yellow Zone applies to complex arrangements combining several elements such as software licences, technical services, hardware and/or training.
• Unbundling requirements: transactions should be reasonably unbundled (supported by appropriate documentation), with each component categorised into Green Zone or Red Zone. Otherwise, the tax treatment follows the predominant main substance and purpose of the contract.
• Business use versus personal or support use: software used for back-office support functions stays in Green Zone, but software used directly to deliver services or products to clients falls squarely in Red Zone.

The public consultation will close on 5 November 2026.