Explained: The Double Taxation Agreement Between Singapore and Malaysia

When Does Double Taxation Take Place?

Double taxation happens when the same income is taxed in two different countries. For instance, Malaysia’s tax residents working in Singapore will have to declare their income in Malaysia and in Singapore. This is prevented under the double taxation agreement between Singapore and Malaysia. A double tax agreement or a double tax treaty is an agreement that determines which state has the right to impose taxes when income flows between two states. It outlines what is considered Malaysia income tax, Singapore income tax, as well as business tax in both countries. 

Why The Need for Double Tax Treaties? 

Businesses operating in more than one country need to adjust their structure and operations to maximise their tax position, reduce costs, and increase global competitiveness. Double tax treaties play an essential role for such businesses. A business established in Singapore may have operations or an office in Malaysia. If it is subject to Malaysia tax and Singapore tax, it will impact the company’s profit considerably. A double tax agreement, like the double taxation agreement between Singapore and Malaysia, prevents businesses from having to bear the burden of paying taxes twice.

What is The Double Taxation Agreement between Singapore and Malaysia?

The Singapore-Malaysia double taxation agreement prevents double taxation in either country and acts as a safeguard against fiscal evasion. The Double Taxation Agreement in Singapore and Malaysia is one among numerous double tax treaties signed by Singapore with other countries.  

The double taxation agreement in Singapore and Malaysia covers taxes levied on both states. The main taxes covered by the double taxation treaties in Singapore are income and corporate taxes, while the main taxes in Malaysia are income and petroleum taxes. 

What Are The Key Objectives and The Scope of the Double Tax Agreement? 

The major aim of the double tax treaty is to ensure that there is no tax evasion and that taxpayers are not penalised through double tax payments. The double taxation agreement between Singapore and Malaysia applies to individuals and businesses that are tax residents in Malaysia or tax residents in Singapore. 

How Will a Business Based in Singapore Benefit from the Double Tax Agreement?

When a Singapore-based business receives foreign income, there are two possibilities for taxation:

1. The company would only be taxed under one jurisdiction in case there is a provision of tax exemption under any relevant double tax agreement
2. The income will also be taxed in the foreign jurisdiction if the relevant double tax agreement does not offer a tax exemption but a reduction in the tax rate. In such cases, the relevant double tax agreement will provide relief for the tax charged twice by allowing the Singapore business to claim a credit equivalent to the Malaysian tax, which is payable on the same income. This credit is known as double tax relief.

What Taxes Does the Singapore-Malaysia Double Tax Treaty Cover in Singapore and Malaysia?

The Singapore-Malaysia Double Tax Treaty covers taxes on income. It covers income tax in Singapore, and petroleum and income tax in Malaysia. 

Who Can Benefit from the Singapore-Malaysia Double Tax Treaty?

The Double Tax Treaty between Singapore and Malaysia applies to both individuals and businesses in one of the two countries and completing various activities in the other country. 

Taxpayers under the following categories are considered under the Singapore-Malaysia Double Tax Treaty:

1. Individuals subject to taxation of their personal incomes in Singapore and Malaysia
2. Businesses considered for taxation of profits and other incomes in Singapore and Malaysia
3. Enterprises of a contracting state which are deemed for taxation in the other state signatory of the agreement
4. Legal persons, associations, and partnerships subject to taxation in Singapore and Malaysia

What Are The Residency Requirements under the Singapore-Malaysia Double Tax Treaty? 

The following are the residency requirements for a tax resident in Malaysia and in Singapore who have to pay tax in Malaysia or tax in Singapore:

• A person or a business must be a resident of one of the two contracting states to benefit from the double taxation agreement between Singapore and Malaysia.  
• A person or a business is considered a resident of Singapore if they pay their taxes in Singapore, and a person is considered a Malaysia tax resident if they pay their tax in Malaysia. 

Residency also depends upon the place where a person has property. If a person lives in both states, the state where the person or a business has its centre of vital interest would determine residency. Companies or a body of people whose business control and management are exercised in Singapore are also considered residents of Singapore. The same applies to tax residents in Malaysia. 

What are Permanent Establishments under the Singapore-Malaysia Double Tax Treaty?

A fixed place of business from where operations of an enterprise are fully or partly carried out is considered its permanent establishment. It essentially includes a place of management or a branch, an office or a factory, a workshop or a mine, an oil or gas well, a quarry or any other area of extracting natural resources or a building site or construction, or an installation or assembly project that has existed for over six months.

The term “permanent establishment ”does not include- 

1. Facilities for storing, displaying or delivering goods belonging to the company
2. Maintaining a stock of goods or merchandise that belongs to the enterprise or is to be processed by another enterprise
3. A business’s fixed place that is maintained for purchasing goods or collecting data 
4. A company’s fixed place that is established especially for carrying on the company or any other preparatory or auxiliary activity 

A business established in Singapore or Malaysia will be considered a permanent establishment in the other country if it executes supervisory activities in the other country for more than six months. This could be related to building a site or construction, installing or assembling activities, drilling, etc. 

If the enterprise is simply carrying out business activities without an established presence in the country, it will not be considered a permanent establishment. 

What Are Important Provisions of the Singapore-Malaysia Double Tax Treaty Applicable to Businesses?

The Singapore-Malaysia Double Tax Treaty is a comprehensive document that addresses income from various sources, including business profits, shipping, air and road transport, etc. for Singapore tax residents and Malaysia tax residents. 

The important provisions of the Singapore-Malaysia Double Tax Treaty that apply to businesses are:‍

Tax on dividends

Dividends are taxed in the state of the recipient’s residency. They may also be taxed in the state of residency of the business, which sometimes pays dividends. 

 If the business is a resident of Singapore and the recipient of the dividend is a beneficial owner and is a resident of Malaysia, the dividend tax charged by Singapore should not exceed:

1. Five percent of the gross amount of the dividends if the receiver is a business which directly owns at least 25% of the capital of the business which is paying the dividends
   
   
2. Ten percent of the gross amount of dividends in all other cases. However, the above provisions will not be applicable if the recipient has a permanent establishment in the source state of the dividends, and such dividends are paid according to the shares of the permanent establishment. Such dividend income will be considered business profits or independent personal services and subject to tax treatment in that state.

Tax on technical fees

Technical fees are taxed in the state from which the fees are derived. The tax shall not exceed 5% of the gross amount of the technical fees.

Income from property taxes

Income from immovable property, such as rent on a building, is taxable in the state where the property is located. For instance, rent from a property in Singapore will be taxed in Singapore even if the business owning it is established in Malaysia. 

Business profit taxes 

The profit of a business in a contracting state shall be taxable only in that State unless the enterprise carries on its operations in the other contracting state through a permanent establishment situation. If the business carries on its operations as mentioned above, the profits will be taxed in the other state only to the extent attributable to the permanent establishment. 

If an independent firm has a permanent establishment, whether it is in Malaysia or Singapore, deduction expenses, including executive and general administrative expenses, would be deductible. The profit of the permanent establishment will have to be calculated using the same method every year unless there is a valid reason not to do so. 

Tax on income from shipping and transport

Profit from the operation of ships by a business that is a resident of a country will be taxable only in that country. For instance, if a Singapore business owns a ship, then profit from the shipping business will only be taxed in Singapore.  

Tax on associated enterprises

In situations where a company of a contracting state, in this case, Singapore or Malaysia, participates directly or indirectly in the management, control, or capital of an enterprise of the other contracting state or the same people are directly or indirectly involved in the management, control or capital of the enterprise of the other contracting state, it is called an associated enterprise. 

If one country taxes a resident enterprise on its profit, and the profit is already taxed in the other country, then appropriate adjustments will be made to the taxation. The authorities of both countries will consult each other to understand what tax applies in each country so that there is no double taxation. 

What Are The Tax Reductions Available under the Singapore-Malaysia Double Tax Treaty?

The double tax treaty applies to businesses that reside in one or both contracting countries. The withholding tax in Malaysia and Singapore on interest is 10%, and the withholding tax in Malaysia and Singapore on royalties is 8%. The treaty taxes technical fees at a rate of 5%.

For payments that are made by a business from one state to another business from another state, a reduced dividend payment tax facility is available. The lowest rate of 5% is applicable if the company receiving dividends holds at least 25% of the capital in the company that makes the payment.

Conclusion 

Singapore has more than 100 double tax agreements with other countries, which enables businesses outside of Singapore to avoid paying their taxes twice. The Double Tax Treaty between Singapore and Malaysia also provides some exemptions or reductions on some taxes for Malaysian income tax payers and Singaporean income tax payers. The treaty eliminates tax evasion and encourages cross-border trade efficiency.