India-Malaysia DTAA: Complete Guide to the Double Taxation Treaty

Quick answer: The India-Malaysia DTAA, revised in 2012 and effective from 1 April 2013, caps dividend withholding tax at 5% and interest, royalties, and fees for technical services at 10% — all below India's 20% domestic rate. Interest paid to the Malaysian Government or approved institutions is exempt at 0%. A services PE arises only if employees stay in India more than 90 days in any 12-month period, and MLI provisions including the Principal Purpose Test apply, with the MLI in force for India since 1 October 2019 and for Malaysia since 1 June 2021.

Key takeaways:

• Dividends taxed at 5%, one of the lowest rates among India's DTAAs.
• Interest, royalties and FTS each capped at 10% under the treaty.
• Government/approved institution interest is exempt at 0%.
• Services PE threshold is 90 days; construction PE threshold is nine months.
• Revised treaty entered into force 26 December 2012, effective 1 April 2013.

Overview of the India-Malaysia DTAA

The Double Taxation Avoidance Agreement (DTAA) between India and Malaysia is a critical bilateral tax treaty governing the taxation of cross-border income between two of Asia's most dynamic economies. The current agreement was signed on 9 May 2012 at Putrajaya, replacing the earlier treaty signed on 14 May 2001. The revised treaty entered into force on 26 December 2012 and became effective from 1 April 2013 for Indian tax purposes. It is based primarily on the OECD Model Tax Convention, reflecting both countries' commitments to international tax standards and double taxation avoidance.

India and Malaysia share robust economic ties, with bilateral trade exceeding USD 19 billion annually and significant mutual investment flows. The DTAA provides a stable and predictable tax framework for businesses and individuals operating across both jurisdictions, reducing withholding tax burdens and clarifying taxing rights. Malaysia is a key destination for Indian IT companies, while Malaysian palm oil, petroleum, and infrastructure firms maintain a strong presence in India.

For businesses setting up operations in India from Malaysia, understanding the treaty provisions is essential to structuring investments tax-efficiently. Beacon Filing's tax advisory services help you navigate these provisions and maximize available benefits.

Treaty History and Current Status

The original India-Malaysia DTAA was signed in 1976 and was later replaced by a revised agreement signed at Putrajaya on 14 May 2001, which governed bilateral taxation until the current treaty took effect. As both economies evolved and bilateral trade expanded significantly, the need for a modern, comprehensive agreement became apparent. The revised DTAA was negotiated and signed on 9 May 2012, entering into force on 26 December 2012. The new treaty became effective from 1 April 2013 in India (assessment year 2014-15) and from 1 January 2013 in Malaysia.

The revised agreement introduced several modern provisions, including a comprehensive article on fees for technical services (FTS), updated permanent establishment definitions, and enhanced exchange of information provisions consistent with OECD standards. It also lowered the dividend withholding rate from 10% to 5%, making it one of the most competitive rates in India's DTAA network.

Both India and Malaysia have signed and ratified the OECD Multilateral Instrument (MLI). India signed the MLI on 7 June 2017 and ratified it on 25 June 2019, with the MLI entering into force for India on 1 October 2019. Malaysia signed the MLI on 24 January 2018 and ratified it on 18 February 2021, with the MLI entering into force for Malaysia on 1 June 2021. The India-Malaysia DTAA is listed as a Covered Tax Agreement by both countries, meaning MLI modifications including the Principal Purpose Test (PPT) under Article 7 of the MLI apply to this treaty. This affects treaty benefits by introducing anti-abuse provisions designed to prevent treaty shopping.

Key Treaty Articles

The India-Malaysia DTAA contains 31 articles covering the full range of cross-border income categories. Below are the provisions most relevant to businesses and investors operating between India and Malaysia.

Article 5 — Permanent Establishment

Article 5 defines when a Malaysian enterprise creates a permanent establishment (PE) in India, subjecting its business profits to Indian taxation. The definition includes a fixed place of business such as a place of management, branch, office, factory, workshop, mine, oil or gas well, quarry, or any place of extraction of natural resources. A building site or construction, installation, or assembly project, or supervisory activities in connection therewith, constitutes a PE only if it lasts more than nine months. The furnishing of services through employees or other personnel creates a PE if such activities continue for a period exceeding 90 days within any 12-month period.

Article 7 — Business Profits

Business profits of a Malaysian enterprise are taxable in India only if the enterprise carries on business through a PE in India. Profits are attributable to the PE under the arm's-length principle, as if the PE were a distinct and separate enterprise dealing independently with the rest of the enterprise.

Article 10 — Dividends

Dividends paid by an Indian company to a Malaysian resident may be taxed in India, but the tax charged shall not exceed 5% of the gross amount of dividends where the beneficial owner is a resident of Malaysia. This is one of the lowest dividend withholding rates in India's DTAA network and provides significant savings compared to the domestic rate of 20% under Section 195 of the Income Tax Act.

Article 11 — Interest

Interest arising in India and paid to a Malaysian resident may be taxed in India at a rate not exceeding 10% of the gross amount. Interest paid to the Government of Malaysia, Bank Negara Malaysia (the central bank), or any institution wholly owned by the Government is exempt from Indian tax. This provides meaningful savings against India's domestic withholding rate of 20%.

Articles 12 and 13 — Royalties and Fees for Technical Services

Royalties (Article 12) and fees for technical services (FTS, covered by a separate Article 13 in this treaty) arising in India and paid to a Malaysian resident may each be taxed at a rate not exceeding 10% of the gross amount. Royalties include payments for the use of copyrights, patents, trademarks, designs, models, plans, secret formulas, or processes. FTS includes payments for managerial, technical, or consultancy services. Unlike the India-USA DTAA, there is no "make available" clause — meaning all types of technical services are potentially covered, not just those that transfer technical knowledge to the recipient.

Article 14 — Capital Gains

Capital gains from the alienation of immovable property may be taxed in the state where the property is situated. Gains from shares deriving more than 50% of their value from immovable property in a contracting state may also be taxed in that state. Gains from the alienation of shares (other than immovable property-rich shares) of a company resident in a contracting state may be taxed in that state; the treaty does not cap the rate, so India taxes such gains at its domestic capital gains rates — for example, long-term gains on unlisted shares are taxed at 12.5% (plus surcharge and cess) without indexation. This is particularly relevant for Malaysian investors holding Indian equity portfolios.

Withholding Tax Rates Summary

The following table compares the treaty rates with India's domestic withholding tax rates for payments to Malaysian residents:

Under Section 90(2) of the Income Tax Act, a taxpayer may apply whichever rate — the DTAA rate or the domestic rate — is more beneficial. Since all treaty rates here are lower than domestic rates, the treaty provides a clear advantage. For a detailed rate-by-rate breakdown, see our dedicated withholding tax rates page for India to Malaysia.

Permanent Establishment Rules

The PE provisions in the India-Malaysia DTAA are carefully structured to balance the interests of both source and residence countries. Article 5 establishes several categories of PE:

Fixed Place PE: A place of management, branch, office, factory, workshop, mine, oil or gas well, quarry, or any place of extraction of natural resources. A fixed place of business used solely for storage, display, delivery, purchasing, or preparatory and auxiliary activities does not constitute a PE.

Construction PE: A building site or construction, installation, or assembly project, or supervisory activities in connection therewith, constitutes a PE only if it lasts more than nine months. This is one of the more lenient thresholds in India's DTAA network compared to treaties with shorter thresholds (e.g., 120 days under the India-USA treaty).

Services PE: The furnishing of services, including consultancy services, by a Malaysian enterprise through employees or other personnel creates a PE if such activities continue in India for a period or periods aggregating more than 90 days within any 12-month period. Malaysian service companies should carefully track employee deployment durations in India.

Agency PE: A person acting on behalf of a Malaysian enterprise who habitually exercises authority to conclude contracts in the enterprise's name creates a PE, unless that person is an independent agent acting in the ordinary course of their business.

With the MLI now applicable to this treaty, the PE definition may be further modified by MLI Article 12 (artificial avoidance of PE status through commissionnaire arrangements) and Article 13 (specific activity exemptions), depending on each country's MLI positions. Malaysian companies should seek professional advice from Beacon Filing's India entry strategy team to assess PE risk.

Tax Residency and Certificate Requirements

To claim treaty benefits, a person must be a tax resident of one of the contracting states. Under Article 4, a resident means any person who is liable to tax in that state by reason of domicile, residence, place of management, place of incorporation, or any similar criterion. In India, tax residency is determined primarily by the 182-day presence test under Section 6 of the Income Tax Act. In Malaysia, residency is based on a 182-day physical presence test in a calendar year.

For individuals who are resident in both states (dual residents), the tie-breaker rules apply sequentially: permanent home, center of vital interests, habitual abode, and nationality. If the conflict cannot be resolved, the competent authorities determine residency by mutual agreement.

To claim reduced treaty rates in India, a Malaysian resident must provide a Tax Residency Certificate (TRC) issued by the Inland Revenue Board of Malaysia (Lembaga Hasil Dalam Negeri Malaysia, or LHDN). The TRC certifies that the person is a tax resident of Malaysia for the relevant period. Additionally, the Malaysian resident must furnish Form 10F to the Indian payer containing prescribed details.

Mutual Agreement Procedure

Article 26 of the India-Malaysia DTAA provides for a Mutual Agreement Procedure (MAP) where a resident believes that the actions of one or both contracting states result in taxation not in accordance with the treaty. The resident may present the case to the competent authority of the state of which they are a resident within three years from the first notification of the action. The competent authorities shall endeavor to resolve the case by mutual agreement, and may communicate directly with each other.

This procedure is particularly relevant for transfer pricing disputes between Indian and Malaysian associated enterprises, which constitute a significant portion of MAP cases. India's competent authority is the Central Board of Direct Taxes (CBDT), while Malaysia's competent authority is the Ministry of Finance.

How to Claim Treaty Benefits

Claiming benefits under the India-Malaysia DTAA requires compliance with both procedural and substantive requirements:

Step 1: Obtain a Tax Residency Certificate (TRC)

The Malaysian resident must obtain a TRC from the Inland Revenue Board of Malaysia (LHDN) certifying their tax residency status for the relevant fiscal year. This is the foundational document for claiming treaty benefits in India.

Step 2: Provide Form 10F

The non-resident must furnish Form 10F to the Indian payer, containing prescribed information such as name, status, nationality, TIN, and period of residential status. This form can be filed electronically on the Indian Income Tax portal.

Step 3: Self-Declaration

A self-declaration confirming that the recipient does not have a permanent establishment in India (if claiming that income is not attributable to a PE), that the recipient is the beneficial owner of the income, and that the arrangement has a genuine business purpose (relevant under the MLI's Principal Purpose Test).

Step 4: Indian Payer Compliance under Section 195

The Indian payer must deduct tax at the treaty rate and file Form 15CA electronically before making the remittance. For payments exceeding INR 5 lakh, a Chartered Accountant's certificate in Form 15CB is also required. The payer must file quarterly TDS returns reflecting the lower treaty rate applied.

Step 5: Claim Relief under Section 90

Indian residents earning income in Malaysia can claim double taxation relief under Section 90 of the Income Tax Act by way of a foreign tax credit for Malaysian taxes paid, subject to Rule 128 provisions.

Beacon Filing's FEMA and RBI compliance services ensure all documentation is properly prepared for claiming treaty benefits.

Frequently Asked Questions

What is the India-Malaysia DTAA and when was it signed?

The India-Malaysia DTAA is a bilateral tax treaty signed on 9 May 2012 between the Government of India and the Government of Malaysia. It replaced the earlier 2001 agreement and entered into force on 26 December 2012, becoming effective from 1 April 2013 for Indian tax purposes. The treaty aims to eliminate double taxation on cross-border income and prevent fiscal evasion.

What is the dividend withholding rate under the India-Malaysia DTAA?

The treaty provides a highly competitive 5% withholding rate on dividends paid by an Indian company to a beneficial owner resident in Malaysia. This is significantly lower than India's domestic rate of 20% and is one of the lowest dividend rates in India's DTAA network, comparable to the 5% rate available under the India-Mauritius treaty.

Does the MLI apply to the India-Malaysia DTAA?

Yes. Both India and Malaysia have signed and ratified the OECD Multilateral Instrument (MLI), and the India-Malaysia DTAA is listed as a Covered Tax Agreement by both countries. Key MLI provisions including the Principal Purpose Test (PPT) now apply, which means treaty benefits may be denied if one of the principal purposes of an arrangement was to obtain those benefits without genuine economic substance.

How does a Malaysian company avoid creating a permanent establishment in India?

A Malaysian company can avoid PE exposure in India by ensuring its employees do not stay in India for more than 90 days in any 12-month period (services PE threshold), not maintaining a fixed place of business in India, ensuring construction projects do not exceed nine months, and not having dependent agents who habitually conclude contracts on its behalf in India.

What documentation is required to claim DTAA benefits in India?

A Malaysian resident must provide a Tax Residency Certificate (TRC) issued by LHDN Malaysia, Form 10F filed on the Indian Income Tax portal, and a self-declaration of beneficial ownership and non-PE status. The Indian payer must file Form 15CA (and Form 15CB for payments exceeding INR 5 lakh) before making the remittance.

Are capital gains on Indian shares taxable for Malaysian residents?

Yes. Under Article 14, gains from the alienation of shares of an Indian company may be taxed in India, and the treaty does not cap the rate, so Indian domestic capital gains rates apply — for example, long-term gains on unlisted shares are taxed at 12.5% (plus surcharge and cess) without indexation. Gains from shares of immovable property-rich companies (deriving more than 50% value from Indian real estate) may likewise be taxed in India. Malaysian residents can claim a foreign tax credit in Malaysia for taxes paid in India.

How are fees for technical services taxed under this DTAA?

Fees for technical services paid by an Indian entity to a Malaysian resident are taxed at a maximum of 10% of the gross amount under Article 13(2). Unlike the India-USA DTAA, there is no "make available" clause, meaning all managerial, technical, and consultancy services are covered regardless of whether technical knowledge is transferred to the recipient.