The India–Malaysia tax treaty

The rates, at a glance

Status

Dividends

Art. 10(2) closes with the standard saving that the paragraph 'shall not affect the taxation of the company in respect of the profits out of which the dividends are paid'. Art. 10(4) disapplies both paragraphs 1 and 2 where the holding is effectively connected with a PE or fixed base — contrast the FTS article, where the equivalent carve-out is drafted to disapply paragraph 1 only (see fts.definition_note). On the Malaysian side Art. 24(4) gives an underlying tax credit for Indian corporate tax where the Malaysian recipient owns not less than 10 per cent of the voting shares of the Indian payer — that 10 per cent figure is a credit condition in the elimination article, not a withholding threshold in Art. 10, and the two must not be conflated.

Interest

Art. 11(4) defines interest to include 'income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures', and expressly provides that 'Penalty charges for late payment shall not be regarded as interest for the purpose of this Article' — so late-payment penalties fall out of Art. 11 and are left to Art. 23 (Other Income), where Art. 23(3) gives the source State a taxing right anyway. There is no reduced rate for bank interest and no separate treatment of interest on loans of a stated tenor: it is a flat 10 per cent or the named-institution exemption, nothing in between.

Royalties

The Art. 12(3) definition is a single undivided sentence covering: any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for television or radio broadcasting (films are inside the royalty article, not excluded from it as they are in some treaties); any patent, trade mark, design or model, plan, secret formula or process; the use of, or the right to use, industrial, commercial or scientific equipment (equipment rental is a royalty, at the same 10 per cent); and information (know-how) concerning industrial, commercial or scientific experience. The definition does not extend to gains contingent on productivity or alienation of rights, and there is no separate limb for payments for the use of software. Art. 12(4), unlike Art. 13(4), correctly disapplies both paragraphs 1 and 2 where the right or property is effectively connected with a PE or fixed base.

Fees for technical services

There is no make-available limb and no 'ancillary and subsidiary' limb. Art. 13(3): 'The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Article 15 and Article 16 of this Agreement.' That is the whole definition. It is the broad Indian-domestic-law style formula — managerial services are inside it (many make-available treaties drop 'managerial' as well), and nothing turns on whether technology, knowledge, skill or know-how is transmitted to the payer so that the payer can apply it independently. Routine, repetitive technical support that would escape FTS taxation under the make-available treaties is fully taxable at 10 per cent here. The only carve-outs are the two cross-references: payments for services falling under Art. 15 (Independent Personal Services) and Art. 16 (Dependent Personal Services) are excluded, which pushes individual professionals into Art. 15 and its own thresholds — a fixed base regularly available, or a stay in the other State amounting to or exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned (Art. 15(1)(a) and (b)). There is no exclusion for services connected with a sale of property, no exclusion for construction/assembly/mining projects, and no exclusion for services to individuals for personal use — all of which appear in other Indian treaties.

Capital gains on shares

Permanent establishment

Art. 5(2) lists as PEs, among the usual items, 'a sales outlet' (5(2)(f)), 'a warehouse in relation to A person providing storage facilities for others' (5(2)(g)) and 'a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on' (5(2)(h)) — the plantation limb reflects the bilateral economy and does not appear in most Indian treaties. Art. 5(4) is the original, pre-beps preparatory-and-auxiliary list: sub-paragraphs (a), (b) and (c) (storage or display, stock for storage or display, stock for processing by another enterprise) are drafted as standalone exclusions and are not themselves subjected to a preparatory-or-auxiliary condition — only (e) and the combination rule in (f) carry that condition. There is no anti-fragmentation rule. Art. 5(8) is the standard control-is-not-PE saving.

Anti-abuse: limitation of benefits, and the MLI

No Synthesised Text for Malaysia has been identified from the sources used here. Accordingly the text reported here is the comprehensive agreement as notified, unmodified by any MLI overlay. Whether the MLI in fact modifies this treaty cannot be established from this source and is recorded as a gap. Note that this treaty already carries its own main-purpose test in Art. 28(2), so a PPT is not the practical novelty here that it is elsewhere.

The protocols, in order

• None. There is no amending protocol and no amending notification. The single protocol record is the original Protocol signed with the Agreement at Putrajaya on 9 May 2012, expressed to 'form an integral part of the Agreement'. It has eight numbered paragraphs and at least three of them are load-bearing.
• Protocol para 2 is the most important provision in the whole instrument and IT is not in any article — the labuan exclusion. 'It is understood that the persons who are entitled to tax benefits according to the Labuan Business Activity Tax Act, 1990 are not entitled to benefits of this Agreement. However, the provisions of this Agreement shall apply to such Labuan companies that have made an irrevocable election to be charged to tax in accordance with the Income Tax Act, 1967 of Malaysia.' Note the trigger is entitlement to Labuan benefits, not their actual claim, and the only escape is an irrevocable election into the ordinary Malaysian Income Tax Act 1967. Protocol para 5 then carves back through it: notwithstanding para 2, the Malaysian competent authority will still provide Art. 27 information about persons entitled to Labuan benefits — i.e. Exclusion from treaty benefits does not buy exclusion from exchange of information.
• Protocol para 1 qualifies the residence article: the second sentence of Art. 4(1) (which excludes a person liable to tax only on source income) 'is not to exclude residents of countries adopting a territorial principle in their taxation law'. This matters because Malaysia taxes on a broadly territorial basis; without para 1 the source-only exclusion in Art. 4(1) could have been argued to strip Malaysian residents of treaty access altogether.
• Protocol para 3 is an anti-'may be taxed' clause: 'It is understood that the term "may be taxed in the other State" wherever appearing in the Agreement should not be construed as preventing the country of residence from taxing the income.' This forecloses the argument (run successfully under some older Indian treaties) that 'may be taxed in the other State' confers exclusive source taxation.
• Protocol para 4 puts A ten-year clock on the tax-sparing credits: the Contracting States 'shall review the provisions of Article 24 (Methods for Elimination of Double Taxation) in order to consider the extension of benefits in paragraphs 3 and 5 of that Article after the period of 10 years from the date on which this Agreement enters into force'. Entry into force was 26 December 2012, so that ten-year point passed in December 2022. Art. 24(3) and 24(5) are the reciprocal tax-sparing (deemed-paid) clauses. Nothing in this record establishes whether any review took place or whether the sparing credits were extended, curtailed or left alone — see gaps.
• Protocol paras 7 and 8 are forward-looking consultation clauses only: if Malaysia amends its domestic law to permit assistance in collection of taxes / tax examination abroad, the two States 'shall consult each other for the purpose of inserting' such an Article. So this treaty has no assistance-in-collection article and no tax-examination-abroad article — a practical gap when enforcing an Indian demand against a Malaysian-resident debtor.

The words themselves

What to watch

• A drafting asymmetry in the FTS article that nobody should report without noticing. Art. 11(5), Art. 12(4) and Art. 10(4) each disapply 'the provisions of paragraphS 1 and 2' where the income is effectively connected with a PE or fixed base, throwing the income into Art. 7. Art. 13(4) — the FTS article — says instead: 'The provisions of paragraph 1 of this article shall not apply if the beneficial owner of the fees for technical services... Carries on business in the other Contracting State... Through a permanent establishment...'. Paragraph 2, which contains the 10 per cent ceiling, is not disapplied on its face. Read literally, an effectively-connected FTS receipt goes to Art. 7 for the allocation of taxing rights while the 10 per cent gross ceiling in Art. 13(2) remains textually alive — an argument a taxpayer with a low-margin Indian PE would want to run. Whether this is a deliberate divergence or a transcription slip cannot be settled from the text alone, but it is on the face of the notified Agreement and it is different from the parallel articles in the same instrument.
• The dividend rate is the headline and IT is unusual in shape, not just in size. 5 per cent flat with no shareholding threshold means the usual planning question — can we get the holding above the participation threshold before the dividend is declared — simply does not arise. It also means a Malaysian portfolio investor is better off under this treaty than a Malaysian parent would be under most others.
• The 90-day service PE is the shortest-fuse provision in this treaty. Ninety days aggregated across periods, for the same or connected project, in any twelve-month period. A team rotating engineers into India on short visits crosses it easily, and the twelve-month window is a rolling one ('any twelve-month period'), not the fiscal year. Once crossed, the 10 per cent gross FTS charge is displaced by net taxation of attributed PE profits under Art. 7 — which can be better or much worse depending on margin.
• No make-available limb. This is not a Singapore/UK/US-style FTS article. Managerial services are taxable; repetitive technical support is taxable; nothing turns on whether the Indian payer is enabled to apply the technology on its own. Advisers who reflexively run the make-available argument on Asian treaties will lose it here.
• The labuan exclusion is the first thing to check on any malaysian counterparty, and IT is in the protocol, not in article 28. Protocol para 2 denies the whole Agreement to persons entitled to Labuan Business Activity Tax Act 1990 benefits. The test is entitlement, not election or claim, and the only cure is an irrevocable election into the Malaysian Income Tax Act 1967. A treaty analysis that reaches Article 10 without first clearing Protocol para 2 is worthless for a Labuan-incorporated counterparty.
• The interest exemption is A named list, which cuts both ways. Both central banks are covered — Bank Negara Malaysia and the Reserve Bank of India — but only because each is named. A Malaysian sovereign wealth or government-linked investment vehicle that is not one of the nine named bodies and is not a 'statutory body wholly owned by the Government' gets no exemption, and Art. 11(3)(c) requires an actual competent-authority agreement to add it. Do not reason from 'state-owned' to 'exempt'.
• Share gains: india taxes, full stop. Art. 14(5) preserves source taxation of all share gains not already caught by the immovable-property test in Art. 14(4). There is no grandfathering because there was never an exemption. The planning question on this treaty is not whether India can tax the gain but whether the vehicle is a company resident in a Contracting State at all — a gain on shares of a third-country company falls to Art. 14(6) and residence-only taxation.
• The 50 per cent immovable-property test is in the article, not in A protocol gloss. Contrast Korea, where 'principally' in the article had to be given content by a Protocol paragraph, and Cyprus and Luxembourg, where the word 'principally' stands with no gloss at all. Here Art. 14(4) says 'more than 50 per cent' on its face, and it applies directly or indirectly, so a tiered holding structure over Indian real estate is caught.
• Art. 28(2) is tougher than an MLI PPT, not softer. The MLI Art. 7(1) PPT lets a taxpayer escape by showing the benefit accords with the object and purpose of the relevant treaty provisions. Art. 28(2) has no object-and-purpose saving. Combined with Art. 28(1)'s express preservation of domestic anti-avoidance law 'whether or not described as such', and Art. 28(3)'s bona fide business test, this treaty gives India three independent grounds to refuse benefits without needing the MLI at all.
• Article 24 contains reciprocal tax sparing and its cross-references are transposed in the notified text. Art. 24(3), which deems 'tax paid in Malaysia' to include Malaysian tax spared by incentive legislation, opens 'For the purposes of paragraph 4' — but paragraph 4 is malaysia'S credit article; the Malaysian-spared-tax rule is only useful to india'S credit in paragraph 2. Symmetrically Art. 24(5), which spares Indian tax, opens 'For the purposes of paragraph 2' when it can only be relevant to Malaysia's credit in paragraph 4. The two cross-references appear to have been swapped. Read purposively they work; read literally each sparing clause points at the wrong credit.
• The tax sparing was meant to be reviewed after ten years and that date has passed. Protocol para 4 obliges both States to review Art. 24 'in order to consider the extension of benefits in paragraphs 3 and 5 of that Article after the period of 10 years from the date on which this Agreement enters into force' — i.e. After 26 December 2022. Anyone relying on the deemed-paid credit today should confirm its current status rather than assume the clause runs on.
• Art. 24(1) is an unusual opening and is easy to misread: 'The laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Agreement.' It is a savings clause, not a grant, and it reinforces Protocol para 3's rejection of the 'may be taxed = exclusive source taxation' argument.
• Other income is A source-state article here. Art. 23(1) gives residence-only taxation, but Art. 23(3) overrides it: 'Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles... And arising in the other Contracting State may also be taxed in that other state.' So anything falling outside Articles 6 to 22 — including late-payment penalty charges expelled from Art. 11 by Art. 11(4) — remains taxable at source under Indian domestic law with no treaty ceiling.
• No assistance in collection and no tax examination abroad. Protocol paras 7 and 8 record only an agreement to consult about inserting such Articles if Malaysian domestic law changes. Neither Article exists today, so an Indian tax demand cannot be collected through the Malaysian revenue under this treaty.