DeepSeek AI & Malaysian Withholding Tax: What Every Business Paying HANGZHOU DEEPSEEK ARTIFICIAL INTELLIGENCE BASIC TECHNOLOGY RESEARCH CO., LTD. Must Know
If your Malaysian business has subscribed to DeepSeek AI — the powerful large language model (LLM) developed by HANGZHOU DEEPSEEK ARTIFICIAL INTELLIGENCE BASIC TECHNOLOGY RESEARCH CO., LTD. — you may already be unknowingly non-compliant with Malaysian tax law. Payments made to this China-registered entity for AI software access are classified as royalties under the Income Tax Act 1967, triggering a Withholding Tax (WHT) obligation that falls squarely on your shoulders — not the vendor’s.
This guide breaks down the legal basis, the gross-up calculation mechanics, the risks of non-compliance, available Double Taxation Agreement (DTA) relief, and exactly how to file using LHDN’s e-WHT portal. Read carefully — the penalties are steep and the compliance window is tight.
Section 1: The Legal Basis — Why Payments to HANGZHOU DEEPSEEK ARTIFICIAL INTELLIGENCE BASIC TECHNOLOGY RESEARCH CO., LTD. Are Taxable Royalties Under Section 109
Under Section 109 of the Income Tax Act 1967, any payment made by a Malaysian resident to a non-resident entity in respect of royalties is subject to Withholding Tax at a standard rate of 10%. The critical question is: does a subscription or API access fee paid to DeepSeek’s parent company qualify as a royalty?
The answer, according to LHDN’s interpretation and Practice Note No. 3/2023, is yes. The Income Tax Act 1967 defines “royalty” broadly to include payments for:
- The use of, or the right to use, any software
- Access to any scientific, technical, or commercial knowledge
- The use of any intellectual property embedded in AI models or algorithmic systems
When your company pays for access to DeepSeek AI — whether via API calls, monthly subscriptions, or token-based billing — you are effectively licensing the right to use proprietary AI software and underlying model weights developed and owned by HANGZHOU DEEPSEEK ARTIFICIAL INTELLIGENCE BASIC TECHNOLOGY RESEARCH CO., LTD., a company incorporated in the People’s Republic of China. This cross-border payment to a non-resident entity classifies the transaction as a royalty payment, making WHT mandatory under Section 109.
Importantly, LHDN’s Practice Note No. 3/2023 further reinforces that cloud-based software access and AI model subscriptions do not escape royalty characterisation simply because no physical software is installed. The economic substance of the transaction — paying for the right to use intellectual property — governs the tax treatment.
Section 2: The Gross-Up Reality — You Are Paying 100% to the Vendor, But Owe 10% Extra to LHDN
Here is where most Malaysian businesses get blindsided. When you pay for DeepSeek AI using a corporate credit card or wire transfer, HANGZHOU DEEPSEEK ARTIFICIAL INTELLIGENCE BASIC TECHNOLOGY RESEARCH CO., LTD. charges you 100% of the invoice amount. They do not deduct WHT on your behalf — because the obligation is yours as the Malaysian payer, not theirs as the foreign recipient.
This means you must perform a gross-up calculation to determine your true tax liability. Here is how it works:
Standard WHT Gross-Up Formula (10% Rate)
| Item | Amount (RM) |
|---|---|
| Invoice paid to DeepSeek (net payment) | RM 1,000.00 |
| Gross-Up Formula: Net ÷ (1 – 0.10) | RM 1,111.11 |
| WHT Amount Due to LHDN (10% of gross) | RM 111.11 |
| Total Cost to Your Business | RM 1,111.11 |
In plain terms: for every RM 1,000 you pay DeepSeek, you owe LHDN an additional RM 111.11 out of your own pocket. This is not recoverable from the vendor. It is your company’s statutory obligation. Failure to account for this in your financial planning leads to both cash flow surprises and serious regulatory exposure.
Section 3: Section 39(1)(f) Risks — The 100% Expense Disallowance Trap
Non-compliance with WHT obligations is not merely a penalty issue — it can completely destroy your tax deduction for the expense. Under Section 39(1)(f) of the Income Tax Act 1967, any payment subject to WHT that has not been properly remitted to LHDN is fully disallowed as a deductible expense when computing your chargeable income.
The cascading consequences of non-remittance include:
- 100% disallowance of your DeepSeek AI subscription costs as a business expense
- A 10% late payment penalty on the outstanding WHT amount under Section 107C
- Potential LHDN audit triggers for businesses making frequent cross-border software payments without CP37 filings on record
- Director-level personal liability in cases of wilful non-compliance
Given that many businesses now integrate AI tools like DeepSeek across departments — customer service, content generation, coding, analytics — the cumulative annual spend can quickly reach five to six figures in Ringgit. At that scale, a 100% disallowance is a material tax risk that your auditors and tax agents cannot overlook.
Section 4: Double Taxation Agreement (DTA) Relief — Can You Pay Only 8% Instead of 10%?
HANGZHOU DEEPSEEK ARTIFICIAL INTELLIGENCE BASIC TECHNOLOGY RESEARCH CO., LTD. is incorporated in the People’s Republic of China. Malaysia and China have an active Double Taxation Agreement (DTA), and under this treaty, the withholding tax rate on royalties may be reduced to 10% or lower, depending on the interpretation and conditions met.
However, to legitimately apply any DTA-reduced rate, your company must obtain and retain:
- A valid Certificate of Residence (COR) issued by the Chinese tax authority confirming that HANGZHOU DEEPSEEK ARTIFICIAL INTELLIGENCE BASIC TECHNOLOGY RESEARCH CO., LTD. is a tax resident of China
- The correct foreign Tax Identification Number (TIN) of the vendor, which must be accurately declared on your CP37 or CP37S form
- Documentary evidence that the DTA conditions are fully satisfied prior to applying any reduced rate
Important: LHDN will not accept DTA relief claims without a verified COR on file. Applying a reduced rate without proper documentation exposes your business to the full 10% rate plus penalties upon audit. Do not guess or estimate the vendor’s TIN or residency status.
Section 5: Filing Guide — Form CP37 vs CP37S for DeepSeek AI Payments
LHDN provides two pathways for remitting WHT on royalty payments to non-residents:
Form CP37 — Standard Monthly Filing
CP37 is used for individual large or one-off payments. It must be submitted and the tax remitted within one month of the date the payment is made or credited to the non-resident. This is the default form for high-value or infrequent DeepSeek transactions.
Form CP37S — Bi-Annual Simplified Filing
For businesses making small, recurring cross-border software payments — such as monthly DeepSeek API subscriptions — LHDN permits the use of Form CP37S, which allows you to aggregate payments over a six-month period and file twice yearly:
- First filing deadline: 30 July (covering January–June payments)
- Second filing deadline: 30 January (covering July–December payments)
CP37S is particularly practical for SMEs and startups paying for DeepSeek AI on monthly credit card cycles. Rather than filing 12 separate CP37 forms annually, you consolidate into two filings — reducing administrative burden significantly while remaining fully compliant.
How to File via LHDN e-WHT Portal
- Log in to MyTax (mytax.hasil.gov.my) with your company’s tax credentials
- Navigate to e-WHT under the Filing section
- Select CP37 or CP37S as appropriate
- Enter the foreign payee’s TIN, country of residence (China), payment amount, and royalty classification
- Upload the Certificate of Residence (COR) if claiming DTA relief
- Submit and make payment via FPX or banker’s draft
Ensure all TIN details match verified records — an incorrect TIN can cause your filing to be rejected or flagged for review.
Section 6: Get Verified TIN Data & COR Documents — Don’t Risk Non-Compliance
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Final Word: DeepSeek AI Is Powerful — But Your WHT Compliance Cannot Be an Afterthought
Malaysian businesses embracing AI tools like DeepSeek AI are making smart productivity investments. But every Ringgit paid to HANGZHOU DEEPSEEK ARTIFICIAL INTELLIGENCE BASIC TECHNOLOGY RESEARCH CO., LTD. carries a withholding tax obligation that, if ignored, can cost you far more than the software subscription itself — through disallowed deductions, penalties, and audit exposure.
The compliance path is clear: classify the payment correctly as a royalty, gross up your liability, secure the vendor’s verified TIN and COR, and file accurately via e-WHT on CP37S. Start today — before your next billing cycle creates another unremitted liability on the books.