Malaysia publishes Korea treaty interest exemption for KWAP and KDB

A final agreement, not a proposal

The authorities concluded the arrangement through Korean and Malaysian letters dated 2 July and 21 July respectively. It is already in effect; this is not a proposal or a change beginning on the November publication date.^[1]

How the government-interest exemption works

Article 11(2) of the 1982 treaty generally permits the source state to tax interest at up to 15% of the gross amount where the recipient is the beneficial owner. Article 11(4) instead exempts interest derived by one contracting state's government from tax in the other state. Article 11(5)(a)(iv) and (b)(iv) allow the competent authorities to agree that wholly government-owned institutions fall within that definition. The arrangement uses that designation power; it does not reduce the treaty's general interest rate for other recipients.^[2]

Two institutions, reciprocal treatment

Korea agreed to treat KWAP as part of the Malaysian Government for Article 11(4), exempting Korean-source interest paid to KWAP on or after 1 August 2026. Malaysia reciprocally accepted Korea Development Bank as part of the Korean Government, so Malaysian-source interest paid to KDB from that date is exempt. The operative word is paid: the published extract does not establish a broader exemption for other institutions, other income, or interest paid before 1 August.^[1][2]

Checks for payers and treasury teams

The exemption still sits within Article 11. If the debt claim is effectively connected with the recipient's permanent establishment in the source state, Article 11(7) redirects the income to the business-profits rules. Article 11(8) determines where interest arises, while Article 11(9) confines treaty treatment to the arm's-length amount where a special relationship inflates the payment. Malaysian and Korean payers should therefore verify the recipient, payment date, source, debt-claim connection and any excess-interest element before changing withholding treatment.^[2]

Published extract leaves process questions

The Inland Revenue Board says its one-page document is an extract, not the underlying correspondence or complete agreement, and that publication does not alter commencement. It does not set out certificate, filing, refund or evidence procedures. Groups should retain payment and recipient records and confirm the applicable Malaysian or Korean administrative route before stopping withholding or seeking a refund. No new return, payment or registration deadline is announced.^[1]