Malaysia welcomes foreign investments, especially those involving activities that support the policies identified in The Third Industrial Master Plan 2006– 2020. Activities such as research and development, product design, distribution and marketing, or which promote productivity-generated growth such as those involving usage of high technology (automation/robotizing), emphasizing knowledge and capital-intensive manufacturing, applying new technology, innovation, best management practices and more efficient usage of resources.
The Ministry of International Trade and Industry (MITI) is usually the first ministry encountered or approached by foreign investors. MITI and its agencies regularly organize seminars, roadshows or exhibitions in foreign countries to update investors on the government’s current policies, incentives, facilities and support services available, as well as to highlight business opportunities available in Malaysia. MITI and its agencies have offices in many foreign countries.
Malaysia, however, does not have a centralized department dealing with all matters relating to the regulation of foreign investors or foreign investments. Foreign investments are subject to the supervision or approval by the regulatory and approving bodies or authorities that oversee the relevant industries, just as for local investments.
MITI and its agencies focus more on manufacturing activities. One of its agencies, the Malaysian Industrial Development Authority, as part of its regular functions, has been assigned the task of evaluating applications for incentives provided under the Promotion of Investments Act 1986 and application of manufacturing licenses under the Industrial Coordination Act 1975.
Franchising businesses, for example, are subject to the supervision of the Ministry of Entrepreneur Development while shipping, transport and logistic businesses are subject to the Ministry of Transport. For a business that is not subject to the scrutiny of any specific authority, the Foreign Investment Committee (FIC) will be the regulatory body. The FIC has issued various guidelines and circulars through the years which cover two main areas: the acquisition of interests, mergers and takeovers by local and foreign interests; and the acquisition of properties by local and foreign interests.
Foreign investments are generally subject to a cap on foreign shareholdings. The cap varies according to industries but generally it was 30 per cent, with a minimum of 30 per cent shareholding by Bumiputera or indigenous people and the rest by Malaysians.
On 30 June 2009, the Prime Minister announced a comprehensive rationalization of the investment guidelines administered by the FIC. To allow Malaysia to strengthen its business and regulatory environment to attract greater investment, the government has decided to substantially deregulate FIC investment guidelines.
Accordingly, the government has implemented, inter alia, the following changes to the FIC guidelines with immediate effect:
- the FIC guidelines on the acquisition of interests, mergers and takeovers by local and foreign interests are repealed. The FIC will, therefore, no longer process such share transactions, nor impose equity conditions on such transactions. However, the equity conditions imposed by the respective sector regulators will continue to apply. For strategic sectors (such as information and communication technologies, oil & gas, mining, manufacturing etc.), sector regulators are best placed to oversee their respective sectors and to tailor equity conditions according to the requirements and strategic nature of each sector. There will no longer be any equity conditions imposed on sectors not deemed strategic
- the conditions imposed on fund-raising exercises by listed companies has also been significantly eased in the context of raising Malaysia’s attractiveness as a listing destination
- pursuant to the revised FIC guidelines on the acquisition of properties by local and foreign interests effective from 1 January 2010, FIC will only process transactions involving the following: – direct acquisition of property valued at rM20 million and above, resulting in the dilution in the ownership of property held by Bumiputera interest and/or government agency – indirect acquisition of property by other than Bumiputera interest through acquisition of shares, resulting in a change of control of the company owned by Bumiputera interest and/ or government agency, having property more than 50 percent of its total assets, and the said property is valued more than rM20 million.
Government initiatives and incentives
Tax incentives, both direct and indirect, are provided for in the Promotion of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Sales Tax Act 1972, Excise Act 1976 and Free Zone Act 1990. These Acts cover investments in the manufacturing, agriculture, tourism (including hotel) and approved services sectors as well as research and development, training and environmental protection activities. The direct tax incentives grant partial or total relief from income tax payment for a specified period, while indirect tax incentives come in the form of exemptions from import duty, sales tax and excise duty. Some of the main incentives are summarized below.
Incentives for manufacturing companies
The major tax incentive for companies investing in the manufacturing sector is the pioneer status or investment tax allowance (ITA). Eligibility for pioneer status or ITA is based on certain priorities, including the level of value-added, technology used and industrial linkages. Eligible activities and products are termed “promoted activities” or “promoted products”. The package of incentives may vary according to the products manufactured.
A company granted pioneer status enjoys a five-year partial exemption from the payment of income tax. It pays tax on 30 per cent of its statutory income. Companies located in the promoted areas, namely the states of Perlis, Sabah and Sarawak and the designated “Eastern Corridor” (covering the states of Kelantan, Terengganu and Pahang, and the district of Mersing in the State of Johor) of Peninsular Malaysia will enjoy 100 per cent tax exemption of their statutory income during the five-year exemption period. All project applications received by 31 December 2010 are eligible for this incentive.
Investment tax allowance
As an alternative to pioneer status, a company may apply for an ITA. A company granted ITA gets an allowance of 60 per cent on its qualifying capital expenditure (such as factory, plant, machinery or other equipment used for the approved project) incurred within five years from the date on which the first qualifying capital expenditure is incurred. The company can offset this allowance against 70 per cent of its statutory income for each year of assessment. Any unutilized allowance can be carried forward to subsequent years until fully utilized. The remaining 30 per cent of its statutory income will be taxed at the prevailing company tax rate.
Companies located in the promoted areas, namely the states of Perlis, Sabah and Sarawak and the designated “Eastern Corridor” of Peninsular Malaysia enjoy an allowance of 100 per cent on the qualifying capital expenditure incurred within a period of five years. The allowance can be utilized to offset against 100 per cent of their statutory income for each year of assessment. All applications received by 31 December 2010 are eligible for this incentive.
Incentives for relocating manufacturing activities to promoted areas
Existing companies who relocate their manufacturing activities to the promoted areas are eligible for a second round of the following incentives:
·pioneer status with tax exemption of 100 per cent of statutory income for a period of five years. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period can be carried forward and deducted against post-pioneer income of the company
·ITA of 100 per cent on the qualifying capital expenditure incurred within a period of five years. The allowance can be utilized to offset against 100 per cent of the statutory income for each year of assessment. Any unutilized allowance can be carried forward to subsequent years until fully utilized.
Incentives for high technology companies A high-technology company that fulfils certain criteria qualifies for pioneer status with a tax exemption of 100 per cent of its statutory income for a period of five years. Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted against post-pioneer income of the company. Additionally, a high-technology company qualifies for an ITA of 60 per cent (100 per cent for promoted areas) on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. Any unutilized allowance can be carried forward to subsequent years until the whole amount has been fully utilized. The allowance can be utilized to offset against 100 per cent of its statutory income for each year of assessment.
Incentives for strategic projects
Strategic projects involve products or activities of national importance. They generally involve heavy capital investments with long gestation periods, have high levels of technology and are integrated, generate extensive linkages, and have significant impact on the economy. Such projects qualify for:
·pioneer status with income tax exemption of 100 per cent of statutory income for a period of ten years. Unabsorbed capital allowance as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post-pioneer income of the company
·ITA of 100 per cent on qualifying capital expenditure incurred within five years from the date on which the first qualifying capital expenditure is incurred. This allowance can be offset against 100 per cent of statutory income for each year of assessment. Any unutilized allowance can be carried forward to subsequent years until fully utilized.
Incentives for small and medium-scale companies
Effective from the year of assessment 2009, for small and medium-sized companies with paid-up ordinary share capital not exceeding RM2.5 million to the extent of that portion of their chargeable income of up to RM500,000, the corporate tax rate is reduced to 20 per cent. The tax rate on the remaining chargeable income is maintained at 26 per cent. Small-scale manufacturing companies incorporated in Malaysia with shareholders’ funds not exceeding RM500,000 and having at least 60 per cent Malaysian equity can obtain, under the Promotion of Investments Act 1986, pioneer status with an income tax exemption of 100 per cent of the statutory income for a period of five years. Unabsorbed capital allowance as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post-pioneer income of the companies. Additionally, they are eligible for an ITA of 60 per cent (100 per cent for promoted areas) on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. This allowance can be offset against 100 per cent of statutory income for each year of assessment. Any unutilized allowance can be carried forward to subsequent years until the whole amount has been fully utilized.
A sole proprietorship or partnership is eligible to apply for this incentive provided a new private limited/limited company is formed to take over existing production/activities. The applicant company must not be a subsidiary of another company with shareholders’ funds of more than RM500,000. To qualify for the incentive, the small-scale company must have either achieved at least 15 per cent value-added, or the activities of the company contribute towards the socio-economic development of the rural population.
Incentives for the Multimedia Super Corridor
The Multimedia Super Corridor (MSC), a 15km x 50km zone extending south from Malaysia’s capital city and business hub, Kuala Lumpur, is a perfect environment for companies wanting to create, distribute and employ multimedia products and services.
MSC status is the recognition granted by the Malaysian government through the Multimedia Development Corporation (MDeC) to companies that participate and undertake information and communication technology activities in the MSC. Companies with MSC status enjoy a set of incentives and benefits that is backed by the Malaysian government’s Bill of Guarantees.
Generally, MSC status multimedia companies as well as multimedia faculties located in institutions of higher learning outside the cyber cities are eligible for the following incentives/facilities:
- pioneer status with income tax exemption of 100 per cent of the statutory income for a period of ten years or ITA of 100 per cent on the qualifying capital expenditure incurred within a period of five years to be offset against 100 per cent of statutory income for each year of assessment
- eligibility for R&D grants (for majority Malaysian-owned MSC status companies).
In addition, there are other benefits such as duty-free import of multimedia equipment, and import duty, excise duty and sales tax exemption on machinery, equipment and materials.
Business incentive and support package developed by the Iskandar Regional Development Authority
The Iskandar Malaysia project is the new main southern development corridor in Johor, Malaysia. It aims to become Southern Peninsular Malaysia’s most developed region where living, entertainment, environment and business seamlessly converge within a bustling and vibrant metropolis. The five economic/flagship zones in the Iskandar Malaysia Region, namely Johor Bahru City Centre, nusajaya, Western Gate Development, Eastern Gate Development and Senai-Skudai, are proposed as key focal points for developments in Iskandar Malaysia.
The Iskandar Regional Development Authority (IRDA), a federal statutory body formed under the IRDA Act 2007, is the single authority entrusted with the responsibility of planning, promoting, processing, stimulating, facilitating and undertaking development in Iskandar Malaysia.
IRDA has developed a comprehensive business incentive and support package (ISP). The ISP, which was announced initially on 22 March 2007, is designed to encourage and kick-start early investment into Iskandar Malaysia. It focuses on the following six targeted services-based sectors at designated nodes:
- creative industries and related services
- educational services
- financial advisory and consulting services
- healthcare and related services
- logistics services ·tourism-related activities.
The ISP includes fiscal and non-fiscal incentives as follows:
- corporate tax exemption for ten years provided operations commence on or before 31 December 2015
- exemption from withholding tax provisions on payments for services and royalties to non-residents for a period of ten years from the date of commencement of operations
- exemption from the FIC’s rulings
- permission to source capital globally ·permission to employ foreign knowledge workers without restriction.
The company must be an IRdA-status company to qualify for the above incentives. Essentially, an IRdA-status company must fulfil the following two general criteria:
- involving in one of the six targeted services-based sectors mentioned above
- be situated in the designated IRdA-approved zones.
The latest incentive package, which was announced by IRdA on 9 October 2007, complements the initial announcement. The Isp is not only intended for Iskandar Malaysia-status companies and foreign knowledge workers, but is now extended to include approved developers and approved development managers.