Business

Malaysia Free Trade Zones: An In-depth Guide

Malaysia Free Trade Zones carry out commercial and industrial activities. They are an important mechanism in the nation’s economic strategy, designed to attract foreign investment, boost exports, and enhance industrial development.

This guide delves into the components of the Malaysian free Trade Zones to explore the legal and regulatory framework and the specific types of zones available, including Free Commercial Zones, free Industrial Zones, and Digital Free trade Zones. These zones offer various benefits in Malaysia, such as tax incentives, customs exemption, and streamlined administrative procedures that facilitate easier business operations.

Malaysian free Trade Zones, such as the Port Klang Free Zone, Port of Tanjung Pelepas Free Zone as a Free Commercial Zone, and Bayan Lepas and Pasir Gudang as a Free Industrial Zone, highlight the unique benefits and infrastructure that also address the economic impact of these industries on Malaysia’s economy.

Understanding about Malaysia Free Trade Zones

The Malaysian Government enacted the Free Zone Act of 1990 to create duty-free zones within the country, simplify customs regulations, and facilitate trade activities. In Malaysia, a Free Trade Zone is a designated area where businesses benefit from fewer customs checks and tax exemptions on most goods and services.

Free zone trade locations are where productive materials or goods are exempt from the standards of import and export rules and taxes, except for items prohibited by law. This customs relief provides businesses with significant trade and commercial advantages, mainly through duty and tax exemption. The elimination of customs duties, excise taxes, and sales taxes makes manufacturing, industrial, and commercial activities more cost-effective.

Types of Malaysia Free Zone Trade

There are two types of Malaysia Free Trade Zones; below is a detailed description of the Free Trade Zone:

1. Free Industrial Zone (FIZ)

Free Industrial Zones (FIZs) are designated areas established for manufacturers that import all their raw materials and produce goods for export. Companies operating in FIZs are required to import all raw materials and export at least 60 % to 80% of their raw material output.

Companies operating in FIZ can seek approval from the Ministry of International Trade and Industry and customs authorities to reduce the export requirements from the default of 80% to 60% of the production. These companies sell 20% of their production domestically in Malaysia, but the finished goods will be treated as imported goods and subject to Malaysia’s standard import duties and taxes.

2. Free Commercial Zone (FCZ)

A free Commercial Zone is established to promote commercial and trade activities in Malaysia, such as trading, repacking materials, transshipments, or further processing into finished products for re-export, which is obtained from trading within other free zones. Companies operating in Free Commercial Zones are prohibited from conducting any retail trading within these zones. This prohibition applies to FCZs except for a few free zones.

Most of the Free Commercial Zone in Malaysia is situated near ports to facilitate the transport of goods and products. Therefore, it is exempt from customer duties, sales, and services tax for all imports.

List of Malaysia Free Trade Zones

Malaysia offers approximately 27 Free Zones; some of the key free trade zones are stated below:

1. Pasir Gudang Tanjung Pelepas Free Zone (Manufacturing)

It was established in 1997 and offers warehousing, logistic, and distribution-related facilities, with an important portion dedicated to modern storage, redistribution, packaging, and grading services. It is also a base for international exports.

2. Bayan Lepas Free Zone (Logistics and Technology)

It is situated in Penang, Malaysia and was established in 1997. It hosts renowned brands like Hitachi among others by offering various facilities and benefits to remain an attractive option for businesses in the logistics and technology sectors.

3. Port Klang Free Zone (Trade and Logistics)

It is situated in Klang, Malaysia, Port Klang Free Zone, established in 2004, serves as one of the nation’s primary sea gateways. It accommodates significant cargo distribution and consolidation, permitting both local and international companies to establish manufacturing facilities for export-oriented production.

4. Kulim Hi-Tech (High Tech Technology)

It is located in Kedah, Malaysia, which was opened to investors in 1996. It is known for its high technology, which attracts companies to maintain high-tech manufacturing businesses.

Introduction to Digital Free Trade Zone

In 2017, the Prime Minister of Malaysia launched the Digital Free Trade Zone, and Jack Ma, the founder of Alibaba Group Holding Ltd., initiated as Malaysia’s Digital Economy Corporation. The Digital Free Trade Zone facilitates seamless cross-border trade using e-commerce through both virtual and physical facilities.

The Digital Free Trade Zone objectives include increasing domestic SMEs’ exports of goods to $38 billion by creating jobs and supporting $65 billion worth of goods moving through the Digital Free Trade Zone by 2025 and making Malaysia Asia’s leading transhipment hub by 2025. The Digital Free Trade Zone will operate similarly to an existing Free Trade Zone, offering incentives such as tax exemptions to businesses and it is located at the Low-Cost Carrier Terminal in Malaysia.

Its goal is also to connect Malaysia’s SMEs to the global market through Alibaba’s inspired electronic world trade platform to facilitate greater exchange between countries and for the SMEs to utilize these e-commerce platforms effectively by developing an export strategy that includes a thorough understanding of the regulatory framework of both home and importing countries.

Why Register a Company in Malaysia’s Free Trade Zone?

Registering a company in Malaysia Free Trade Zones offers several advantages to the companies or businesses. One of the key benefits is the tax-free environment, which reduces operational costs because these zones are located near ports, seaports, airports, highways and railways. It also provides excellent logistics support and connectivity for businesses or companies. 

Also, the Malaysian Government maintains easy foreign exchange control, making it easier for businesses to manage international transactions. This will benefit the company with simplified and flexible import-export procedures and cost-saving measures for industrial, manufacturing, and commercial activities.

Moreover, there is no custom duty on products imported into the free zone for re-exportation purposes. This will further enhance the financial transactions of these zones for businesses looking to optimize their goods operations.

Who is the Malaysia Free Zone Authorities?

The Ministry of Finance in Malaysia appoints a Free Zone Authority as a regulatory body. This body can be a statutory organization established under federal and state laws of Malaysia. The Authority’s primary role is to maintain and operate the free zones within the country.

These authorities include the Malaysian Investment Development Authority, which promotes investment and provides support to businesses within the Free Trade Zone. Also, the Malaysia Customs Department oversees customs procedures to ensure compliance with import and export regulations. The Ministry of International Trade and Industry prepare policies to enhance trade and industrial growth within the zones.

Glimpse of the Company Registration in Malaysia Free Trade Zones

Company Registration in Malaysia involves several steps designed to meet the specific requirements of the Free Trade Zone. Below are the steps for establishing a company in Malaysia Free Trade Zones:

1. Incorporation of the Company

The incorporation of the private limited company (Sdn Bhd) needs to be registered with the Companies Commission of Malaysia, whether it’s foreign-owned, local-owned, or a branch company.

2. Choosing a Free Trade Zone

Research the available Free Trade Zone in Malaysia and select the one that best suits your business needs, such as location, industry focus, and regulatory environment.

3. Capital Requirements

To qualify for a free trade zone company registration in Malaysia, the business must have a minimum paid-up capital of RM 500,000 to RM 1 million.

4. Legal Structure

To determine the legal structure of the company, the registration of the company with the relevant authorities in Malaysia Free Trade Zone with the Companies Commission of Malaysia.

5. Approval from Malaysia Free Trade Zones Authority

The company needs to obtain approval from the Malaysia Free Trade Zones Authority governing the chosen FTZ, which may involve submitting an application and supporting documents detailing the business activities.

6. Obtaining Necessary License & Permits

The company needs to obtain the necessary licenses to operate within a Malaysia Free Trade Zone, depending on its business activities, from the Malaysia Free Trade Zone authorities for trade, manufacturing, and other industry-specific licenses.

7. Physical Office

The company must maintain physical offices within the designated Malaysia Free Trade Zones.

8. Custom Registration

The company needs to register with Malaysia’s customs laws to familiarize the business with customs procedures and ensure that premises comply with Malaysia Free Trade Zones regulations.

9. Tax Consideration

The company needs to understand the tax incentives, exemptions, and financial benefits available to businesses operating within the Free Trade Zone in Malaysia.

10. Obtain Approval

After submitting the application and supporting documents detailing the business activities, proposed investment, and compliance with Free Trade Zone regulation for the company’s registration, the company will obtain approval within four months, depending on the chosen zone and business activities.

What is a License Manufacturing Warehouse?

In Malaysia’s Free Trade Zone, a licensed manufacturing warehouse (LMW) is a specialized facility sanctioned by the Malaysian Government to conduct manufacturing activities within the designated zones.

It plays an important role in promoting industrial development, fostering international trade, and attracting foreign investment to Malaysia. Companies operating within licensed manufacturing warehouses benefit from a range of advantages, including streamlined customs processes, tax incentives, operational flexibility, and access to modern infrastructure. They are authorized to engage in various manufacturing activities such as production processing, assembly, and packaging of goods, catering to both domestic and export markets.

The licensed manufacturing warehouse also enjoys the same benefits as the business operating in the Free Industrial Zone in Malaysia, including exemption of customs duty for the raw materials directly used in the approved export manufacturing process.

What are the Advantages of Malaysia Free Zone Trade?

Let’s discuss the advantages of Malaysia’s Free Zone Trade because investors establishing a company in Malaysia’s free zone trade can enjoy benefits designed for their business activities. Below is a detailed description of the advantages of Malaysia Free Zone Trade:

1. Tax Exemption

Companies operating within the Malaysia Free Trade Zones are typically exempted from customs duties, taxes and import and export activities. Goods processed within the free zone and subsequently exported qualify for these exemptions, provided they are not shipped into Malaysia from the free zone.

2. Improvement in Logistics

Malaysia Free Trade Zones often offer advanced warehousing and reshipment facilities, enhancing companies’ operational efficiency. Access to a robust supply chain and warehouse infrastructure within the zone can reduce lead times and streamline processes.

3. Strategic Location

Malaysia Free Trade Zones is strategically located near ports, highways and railways, providing companies with efficient access to local infrastructure and transportation networks.

4. Flexible Procedure for Import and Exports

Once a company qualifies as a free zone entity and obtains the necessary licenses and permits, the document related to recurring import and export activities is reduced. This streamlined process saves time and minimizes administrative burden.

5. Capital Return

Companies in Malaysia’s free trade zone face no restriction on repatriating capital out of the country, offering flexibility and ease of financial operations.

6. Connectivity of Infrastructure

Malaysia provides a robust transportation infrastructure, facilitating the seamless movement of goods domestically and internationally with well-connected air, sea and road networks; the country ensures efficient transportation of goods and raw materials.

7. Support of Government

Malaysia Free Trade Zones receive dedicated attention and support from the Government or regulatory bodies such as the Malaysia Investment Development Authority and Malaysia External Trade Development Corporation to continually evaluate and enhance the nation’s free trade policies.

Certain Goods within the Malaysia Free Trade Zones are subject to Duties and Taxes.

Below is the list of certain goods within the Malaysia Free Trade Zones that are subject to duties and taxes, including:

1. Forklifts
2. Construction or building materials and equipment
3. Cranes
4. Equipment of Office or Furniture
5. Equipment for Pollution Control and Fire
6. Parts for Motor Vehicles, Tyres and Spare Parts
7. Petroleum
8. Explosive and Chemicals
9. Equipment of Air Conditioning
10. Goods imported or transported into a Free zone for use or consumption in the Free Zone.
11. Alcohol and tobacco products.

Why does the Malaysian Government Establish the Process of a Free Trade Zone?

The Malaysian Government establishes Free Trade Zones to establish duty-free zones within the country, as well as customs regulations, and facilitate trade activities to stimulate economic growth. Attract foreign investment and enhance the country’s exports to maintain economic development. It also provides an environment with various benefits such as tax exemption, reduced customs, etc., to make Malaysia a more attractive place for multinational corporations and contribute to industrial growth by supporting a wide range of industries.

Conclusions

The Malaysia Free Trade Zone maintains economic growth, attracts foreign investment, and promotes the development of industries by offering tax benefits, custom procedures and modern infrastructure to create a favourable environment for businesses. This is possible with the support of the Government and strategic locations of the Malaysia Free Trade Zone to contribute to Malaysia’s economic growth and competitiveness in the global market.

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