Tax and Legal

Tax Incentives for Foreign Investors in Malaysia

According to the Milken Institute of Global Opportunity Index of 2022, Malaysia is the most stable economy among Southeast Asian countries. However, it is reluctant to support and attract tax incentives for foreign investors. Malaysia’s manufacturing, agriculture, industrial, and all other sectors aim to balance the high global demands by attracting more investment opportunities.

The provisions of the Promotion of Investment Act of 1986, the Income Tax Act of 1967, the Customs Act of 1967, the Excise Act of 1976, and the Free Zones Act of 1990 offer various opportunities for tax incentives for foreign investors in Malaysia.

Malaysia’s Perspective on Tax Incentives for New Investors

Most of the tax incentives for foreign investors in Malaysia are enjoyed by new investors engaged in promoting products and activities of business establishments. In contrast, the options for existing foreign investors are limited to specific tax incentives, such as the green technology incentive program, global trading centre incentive program, and reinvestment allowance program.

The Malaysian perspective on attracting several tax incentives for foreign investors guides new investors in promoting economic growth, stimulating opportunities for domestic investment, and attracting foreign direct investment in Malaysia.

Rules for Tax Exemptions for Foreign Incentives

The government of Malaysia offers affordable tax concessions for foreign investors. The Malaysian Budget of 2023 aims to maintain the competitive Malaysian investment environment by attracting various tax incentives for foreign investors.

Generally, tax incentives include tax exemptions and allowances for tax deductions, which are made available for both resident and non-resident investors of Malaysia. The Malaysian Budget of 2021 authorized the Malaysian Investment Development Authority i.e., MIDA, to set guidelines and provisions for implementing necessary programs providing tax incentives for foreign investors in Malaysia. The tax incentive rules established under MIDA are governed to attract foreign multinational enterprises to invest in Malaysia.

The Malaysian Budget of 2024 aims to implement economic reforms, including recognizing various tax incentives for foreign investors in Malaysia.

Legal Compliance for Foreign Investors in Malaysia

Compliance with the essential tax regulations is necessary for attracting multiple opportunities for tax incentives for foreign investors in Malaysia. Compliance with the following rules aims to avoid any legal issues or penalties while attracting tax incentives for foreign investors in Malaysia. The investors are required to comply with the following legal requirements mandatorily:

1. The business of foreign investors must be registered with the authorities (including the Companies Commission of Malaysia or the Inland Revenue Board of Malaysia) responsible for regulating business operations in Malaysia;
2. The foreign investors must timely file the tax returns for their registered business in Malaysia;
3. The foreign investors must keep an accurate record of the financial documents for their business registered in Malaysia;
4. The foreign investor must comply with Malaysian laws dealing with the services and other taxes.

Significant Tax Incentives for Malaysian Investors

The 2024 Malaysian Budget tailors various structural changes to the Malaysian tax system, which aims to target tax incentives for foreign investors in Malaysia. Some of the significant tax incentives for foreign investors in Malaysia are detailed below:

Enjoys the Pioneer Status

Businesses owned and regulated by foreign investors in Malaysia are granted pioneer status with several tax benefits and partial exemptions, providing at least 70% tax exemption from the statutory income of the business. The tax incentives for foreign investors in Malaysia are ensured through the grant of pioneer status of the companies enjoying the tax exemption for 5 to 10 years. The pioneer status is only granted to foreign-owned businesses engaged in specific industries that produce a promoted product activity. Following is the list of qualifying industries that are allowed to enjoy the pioneer status:

• The high technology and capital-invested industries in Malaysia with specific projects aiming at national and strategic importance are granted a tax incentive of 100% on the statutory income for a period of 15 to 10 years.
• The high-tech industries engaged in businesses in new and emerging technologies are granted a 100% on the statutory income tax incentive for five years.
• The manufacturing industries engaged in the manufacturing of machinery and equipment are granted a 100% tax incentive on the statutory income for ten years;
• Small-scale industries with specified conditions are granted a 100% tax incentive on the statutory income for five years;
• The established industries aiming to invest and re-invest their business in oil, palm, and biomass to produce value-added goods are granted a 100% tax incentive on the statutory income for ten years.

Investment Tax Allowance

The investment tax allowance, ITA, is granted as an alternative to the pioneer status. The ITA is designed to offer various tax incentives for foreign investors in Malaysia. A 60% tax incentive applies to qualifying capital expenditures incurred within five years. Industries aim to offset the investment tax allowance against 70% of the statutory income accrued during the assessment year. Also, the unused investment tax allowance is generally carried forward for future deductions.

The investment tax allowance granted to various industries attracting foreign investors in Malaysia is provided below:

• A business engaged in conducting in-house counsel is granted a 50% investment tax allowance on the qualifying capital expenditure;
• A high-technology business is granted a 60% investment tax allowance on the qualifying capital expenditure for five years;
• A manufacturing business with specialized machinery and equipment is granted a 100% investment tax allowance on the qualifying capital expenditure for five years;
• Small-scale businesses with special conditions are granted a 100% investment tax allowance on the qualifying capital expenditure for five years;
• The industry aims to provide technical and vocational training programs, and private and higher educational institutions and courses are granted a 100% investment tax allowance on qualifying capital expenditures for ten years.

Reinvestment Allowance

Reinvestment allowance, also termed RA, is a tax incentive for foreign investors in Malaysia, which is granted at 60% of the qualifying capital expenditure incurred by the business attracting foreign investors in Malaysia. The reinvestment allowance is given for 15 consecutive years to the industries engaged in carrying out manufacturing or agricultural business operations in Malaysia. The reinvestment allowance in Malaysia is sector-specific. The infrastructure or agriculture industry is granted a reinvestment allowance of 40% and 50% for the cost of plant, machinery, and equipment required to improve technology or production lines. The eligibility for the businesses to attract the benefit of the reinvestment incentive program under the new industrial master plan of 2030 allows the manufacturing or agricultural businesses to engage in expanding and modernizing for at least 36 months in Malaysia.

Also, a special reinvestment allowance of 60% of the qualifying capital expenditure is granted to businesses with an exhausted 15-year reinvestment allowance period for the assessment years from 2020 to 2024.

Double Tax Deductions for Internationalization

The double taxation agreements (DTAs) signed by Malaysia ensure the double tax deductions of withholding taxes for the businesses incurring expenses for promoting activities and international marketing. The tax incentives for foreign investors in Malaysia mainly aim to encourage the global expansion of businesses through Company Registration in Malaysia.

Special Economic Zones

Special tax incentives for foreign investors in Malaysia are granted to businesses incorporated in special economic zones (including Iskandar Malaysia Johor Region, Northern Corridor Economic Region, Sabah Development Corridor, etc.). The corporate tax exemption of 10% for 15 years is applicable for attracting foreign investment opportunities in Malaysia. The Special Economic Zones in Malaysia, also known as the Free Industrial Zones (FIZ) or the Free Commercial Zones (FOZ), offer the following tax incentives for foreign investors establishing businesses in the region:

Import Duty Exemption

Import duty exemption, also termed as the customized packaged investment incentives, is designed to offer tax incentives on the value of raw materials, machinery, and the equipment employed in the agricultural, manufacturing, and selected service (including research and development, private higher education, and training institutions, tourism project) industries of Malaysia.

Sales and Service Tax Exemption

Tax incentives for foreign investors in Malaysia also include exemption from sales and service tax for businesses registered under the country’s special economic zones.

Other Special Tax Incentives

Specific special tax incentives exist for foreign investors in Malaysia engaged in manufacturing activities or business. The following is the list of special tax exemptions offered under the guidelines of MIDA:

Incentives for Relocation to Malaysia

This form of tax incentives for foreign investors in Malaysia is designed to assist businesses in re-establishing or relocating their business operations in Malaysia under various tax incentive programs for new and existing manufacture-related businesses in Malaysia. The incentive is effective from July 1, 2020, to December 31, 2024.

Accelerated and Automation Capital Allowance

The Accelerated capital allowance is a unique incentive program designed to write off the capital expenditure of the manufacturing business within three years. The application for Accelerated Capital Allowance must be accompanied by a letter from MIDA. Tax Incentives for Foreign Investors in Specific Industries

Also, manufacturing businesses operating for at least 36 months can claim an automation capital allowance.

Tax Incentives for Foreign Investors in Specific Industries

There exist various tax incentives for foreign investors in Malaysia that offer different tax exemptions for the engagement of foreign investors or attracting foreign investment opportunities in specific industries like the oil and gas, automobile, shipping, and biotechnology industries.

The following are the specific industries with foreign investment holdings that are offered various tax incentives in Malaysia:

Aerospace Industry

The new aerospace industry that targets the strategic usage of high-tech methodology for manufacturing, assembling, maintaining, and repairing aircraft and their associated services in Malaysia is accountable for a 70% to 100% tax incentive for a 5—to 10-year period and an investment tax allowance of 60% to 100% for five years. The existing aerospace companies are allowed a 60% tax incentive on the investment tax allowance for a 5-year period.

Information and Communication Technology Industry

The Malaysian government offers tax incentives for foreign investors in Malaysia who are aiming to invest in the sector concerned with the development of the information and communication technology industry. The tax incentives offered to the ICT industry include the grant of pioneer status, an investment tax allowance of 60% on the qualifying capital expenditure, and various other research and development incentives.

Shipping Industry

The Malaysian government offers tax incentives for foreign investors who are engaged in the shipbuilding and ship repair business. Approx. 70% of the income tax exemption is allowed for a 5-year period, or an income tax allowance of 60% is applied to the qualifying capital expenditure incurred within the 5-year period.

Machinery and Equipment Industry

The tax incentives for foreign investors in Malaysia employed for investing in the industry specialized with the production of machinery and equipment include the grant of pioneer status with a tax exemption of 100% on the statutory income for ten years or an investment tax allowance of 100% on the qualifying capital expenditure incurred within the five years.

Industrialized Building Manufacturing System

Industries manufacturing at least three industrialized building systems, including slabs, columns, beams, walls, and roof trusses, are eligible for a 60% investment tax allowance on qualifying capital expenditures incurred within five years.

Biotech Based Industry

Foreign investors in the biotechnology industry of Malaysia are qualified for the specific tax incentives that assist in attracting more opportunities for foreign direct investment, leading to the growth of the Malaysian economy. The grant of pioneer status exempting 70% of the statutory income tax for ten years, an investment tax allowance exempting 60% of the qualifying capital expenditure incurred within five years, or the custom duty exemption for importing the equipment, software, and materials required in the biotechnology industry.

Conclusion

The overview of the tax structure of Malaysia aims to assist foreign investors in making a clear understanding of the corporate taxes and available tax incentives for businesses dealing in specified manufacturing and other business operations. The legal requirements are necessary to comply with attracting tax incentives for foreign investors in Malaysia. Adherence to the various corporate and taxation regulations of Malaysia (including the Promotion of Investment Act of 1986, the Income Tax Act of 1967, the Customs Act of 1967, the Excise Act of 1976, and the Free Zones Act of 1990) attracts various opportunities for the Malaysian businesses to enjoy the available tax incentive programs for foreign investment in Malaysia.

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