Malaysia’s Investment Incentives: Opportunities in 2023
Malaysia provides a variety of appealing incentives for businesses looking to initiate new projects or grow their existing ones. These incentives are backed by several legislations such as the Customs Act of 1967, Income Tax Act of 1967, Sales Tax Act of 2018, Service Tax Act of 2018, Excise Act of 1976, Promotion of Investments Act of 1986, and Free Zones Act of 1990. Companies seeking non-tax incentives and pioneer status apply through the Malaysian Investment Development Authority (MIDA). Conversely, those seeking tax incentives apply through the Inland Revenue Board. Within MIDA, the Incentive Coordination and Collaboration Office operates as a single point of contact for businesses, providing advice and coordinating the actions of all agencies offering investment incentives.
The pioneer status is a particularly attractive incentive available to companies operating in the agricultural, commercial, industrial, manufacturing, or tourism sectors. Companies that engage in promoted activities or specific types of production can benefit from this. Under this status, a company’s tax liability is restricted to just 30% of its statutory income for five years. However, certain promoted activities qualify for an extended period of up to 15 years. The exemption period commences from the company’s “production day,” defined as the day its production level reaches 30% of its capacity. Any dividends issued to shareholders from tax-exempt income are also tax-exempt.
The Investment Tax Allowance (ITA) is another incentive offered as an alternative to the pioneer status for businesses partaking in promoted activities or forms of production. The ITA grants a tax deduction equal to 60% of qualifying capital expenditure incurred within five years of the approval date. In certain cases, the period can be extended to ten years. Businesses can utilize this allowance to offset up to 70% of their statutory income in the year of assessment. It’s also worth noting that the criteria for small-scale manufacturing companies to qualify for pioneer status or the ITA are more relaxed.
There are also a variety of other incentives available in Malaysia. These come in the form of reinvestment allowances, accelerated capital allowances, industrial building allowances, research and development tax deductions, value-added manufacturing-services deductions, training deductions, overseas acquisitions, an industrial linkage program, a treasury management centre initiative, a “principal hub” scheme, and an automation allowance. Special deductions are available for companies employing disabled individuals, ex-convicts, former drug dependents, and senior employees aged 60 and above, valid until the year of assessment 2025.
Furthermore, principal hubs can take advantage of a concessional tax rate of 0% or 5% for five years, renewable for another five years. Although existing principal hubs will be taxed at 10% on all chargeable income for five years, the government has made conditions for renewal more lenient. The principal hub scheme’s application period was extended for another two years, until the end of 2022, as part of the 2021 budget law. Applicants must be locally incorporated and have a paid-up capital exceeding MYR 2.5 million.
The 2021 budget law introduced a new incentive for global trading centers. These qualifying hubs will receive a concessional income tax rate of 10% for five years, renewable for another five years. Applications were received by MIDA from January 2021 until the end of 2022. In addition to this, an incentives scheme for research institutions commercializing their research and development findings was re-introduced. Investors in these institutions are eligible for an income tax deduction equivalent to the amount invested, while a subsidiary company commercializing the findings can enjoy 100% income tax exemption for ten years.
In response to the economic impact of the COVID-19 pandemic, the government launched a new incentive scheme in mid-2020 aimed at attracting foreign manufacturers to relocate their operations to Malaysia. A ten-year income tax holiday can be granted to these companies if they invest between MYR 300 million and MYR 500 million in fixed assets. The tax holiday can be extended to 15 years for fixed-asset investments exceeding MYR 500 million. Additionally, foreign companies with existing businesses in Malaysia qualify for a 100% ITA for five years if they relocate their manufacturing operations to Malaysia with fixed-asset investments of at least MYR 300 million.
The Malaysian government has made detailed information regarding these incentives available at the MIDA website, as well as the i-incentives portal. This portal, launched in 2019, offers information on 126 incentives administered by 13 ministries and 29 agencies. It serves as a comprehensive resource for companies interested in understanding the diverse incentives available in the country.
As part of its efforts to mitigate the adverse economic effects of the pandemic, the government allocated MYR 40 billion under the 2022 budget for the Semarak Niaga Keluarga program. This program provides direct loans, financing guarantees, and equity injections to assist companies in recovering from the pandemic’s economic fallout. Moreover, certain relief measures implemented in 2020-21 were extended. For instance, the 2022 budget law extended income tax rebates of up to MYR 20,000 annually for small and medium-sized enterprises starting operations on or after July 1st, 2020, for another year through the end of 2022. Exemptions on tourism and service tax for accommodation services will also continue to apply until the end of 2022.
Incentives by Sectors
The Malaysian government offers a variety of incentives to attract strategic projects of national importance. These incentives can include highly favorable tax relief, up to 100%, for projects with heavy capital investment and advanced technology. The government also considers granting special customized packages of incentives, both tax and non-tax based, for selected projects. These projects are typically technology-intensive, capital-intensive, knowledge- and skills-driven, and capable of generating significant links and contributing to the development of manufacturing-support services, such as research and development (R&D), procurement, marketing, and distribution.
In addition to these incentives for specific projects, the government also uses industry-specific incentives more liberally to bolster areas it sees as a national boon or a developmental necessity. For example, the government has offered tax breaks and other incentives to attract investment in the semiconductor industry, which is seen as a key strategic sector for Malaysia’s future economic growth.
The Malaysian authorities have established an annual allocation of M$1bn for a duration of five years, concluding in 2025, to create customized incentive packages. The intent behind these incentives is to attract high-value-added projects, particularly those involving high technology, manufacturing, creative, and new economic sectors. Eligibility for these incentives requires each company to invest a minimum of M$5bn, thereby catalyzing additional economic activities that will benefit Malaysia’s SMEs and create employment. The packages also earmark funding for Malaysian businesses capable of demonstrating their growth potential and their ability to export their products and services internationally. These incentives take the form of income tax exemptions, additional tax allowances on capital expenditure, and cash grants, reflecting the authorities’ commitment to driving economic growth, innovation, and global competitiveness within the Malaysian business landscape.
High Tech
High-tech industries are backed under the Multimedia Super Corridor Malaysia scheme, a multi-billion-dollar initiative supervised by the Malaysian Digital Economy Corporation (MDEC). The MDEC, through its SMART Automation Grant, has the capacity to fund half the cost of automating a business’s processes. This financial support, however, is subject to a limit of M$200,000 per company. This scheme represents the country’s concerted effort to promote technological innovation and automation within the high-tech industry.
Biotech firms that are granted “bio-nexus” status by the Malaysian Biotechnology Corporation enjoy several tax benefits. Following the expiration of their ten-year tax exemption period, these firms receive a concessionary tax rate of 20% on income from qualifying activities for the subsequent ten years. Companies or individuals investing in a bio-nexus company are awarded a tax deduction equivalent to the total investment made in seed capital and early-stage financing. The window to apply for bio-nexus status extends up to the end of 2022.
The 2021 budget law offers further tax incentives for manufacturers of pharmaceutical products, including vaccines. These manufacturers can apply to the Malaysian Investment Development Authority (MIDA) until the end of 2022 to qualify for a concessional tax rate of between 0% and 10% for the first ten years. Following this period, a tax rate of 10% could be applied for the subsequent ten years. This tax incentive serves to stimulate growth and innovation within the country’s pharmaceutical sector.
SMEs, Startup, and VC
Small and medium-sized enterprises (SMEs) incorporated in Malaysia can qualify for certain benefits if they meet specified criteria. SMEs that have shareholders’ funds of up to M$500,000 and a minimum of 60% Malaysian equity may qualify for pioneer status, which offers a tax exemption of 100% of income for five years. Alternatively, these SMEs could opt for an investment tax allowance (ITA) of 60%.
Angel investors are offered tax incentives to stimulate investment into start-ups. Until the end of 2023, they may deduct total investments from all taxable income, although numerous restrictions apply. In an effort to encourage equity crowd-funding as an alternative financing option for start-ups, the 2021 budget law grants individual investors an income tax exemption on aggregate income. This exemption is equivalent to 50% of the amount invested in equity crowd-funding.
The amount eligible for this tax exemption is capped at M$50,000 for each year of assessment, and the deductible amount is restricted to 10% of the aggregate income in a year. Applications for this incentive should be submitted between January 2021 and the end of 2023.
Venture capital companies that meet specific qualifications are exempt from the payment of tax on income from all sources for five years. This provision is contingent upon them securing certification from the Securities Commission of Malaysia during the year of assessment from 2018 up to the end of 2026. The exemption applies for a period of five years, or the remaining life of the fund, whichever is shorter. Companies that manage venture capital are also exempt from tax on income derived from their share of profits, management fees, and performance fees for five years, or during the remaining life of the fund. Furthermore, investments made by companies and individuals in venture-capital funds between October 2017 and the end of 2026 may be deducted from taxable income, up to a maximum of M$20m. These incentives serve to spur more investment into venture-capital companies, thus fostering the growth of innovative startups and small-to-medium enterprises.
Manufacturing
Manufacturers of industrial building systems can apply for an income tax exemption ranging from 70% to 100% of statutory income for five years. Alternatively, they have the option to apply for an investment tax allowance of 60% on qualifying capital expenditure incurred within five years. This allowance can be offset against 70% of statutory income. The application period for this incentive was initially set to expire at the end of 2020, but under the 2021 budget law, this deadline has been extended through to the end of 2025.
There are also incentives available for companies involved in certain sectors until the end of 2022. Aerospace companies engaged in maintenance, repair, and overhaul activities, as well as companies involved in the building and repair of ships, are among those eligible for these incentives.
Service
Investments in the service sector are eligible for specific tax incentives intended to encourage staff training, research and development, industrial building allowances, and infrastructure allowances. The status of an approved service project is available for projects in utilities, transport, and communications sectors. These projects can choose to have corporate income tax relief applied directly every year during the life of the relief or in relation to investment tax allowances. In the case of the latter, any unused allowance can be carried forward to offset future tax liabilities.
The export of private healthcare services can qualify for an income tax exemption equivalent to 100% of the value of the increase in exports. This exemption can be offset against 70% of statutory income. The deadline to apply for this tax exemption was initially set to expire at the end of 2020. However, under the 2021 budget law, this application period was extended to the end of 2022.
Others
Companies that invest in qualifying green activities can receive an investment tax allowance of up to 100% on capital expenditure. This allowance can be set off against up to 70% of statutory income for a period of three years. In addition, companies that provide qualifying green services can receive income tax exemption of up to 70% of statutory income for three years. Applications for these incentives must be submitted to MIDA before the end of 2023.
The distribution of income by real-estate investment trusts (REITs) is subject to concessional final tax rates of 24% for nonresident corporate investors, and 10% for both foreign institutional investors and non-corporate investors.
Tax deductions on expenditure incurred when issuing some Islamic bonds are allowed until the end of 2023 or the end of 2025, depending on the type of bonds.
Incentives by Regions
In 2016, the Malaysian government introduced a new budget that provided incentives for underdeveloped regions. The primary aim of these incentives was to stimulate economic growth and development. The incentives were targeted at both newly established firms and existing companies that were willing to expand their operations into these areas. These firms could potentially receive an income tax exemption of 100% for a duration of 15 years. Alternatively, they could receive an investment tax allowance of 100%, which would apply to qualifying capital expenditure incurred within a ten-year period.
A year before the introduction of the 2016 budget, in 2007, the government made public its initial incentive package for Iskandar Malaysia, formerly known as the Iskandar Development Region. This region is a 2,200-square-kilometer special economic zone located in the southern state of Johor, which shares its borders with Singapore. The zone was designed to promote the growth of six specific service sectors. These include creative industries, educational services, financial advisory and consulting services, healthcare services, logistics services, and tourism-related activities.
Iskandar Malaysia wasn’t the only economic region that the government sought to improve. In addition to Iskandar, the government established and operated four other economic corridors. Each of these economic corridors had financial and non-financial benefits tailored to attract investors. The four corridors in question are: The Northern Corridor Economic Region, The East Coast Economic Region, The Sabah Development Corridor, and The Sarawak Corridor of Renewable Energy.
The Northern Corridor Economic Region encompassed an area across the states of Kedah, Penang, Perak, and Perlis. The government’s vision for this region was to invest MYR177 billion from 2007 through 2025. The investment was intended to improve infrastructure, stimulate higher-value-added manufacturing, elevate educational standards, boost tourism, and modernize agricultural practices in the region.
Moving to the northeastern states of Malaysia, the East Coast Economic Region sprawled across 51% of the Malaysian peninsula, stretching from Kelantan, Pahang, and Terengganu to Mersing in southern Johor. The focus in this region was on upgrading the infrastructure, stimulating investments in the petrochemicals and plastics industries, as well as developing farming, energy, and tourism sectors.
The Sabah Development Corridor was another targeted economic region. The objective for this area was to attract MYR105 billion in investments, primarily from private funding. These investments were aimed at bridging the rural-urban divide, reducing poverty, and encouraging sustainable management of the state’s natural resources.
The Sarawak Corridor of Renewable Energy, on the other hand, was a vast area covering around 70,000 square kilometers of the state. The core projects in this region revolved around the establishment of power-generation plants, with a goal to produce at least 20,000 MW of electricity. Other sectors of high priority in this region included aluminum, aquaculture, fishing, livestock, marine engineering, metal production, palm-oil plantations, petroleum, timber plantations, and tourism.
Finally, apart from the special economic zones and corridors, Malaysia also established free zones for exporting companies and several industrial estates. The country boasts more than 500 industrial estates and 43 free zones. The success of these zones and estates led to the development of adjacent industrial parks. Sabah state, for instance, where developed land is in short supply, saw the development of new estates. State governments actively promoted industrial estates in certain activity areas. A good example of this is the Penang state government, which has been advocating for its electronics industry to shift into high tech.
Special Economic Zones & EPZ
In an effort to boost exports, manufacturing companies in Malaysia are offered significant tax benefits. Specifically, a tax exemption equivalent to 10% of the value of increased exports is provided if the goods exported reach a minimum value added of 30% (or 20% for small and medium-sized enterprises or for companies with paid-up capital not exceeding MYR2.5m). This tax exemption can rise to 15% of the value of increased exports if the exported goods achieve at least 50% value added (or 40% for SMEs). Additionally, Malaysian-owned companies with local equity of at least 60% that record an increase in exports are eligible for a 30% income tax exemption on increased exports, and companies that penetrate new markets are eligible for a 50% exemption. Companies that have the highest increase in exports in certain categories can qualify for full income tax exemption. The automotive sector has its own set of criteria that may qualify firms for additional relief.
Service sectors in Malaysia are also eligible for tax exemptions on their statutory income. This exemption is equivalent to 50% of the value of increased exports and applies to sectors such as accounting, architecture, business consultancy, engineering consultancy, legal, marketing, and information and communication technology, among others. Other sectors like construction management, building management, private health and education, publishing, and plantation management are also included in this provision.
The Malaysian government also allows a double-tax deduction for resident companies that incur expenses while seeking export opportunities for their manufactured and agricultural products. Deductible expenses include expenditures for overseas advertising, supply of free samples abroad, market research, preparation of tenders for the supply of goods overseas, and public-relations work connected with exports, among others. Companies with pioneer status may accumulate deductions to be used against their post-pioneer income. Some partnerships and sole proprietorships registered with the Companies Commission of Malaysia are also eligible for this incentive, provided they offer services like accounting, architectural, engineering, legal, or medical and dental.
Malaysia’s designated free zones are another attractive option for companies producing or assembling products entirely for export. These zones are tailored for manufacturing and trading establishments that export all their products and provide them with minimal customs control and formalities in their import of machinery, equipment, parts, and raw materials, and in exporting their finished products. In exceptional cases, the Ministry of International Trade and Industry may allow companies exporting at least 80% of their products to operate in a free zone.
Companies that manufacture finished products for export may be eligible for a full exemption from customs duty on imported raw materials, given that these materials are not available locally at a quality and price deemed acceptable. Exporters may also claim exemption from customs duty and sales tax on spare parts and consumables that are not produced locally, provided that the company’s level of exports comprises at least 80% of its production.
A double-tax deduction is also permitted on premiums paid for export-credit insurance. There are official schemes available to refinance, insure, and guarantee export credits. An annual allowance of 10% of qualifying capital expenditure is given for warehouses that store goods for export and re-export.
Finally, in 2020, the Approved Major Exporter Scheme was introduced. This initiative aims to enhance the competitiveness of the country’s export-oriented companies by offering them full sales tax exemptions on their imports and purchases of goods, raw materials, components, and packaging materials. To qualify for this scheme, a company’s exports must constitute at least 80% of total sales.
Additional export oriented incentive also includes:
- Malaysian international trading companies are entitled to an income tax exemption of 20% on income derived from increased export sales for a period of five years. This incentive aims to motivate companies to enhance their export activities.
- The International Procurement Centre (IPC) scheme is designed to facilitate the centralized purchasing of manufacturing goods and services. Companies under this scheme can open foreign-currency accounts with any licensed commercial bank, which allows them to hold unlimited export proceeds. Moreover, IPCs can enter into foreign-exchange contracts with any licensed commercial bank to forward sell export proceeds based on projected sales. However, sales made by an IPC to the domestic market should not exceed 20% of their annual revenues.
- The Regional Distribution Centre (RDC) scheme provides similar incentives to the IPC scheme. An RDC is a hub for the collection and consolidation of finished goods, components, and spare parts produced by its own group of companies for distribution to dealers, importers, subsidiaries, or other unrelated companies both inside and outside the country. This scheme helps to streamline the distribution process and enhance efficiency.
