INVESTMENT INCENTIVES- MALAYSIA
Malaysia offers one of the most attractive incentives packages in the ASEAN region. Tax incentives and other facilities for the manufacturing sector are provided for in the Promotion of Investment Act 1986, Income Tax Act 1967, Custom Act 1967, Sales Tax Act 1972 and Excise Act 1976.
A company given Pioneer Status will be granted partial exemption from the payment of income tax. It will only have to pay tax on 30% of its statutory income. The period of tax exemption is 5 years, commencing from the production date as determined by the Ministry of International Trade and Industry.
However, companies in Sarawak will enjoy 100% of the exemption on statutory income for 5 years.
For strategic projects in hi-tech industries with heavy capital investment, high R&D content or intensive linkages a 100% exemption may be granted.
INVESTMENT TAX ALLOWANCE (ITA)
A company given Investment Tax Allowance will be granted an allowance of 60% in respect of qualifying capital expenditure incurred within 5 years from the date of approval of the project. The ITA can be offset against 70% of the statutory income in the year of assessment. Unutilised allowance can be carried forward to subsequent years until the whole amount has been used up. 30% of the statutory income will be taxed at the prevailing company tax rate.
However, companies in Sarawak will be granted an allowance of 100% in respect of the qualifying capital expenditure incurred. The allowance can be utilised to set-off against 100% of the statutory income in the year of assessment.
REINVESTMENT ALLOWANCE (RA)
Reinvestment Allowance (RA) is granted to manufacturing companies, which have been in operation for at 12 months and incur qualifying capital expenditure for the expansion of production capacity, modernisation and upgrading of production facilities, and diversification into related products and automation of production facilities.
The RA is in the form of an allowance of 60% of capital expenditure incurred for the expansion, modernisation and upgrading of production facilities and diversification into related products. The allowance can be utilised to offset against 70% of the statutory income in the year of assessment.
SPECIAL ADDITIONAL INCENTIVES FOR MANUFACTURING PROJECTS IN SARAWAK
- Companies eligible for Pioneer Status in Sarawak will be granted tax exemption of 100% (normally 70%) of their statutory income.
- For companies eligible for Investment Tax Allowance, rate of allowance will be increased to a maximum 100% (normally 75%) of the statutory income.
- Second round of pioneer status for existing and new companies.
- Selected industries located in Sarawak can be granted incentives (i.e. Pioneer Status or Investment Tax Allowance, which are no longer given for products manufactured in other parts of Malaysia.
- Infrastructure allowance of 100% of qualifying expenditure.
- Manufacturing projects in Sarawak catering for domestic market are also entitled for full import duty exemption on raw material, components and parts, which are not available in Sarawak.
- Eligibility for double deduction on freight charges incurred for the export of rattan and wood-based products (except plywood, sawn timber and veneer).
- Cheap industrial land. Current price from RM2.50.*
- Low down payment for the purchase of industrial land.
Flexible terms of payment for the purchase of industrial and.* *Subject to change
INCENTIVES FOR HIGH TECH INDUSTRIES
High technology companies are defined as companies engaged in promoted activities or in the production of promoted products in areas of new and emerging technologies. High technology companies are eligible for the following incentives:
- Pioneer Status with full tax exemption at statutory income level for a period of five years; or
Investment Tax Allowance of 60% on qualifying capital expenditure incurred within a period of five years. The allowance can be offset against the statutory income for each assessment year without 100% of
The high technology company must fulfil the following criteria:
- Local research and development (R&D) expenditure to gross sales should be at least 1% on an annual basis. However, companies are allowed a period of three years from the date of operation/commencement of business to comply with this requirement
The percentage of science and technical graduates to total workforce should be at least 7%
INCENTIVES FOR STRATEGIC INDUSTRIES
Strategic projects are generally defined as projects involving products/activities of national importance. They involve heavy capital investments with long gestation periods; have high levels of technology and are integrated; generate extensive linkages; and generally have significant impact on the economy. Such projects are eligible for the following incentives:
Pioneer Status with full tax exemption at statutory income level for a period of 10 years; or
Investment Tax Allowance of 100% on qualifying capital expenditure incurred within a period of five years. The allowance can be offset against the statutory income for each assessment year 100% of
INCENTIVES FOR RESEARCH AND DEVELOPMENT
The definition of R & D in the Promotion of Investment Act 1986 is as follows:
"Research and development means any systematic or intensive study carried out in the field of science or technology with the object of using the results of the study for the production or improvement of materials, devices, products, produce or processes but does not include:
- Quality control of product or routine testing of materials, devices products or produce;
- Research in the social science or humanities;
- Routine data collection;
- Efficiency surveys or management studies;
Market research or sales promotion."
To further strengthen the foundation for a more integrated R & D in the future, companies which carry out designing or prototyping as an independent activity are eligible for incentives.
CONTRACT R&D COMPANY
A contract R&D Company (i.e. a company that provides R & D services in Malaysia only to companies other than its related companies) is eligible to apply for Pioneer Status with full income tax exemption at statutory income level for five years or an Investment Tax Allowance (ITA) of 100% on qualifying capital expenditure incurred within 10 years. The ITA can be utilised to offset against 70% of the statutory income in the year of assessment.
An R&D company (i.e. company which provides R & D services in Malaysia to its related companies or to any other companies) is eligible to apply for an ITA of 100% on qualifying capital expenditure incurred within 10 years. The ITA can be utilised to offset against 70% of the statutory income in the year of assessment. The related companies concerned will not enjoy double deduction for payments made to the R&D Company for the use of its services, unless the R&D Company opts not to avail itself to the ITA.
Contract R & D and R & D companies are eligible to apply for the various incentives provided they fulfil the following criteria:
- Research undertaken should be in accordance with the needs of the country and bring benefit to the Malaysian economy
- at least 70% of the income of the company should be derived from research and development activities;
- for manufacturing-based R&D, at least 50% of the workforce of the company must be appropriately qualified personnel performing research and technical functions; and
for agricultural-based R&D, at least 5% of the workforce of the company must be appropriately qualified personnel performing research and technical functions
Companies that carry out in-house research in Malaysia (i.e. R&D carried out within a company for the purpose of its own business) are eligible to apply for ITA of 50% on qualifying capital expenditure incurred within 10 years. The ITA can be utilised to offset 70% of the statutory income in the Year of Assessment.
DOUBLE DEDUCTION FOR RESEARCH & DEVELOPMENT
Double deduction is allowed on revenue expenditure incurred by a person on research directly undertaken by him or on his behalf, which is approved by the Minister of Finance. Double deduction is allowed on payment for the use of services of approved research institutes, R&D companies or contract R&D companies, as well as on cash contribution made to approve research institutes.
- Industrial Building allowance in the form of an initial allowance of 10% and an annual allowance of 3% is available for buildings used for purposes of approved R&D.
- Capital allowance on capital expenditure incurred in the provision of plant and machinery used for R & D.
Machinery/equipment, materials, raw materials/component parts and samples used for R&D purposes are eligible for exemption from import duties, sales tax and excise duties.
INCENTIVES FOR INDUSTRIAL ADJUSTMENT
Companies in operation before 31 December 1990 in the wood-based, textile, machinery and engineering sectors are eligible for certain incentives when undertaking or participating in approved industrial adjustment programmes.
For the purposes of these incentives, industrial adjustment has been defined as any activity proposed to be undertaken by a particular sector in the manufacturing industry to restructure by way of reorganisation, reconstruction or amalgamation within that particular sector with a view to strengthening the basis for industrial self-efficiency improving industrial technology, increasing productivity, and enhancing the efficient use of natural resources and the efficient management of manpower.
Companies undertaking approved industrial adjustment programmes are eligible for the Industrial Adjustment Allowance (IAA). The IAA provides for an allowance of up to 100% in respect of qualifying capital expenditure incurred by a manufacturing company in its efforts at undertaking industrial adjustment. The features of the IAA are:
- The industrial adjustment programme has to be approved by the Minister of International Trade and Industry and the Minister of Finance.
- The IAA is given for qualifying capital expenditure incurred within five years from the date of approval of the incentive.
- Companies enjoying Investment Tax Allowance (ITA) shall only be eligible to apply for IAA in respect of the capital expenditure on which ITA has not been granted.
Companies granted IAA would not be eligible for Reinvestment Allowance in respect of the same expenditure
INCENTIVES FOR SMALL SCALE INDUSTRIES
Small-scale manufacturing companies incorporated in Malaysia with shareholders' funds not exceeding RM500,000 and having Malaysian equity of at least 60% are eligible for pioneer status incentive with an income tax exemption of 100% of the statuting income for a period of 5 years; or investment tax Allowanle of 60% on the qualifying capital expenditure incurred within five years and can be offset against 100% of the statuting income for each year of assesment
INCENTIVES FOR THE STORAGE, TREATMENT AND DISPOSAL OF TOXIC AND HAZARDOUS WASTES.
Incentives are available to encourage the setting up of proper facilities for the storage, treatment and disposal of toxic and hazardous wastes.
The Pioneer Status incentive for 5 years will be available to companies, which are directly involved in the storage, treatment and disposal of toxic and hazardous wastes in an integrated manner.
Those companies which are themselves waste generators and wish to establish facilities to store, treat and dispose of their wastes, either on-site or off-site, would be eligible for a special allowance at an initial rate of 40% and an annual rate of 20% for all capital expenditure.
As a further incentive to both categories of companies, the Government will also extend the current import duty and sales tax exemption scheme for machinery, equipment, raw materials and components to them for the storage, treatment and disposal of toxic and hazardous wastes
OTHER SPECIAL BENEFITS
There are also special incentives for Tourism Industry, Multimedia Super Corridor (MSC) as well as:
- Agriculture Sector
- Software Development
- Computers and Information Technology Assets
- Acquiring Proprietary Rights
- Operational Headquarters (OHQs)
- International Procurement Centres
- Approved Service Projects
- Shipping Industry
Tariff Related Incentives
PROTECTION OF FOREIGN INVESTMENT
EQUITY POLICY IN THE MANUFACTURING SECTOR
The Malaysian Government welcomes foreign investment in the manufacturing sector. In keeping with the objective of increasing Malaysian participation in manufacturing activities, it is the policy of the Government to encourage projects to be undertaken on a joint venture basis between Malaysia and foreign entrepreneurs.
EQUITY POLICY APPLICABLE TO NEW INVESTMENT, EXPANSION & DIVERSIFICATION
Foreign equity participation in manufacturing projects has been governed by the level of exports. Effective from 31 July 1998, the Malaysia government has liberalised the equity policy for the manufacturing sector in respect of new investment, expansion or diversification as follows:
Foreign investors can now hold 100% equity irrespective of the level of exports.
Equity holdings in all manufacturing projects were fully liberalized effective from 17 June 2003 Foreign investors can now hold 100% of the equity in all investments in new priject, as well as investments in expansion/ diversification project by existing companies, irrespective of the level of exports and without any product/activity being excluded.
The new equity policy also applies to:
Companies previously exempted from obtaining a manufacturing licence but whose shareholders' funds have now reached RM2.5 million or have now engaged 75 or more full-time employees and are thus required to be licensed.
Existing licensed companies previously exempted from complying with equity conditions, but are now required to comply due to their shareholders' funds having reached RM2.5 million.
EQUITY POLICY APPLICABLE TO EXISTING COMPANIES
Equity and export conditions imposed on companies prior to 17 June 2003 will be maintained.
However, companies can request for these condition to be removed. The government will be flexible in considering such requests and approval will be given based on the merits of each case. Companies with export conditions can apply for approval from MIDA to sell in the domestic market based on the following guidelines:
Up to 100% of their output for those products with nil duty or those not produced locally.
Up to 80% of their output if the domestic supply is inadequate or there has been an increase in imports from ASEAN for products with Common Effective Preferential Tariff (CEPT) duties of 5% and below.
Protection of Foreign Investment
Malaysia's commitment in creating a safe investment environment has persuaded more than 4,000 international companies from over 50 countries to make Malaysia their offshore base.
A company whose equity participation has been approved will not be required to restructure its equity at any time as long as the company continues to comply with the original conditions of approval and retains the original features of the project.
INVESTMENT GUARANTEE AGREEMENTS
Malaysia's readiness to conclude Investment Guarantee Agreements (IGAs) is a testimony of the Government's desire to increase the confidence of foreign investors in Malaysia.
Protection against nationalisation and expropriation.
Ensure prompt and adequate compensation in the event of nationalisation or expropriation.
Provide Free transfer of profits, capital and other fees.
Ensure settlement of investment disputes under the Convention on the Settlement of Investment Disputes of which Malaysia has been a member since 1996.
Malaysia has concluded Investment Guarantee Agreements with the following groupings and countries(in alphabetical order):
Association of South-East Asian Nations (ASEAN)
Organisation of Islamic Countries (OIC)
China, People's Republic of
Djibouti, Republic of
Guinea, Republic of
Korea, Republic of
Kuwait Kyrgyz Republic
Laos People's Democratic Republic
Papua New Guinea
Sudan, Republic of
United Arap Emirates
United States of America
Vietnam, Socialist Republic of
CONVENTION ON THE SETTLEMENT OF INVESTMENT DISPUTES
In the interest of promoting and protecting foreign investment, the Malaysia government ratified the provisions of the Convention on the Settlement of Investment Disputes in 1996. The Convention, established under the auspices of the International Bank for Reconstruction and Development (IBRD), Provides international conciliation or arbitration through the International Centre for Settlement of Investment Disputes located at IBRD's principal office in Washington.
REGIONAL CENTRE FOR ARBITRATION
The Kuala Lumpur Regional Centre for Arbitration was established in 1978 under the auspices of the Asian-African Legal Consultative Committee (AALCC)- an inter-governmental organisation in cooperation with and assisted by the Malaysian Government.
A non-profit organisation, the Centre serves the Asia Pacific region. It airms to provide a system to settle disputes for the benefit of parties engaged in trade, commerce and investments with and within the region.
Any dispute, controversy or claim arising out of or relating to a contract, or the breach, termination or invalidaty shall be decided by arbitration in accordance with the Rules for Arbitration of the Kuala Lumpur regional Centre for Arbitration.