Doing Business in Malaysia

Establishing an entity

The principal forms of business organisation in Malaysia are sole proprietorships, general partnerships, limited liability partnerships, limited liability companies and branches of foreign companies.

Businesses carried out under sole proprietorships and general partnerships must be registered with the Companies Commission of Malaysia. Likewise, an application for the incorporation of a company or a limited liability partnership and the registration of a branch of a foreign company must be made to the Companies Commission of Malaysia.

Generally, it takes about 1 to 2 weeks to incorporate a company or to register a branch of a foreign company in Malaysia. Shelf companies are readily available and can be bought and used within days.

A limited liability company must have at least one director who must have a principal or only place of residence in Malaysia. Such a company must have a minimum paid-up share capital of MYR 1. The company must have a registered office and keep their accounts and records in Malaysia. A branch of a foreign company in Malaysia must keep the records of its Malaysian operations in Malaysia.

A limited liability partnership must have at least 2 partners consisting of individuals or corporate bodies. The limited liability partnership must have a compliance officer, registered office and keep its accounts and records in Malaysia. Foreigners can be partners of limited liability partnerships.

Foreign business restrictions

Only a Malaysian citizen or a permanent resident of Malaysia can register a sole proprietorship business or a general partnership business in Malaysia.

Foreign investors are permitted to incorporate a 100% foreign-owned company in Malaysia.

Investment incentives

Companies in manufacturing, agriculture, hotel and tourism, or other encouraged sectors and intending to participate in a promoted activity or manufacture a promoted product, are eligible to apply for either pioneer status or investment tax allowance (ITA) incentives.

Generally, a company enjoying pioneer status is given a tax exemption of 70% of statutory income (i.e. profit after deduction of capital allowances) for 5 or 10 years, with the balance of income being subject to tax at the prevailing corporate tax rate. Unabsorbed losses and unabsorbed capital allowances can be carried forward to subsequent years until fully utilised.

Companies granted ITA are given a 60% allowance on the qualifying capital expenditure incurred within 5 years from the date the incentive takes effect. ITA is allowed to be off set against only 70% of the statutory income, whilst the remaining 30% is subject to tax at the prevailing corporate tax rate. Unabsorbed ITA can be carried forward to subsequent years until fully utilised. ITA is granted in addition to the normal tax depreciation, known as capital allowance.

Pioneer status and ITA incentives are further enhanced for certain promoted activities and promoted products.

A company resident in Malaysia which is involved in manufacturing or agricultural activities is eligible to claim reinvestment allowance (RA) of 60% if it incurs qualifying capital expenditure for the purpose of expansion, modernisation, automation or diversification projects, and has been in operation for at least 36 months. The RA granted is allowed to be set off against only 70% of statutory income, whilst the remaining 30% of statutory income is subject to corporate tax. Unabsorbed RA can be carried forward to subsequent years until fully utilised.

Attractive and enhanced tax incentives are also available for approved service projects, approved food production projects, real estate investment trusts, biotechnology industry, tourism industry, research and development activities, integrated logistics services, principal hub activities, Islamic banking and Takaful businesses, insurance and fund management businesses, venture capital industry, multimedia super corridor status companies and companies operating in Labuan, the Iskandar Development Region as well as in Treasury Management Centres.

Work permit and visas

Generally, a visa is not required for citizens of Commonwealth and ASEAN countries, except for Bangladesh, Cameroon, Ghana, Mozambique, Nigeria, Pakistan, India, Sri Lanka and Myanmar.

Foreigners can obtain a visit pass for social or business visits, but the pass cannot be used for the purpose of employment or work. A foreigner intending to work in Malaysia must be sponsored by an entity in Malaysia and he/she must apply for either a visit pass (temporary employment or professional) or an employment pass. A dependant’s pass can be applied for, relating to his spouse and children.

Foreign-owned companies incorporated in Malaysia are allowed to bring in expatriates to fill in positions where there is a shortage of trained Malaysians. These positions may be given key post status.

Companies undertaking manufacturing activities, research and development activities, hotels with at least 4-star rating and tourism projects, and applying for tax incentives are eligible to apply for expatriate posts on the condition that the minimum paid-up capital requirements below are satisfied:

• 100% Malaysian-owned company: MYR 250,000 (i.e. approximately USD 60,900)
• Company jointly-owned by both Malaysian and foreigner: MYR 350,000 (i.e. approximately USD 85,300)
• 100% foreign-owned company: MYR 500,000 (i.e. approximately USD 121,800)

For the recruitment of a key expatriate post, foreign capital in the company should be at least MYR 500,000. In addition, the company is also required to comply with the minimum monthly salary of MYR 5,000 and certain prescribed minimum academic qualification and experience. The number of expatriate posts allowed will depend on the guidelines applicable at the time of application and on the merits of each case.

Taxation

Malaysia adopts the territorial basis of taxation where income is taxed if it is accrued in or derived from Malaysia. Foreign income remitted into Malaysia is not subject to tax in Malaysia. The exception to the general rule is that income derived from banking, insurance and air or sea transport operations is taxed on a world-wide basis.

Personal Income Tax 

Resident individuals are taxed at a graduated rate, ranging from 0% to 28%. They are entitled to claim personal reliefs and rebates, where applicable. Non-resident individuals are taxed at a flat rate of 28%, effective from the year of assessment in 2016 without any relief.

The tax resident status of an individual depends on the number of days the individual is physically present in Malaysia. Employees and self-employed individuals are required to prepay their taxes through a prescribed instalment scheme.

Expatriates are required to seek tax clearance from the Malaysian tax authorities before leaving Malaysia upon cessation of their employment in Malaysia.

Corporate Tax 

Companies, regardless of whether they are resident or non-resident in Malaysia, are subject to corporate tax at 24% (effective the year of assessment 2016) of their chargeable income. Small and medium-sized enterprises (SMEs) are eligible for the preferential tax rate of 19% (which will be reduced to 18% effective the year of assessment 2017) for the first MYR 500,000 of their chargeable income.

A company is a tax resident in Malaysia if the management and control of its business/ affairs are exercised in Malaysia. Companies are required to provide an estimate of their tax liability and pay their tax in advance on a monthly basis based on the estimate provided. A corporate income tax return must be filed within 7 months after the end of the company’s financial year end.

Unabsorbed losses and unabsorbed capital allowances can be carried forward to subsequent years until fully utilised.

Dividends distributed to shareholders are tax exempt under the single tier tax system.

Withholding Tax 

Payments made to non-residents for installation or technical services performed in Malaysia; rental of moveable property; royalties, commission or guarantee fees, are subject to withholding tax at the rate of 10%, unless a lower rate is prescribed under a Double Taxation Agreement (DTA). Effective from 17 January 2017, payments made to non-residents for installation or technical services performed outside Malaysia are also subject to withholding tax.

Payment of interest on loans or borrowings obtained from non-residents will attract withholding tax at 15%, subject to any preferential rates stated under a DTA.

Payments of service fees to non-resident contractors carrying out a project in Malaysia are liable to withholding tax at the rate of 13%. This is not a final tax as the non-resident contractor is required to file a Malaysian tax return to determine his actual tax liability.

Dividends distributed to non-resident shareholders are not subject to any withholding tax.

Real Property Gains Tax (RPGT) 

There is no capital gains tax in Malaysia. However, disposals of real property or shares in a real property company are subject to RPGT. Effective from 1 January 2014, the RPGT rates are as follows:

Indirect Taxes

Excise duty is imposed on certain goods manufactured in Malaysia or on goods imported into Malaysia, such as hard liquor, motor vehicles and tobacco. The rates of excise duty range from 5% to 105%.

Import duty is generally imposed on goods imported into Malaysia at rates ranging from 7% to 50%.

Stamp Duty 

Stamp duty is chargeable on certain instruments and documents. The rate of stamp duty may be at ad valorem on the transacted value, or at a flat rate of MYR 10, depending on the type of instrument or document involved.

Goods and Services Tax (GST) 

GST was implemented on 1 April 2015. GST is charged on any taxable supply of goods and services made in the course or furtherance of any business by a taxable person in Malaysia. GST is also charged and levied on the importation of goods and services into Malaysia for the purpose of a business. GST on imported services is payable by the recipient of the services using the reverse charge mechanism.

A taxable supply is either standard-rated or zero-rated. A standard-rated supply is subject to GST at a rate of 6%. A zero-rated supply is a taxable supply which is subject to a 0% rate of GST. An exempt supply is not a taxable supply. A supplier making a taxable supply is eligible to claim GST incurred on inputs whereas an exempt supplier is not eligible to do so.

A taxable person is a person in business who makes taxable supplies in Malaysia and whose annual turnover exceeds the threshold of MYR 500,000 at any time within a 12-month period. Such a person is required to be registered under the Malaysian GST Act 2014. A person in business who is not required to be registered for GST purposes may opt to be registered for GST voluntarily.

Audit and accounting

The directors of every company should prepare financial statements and have their annual financial statements audited by an approved company auditor. Financial statements should be prepared in accordance with the approved accounting standards in Malaysia.

Private companies should prepare financial statements using Malaysian Private Entities Reporting Standard (MPERS) or Malaysian Financial Reporting Standards (MFRS). All other companies should prepare financial statements using MFRS. MPERS is word-for-word the IFRS for SME except for the requirements on income tax and property development activities. MFRS are identical to International Financial Reporting Standards (IFRS) in all respects other than the nomenclature.  

Visit Mazars Malaysia for more information on the services available to help you set up your business.