Malaysia: A business hub
Malaysia is a fast growing, modern and progressive nation. It is one of the most developed economies in South East Asia and enjoys strong socio-economic and political stability. A multi-racial and multi-cultural population gives it cultural diversity

By Sridhar Sridharan

Malaysia, strategically located in the heart of South East Asia, offers a cost-competitive location for investors intending to set up offshore operations for the manufacture of advanced technological products for regional and international markets.

Supported by a market-oriented economy and pro-business government policies, Malaysia offers investors a dynamic and vibrant business environment with the ideal prerequisites for growth and profits. Malaysia’s key strengths include a well-developed infrastructure including five international airports and seven international seaports making it an ideal springboard to the Asia-Pacific market. A productive workforce, a politically stable country with a well-developed legal system also provides attractive incentives for investors.

Industries in Malaysia are predominantly located in over 200 industrial estates and Free Zones developed throughout the country. These zones are categorised as export processing zones, which cater to the requirements of export-oriented industries. There are also specialised parks that have been developed to cater to the needs of specific industries.

Economic Overview
Malaysia is an active trading nation, ranked in the top 20 trading nations in the world. It is an open economy with international trade that is twice the size of its GDP. In 2007, the country for the first time breached RM1 trillion in total trade. During the past five years, Malaysia’s GDP has been growing at a stable annual rate of 5-6 per cent of GDP. Malaysia practices liberal market policies aimed at promoting trade, entrepreneurship, industrial and economic development.

Incentives
Malaysia welcomes foreign investments, particularly in the manufacturing sector and offers many incentives and other advantages to foreign investors. Foreign investors in the manufacturing sector can hold 100 per cent of the equity in a Malaysian company. A company with foreign paid up capital of $2mn and above will be allowed up to 10 expatriate posts, including five key posts. Under local tax laws, specific tax incentives are aimed at stimulating investment in manufacturing, biotechnology, information technology and Islamic financing. Generous tax write-offs are allowed in the form of double deductions, tax holiday status and additional deduction on qualifying capital expenditure. The Malaysian Industrial Development Authority (MIDA) is the government’s principal agency for the promotion of the manufacturing and services sectors in Malaysia. MIDA assists companies which intend to invest in the manufacturing and its related services sectors as well as facilitates the implementation and operation of their projects.

Structure of business entities
A number of structures are possible. Private companies, with limited liability, are the most common form of business entity in Malaysia.

1. Limited Liability Companies
   These companies are characterised by a restriction on the right to transfer its shares, a limitation on the number of shareholders to a maximum of 50 and a prohibition to offer its shares or debentures to the public.

2. Partnerships and Sole Traders
   All sole proprietorships and partnerships must be registered with the Companies Commission of Malaysia (CCM). In the case of partnerships, partners are both jointly and severally liable for the debts and obligations of the partnership. Formal partnership deeds may be drawn up but this is not obligatory.

3. Branches of Foreign Companies
   Under the Companies Act, a foreign company that establishes a place of business in Malaysia must register with the CCM. Registration takes up to a month and registration fees are payable in accordance with graduated scales based on the authorised capital of the parent company. Every company shall within a month of establishing a place of business or commencing business within Malaysia lodge with the CCM, notice of the location of its registered office in Malaysia.

Structures used by foreign investors
The form most commonly used by foreign investors is a private company. Such company must maintain a registered office in Malaysia where all books and documents required under the provisions of the Companies Act are kept.

Annual formalities are minimal, except for the requirements to prepare annual financial statements and to have them audited and filed with the CCM. The establishment of a branch of a foreign company should be considered if the company would engage in less than a full operation in Malaysia, such as through a representative office. Branches of foreign companies are subject to income tax of 25 per cent.

Tax implications
Resident and non-resident companies are taxed only on income accruing in or derived from Malaysia. A company is resident in Malaysia if its management and control is exercised in Malaysia; the place of incorporation is irrelevant. The income tax rate for corporations is currently 25 per cent and is competitive
to those in the South East Asian countries.

Where a foreign company has a presence in Malaysia, the taxation of its income will depend on the nature of the income derived and whether a Double Tax Agreement (DTA) exists between Malaysia and the country of residence of that company.

Withholding taxes
Malaysia implements the single tier system (STS) for the payment of dividends. Under the STS, income tax payable on the normal chargeable income of a company is a final tax in Malaysia. Any dividends distributed by the company will be exempt from tax in the hands of the shareholders. There is also no dividend withholding tax imposed on dividends distributed to non-resident shareholders.

Withholding tax is imposed on the following payments to non-residents:

• Interest – 15 per cent

• Royalties – 10 per cent

Income from installation services on the supply of plant and machinery – 10 per cent

• Use of moveable property – 10 per cent

• Technical advice, assistance or services – 10 per cent

Miscellaneous income such as commissions or guarantee fees – 10 per cent

Income tax
Individual income tax is levied at graduated rates, with a maximum marginal rate of 27 per cent (reached at an income level of RM 250,000). Employers must withhold tax at a rate of 27 per cent from wages paid to non-resident employees.

The other significant taxes to be considered by the foreign investor include stamp duties, customs and excise duties and property tax such as quit rent and assessment. Malaysia has signed Double Tax Agreements with 68 countries, a couple of which are limited treaties. Malaysia does not have a Double Tax Agreement with the Sultanate of Oman.

Malaysia’s multi-lingual, multi-skilled talent pool is one of the country’s competitive advantages. The country offers the investor a labour force that is diligent, educated and trainable. Malaysia does not have a general social security system providing benefits; however, employers are required to register with the Social Security Organisation (SOCSO). SOCSO provides social security protection by social insurance including medical and cash benefits. Employers must pay 1.75 per cent for the Employment Injury Insurance Scheme and the Invalidity Pension Scheme while the employee’s share of 0.5 per cent of wages should be paid for coverage under the Invalidity Pension Scheme.

Malaysia has always maintained a liberal foreign exchange administration policy. The implementation of foreign exchange administration policy in Malaysia supports the monitoring of capital flows into and out of the country to preserve its financial and economic stability. There are also no restrictions on the repatriation of capital, profits or income earned in Malaysia. The ringgit may not however be traded overseas and payments outside Malaysia should be made in foreign currency.

Import regulation
Malaysia is a member of the World Trade Organisation (WTO) and follows the Harmonised System of product classification and the WTO Customs Rules of Valuation.

Under the Customs (Prohibition of Imports) Order 2008, selected categories of goods are absolutely prohibited. Certain other categories of goods are conditionally prohibited and such goods may be imported into Malaysia with an import permit issued by the relevant authorities. Although the relevant government ministries are empowered to regulate imports into Malaysia, most goods may be imported into Malaysia without restrictions.

Malaysia’s strategic location provides a premier starting point for investors seeking business development in the region. With a well developed infrastructure, a productive workforce and an extensive trade network with other economies, Malaysia offers investors a dynamic environment with the ideal prerequisites for growth, business opportunities and profits.
 

The author is a Tax Partner at Ernst & Young.

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