Malaysia has a wide variety of incentives covering the major industry sectors. Tax incentives can be granted through income exemption or by way of allowances. Where incentives are given by way of allowances, any unutilised allowances may be carried forward indefinitely to be utilised against future statutory income except for certain incentives such as reinvestment allowance and investment allowance for approved service projects where a seven-year limitation applies.
In compliance with the Forum on Harmful Tax Practices (FHTP)’s criteria under the BEPS Action 5 (Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance), Malaysia has amended the legislation in relation to the tax incentives to:
- Remove ring-fencing features,
- Exclude intellectual property income from the incentives, and
- Stipulate the substantial activities requirements.
The following are the major types of incentives available in Malaysia.
Pioneer status (PS) and investment tax allowance (ITA)
Companies in the manufacturing, agricultural, hotel and tourism sectors, or any other industrial or commercial sector, that participate in a promoted activity or produce a promoted product may be eligible for either PS or ITA.
PS is given by way of exemption from CIT on 70% of the statutory income for five years and the remaining 30% is taxed at the prevailing CIT rate. ITA is granted on 60% qualifying capital expenditure incurred for a period of five years which is utilised against 70% of the statutory income, while the 30% balance is taxed at the prevailing CIT rate.
A company that intends to undertake reinvestment before expiration of its PS or ITA status may opt for reinvestment allowance, provided it surrenders its PS or ITA status.
The PS and ITA incentives are enhanced for the following types of projects:
|Qualifying industry||Pioneer status||Investment tax allowance|
|Incentive||TRP (1)||Incentive||TRP (1)|
|Projects of national and strategic importance involving heavy capital investment and high technology.||100% of SI (2)||5 + 5||100% QCE (3) against 100% SI||5|
|High-technology companies engaged in areas of new and emerging technologies.||100% of SI||5||60% QCE against 100% SI||5|
|Companies manufacturing specialised machinery and equipment.||100% of SI||10||100% QCE against 100% SI||5|
|Existing locally owned companies reinvesting in production of heavy machinery, specialised machinery, and equipment.||70% of increased SI||5||60% new QCE against 70% SI||5|
|Companies providing technical and vocational training, and private higher education institutions providing qualifying science courses.||-||-||100% QCE against 70% SI||10|
|New companies investing and existing companies reinvesting in utilising oil palm biomass to produce value-added products.||100% of SI||10||100% QCE against 100% SI||5|
|Small scale companies (defined) that meet with specified conditions.||100% of SI||5||60% QCE against 100% SI||5|
|Hotel operators undertaking new investments in 4 and 5 star hotels in Sabah/Sarawak (for applications until 31 December 2020).||100% of SI||5||100% QCE against 100% SI||5|
|Hotel operators undertaking new investments in 4 and 5 star hotels in Peninsular Malaysia (for applications until 31 December 2020).||70% of SI||5||60% QCE against 70% SI||5|
- Tax relief period (in terms of years).
- Statutory income.
- Qualifying capital expenditure.
Special incentive schemes
A resident company in operation for not less than 36 months that incurs capital expenditure to expand, modernise, automate, or diversify its existing manufacturing business or approved agricultural project is entitled to reinvestment allowance as follows:
- The allowance is given for 15 years from the first year of claim.
- The allowance is computed at 60% of QCE incurred and can be utilised against 70% of statutory income.
- The 70% restriction does not apply to projects that have achieved the level of productivity as prescribed by the Minister of Finance.
- The allowance will be withdrawn if the asset for which the allowance is granted is disposed of within five years.
It is proposed that a special reinvestment allowance of 60% of QCE will be given for years of assessment 2020 to 2022 for companies which have exhausted their existing 15 year reinvestment allowance period and special reinvestment allowance granted for years of assessment 2016 to 2018.
Approved service projects
A resident company undertaking a project approved by the Minister of Finance in the transportation, communications, utilities, and services subsectors may enjoy the following incentives:
- Investment allowance of 60% of QCE incurred within five years to be utilised against 70% of statutory income, or income tax exemption of 70% of statutory income for a period of five years.
- Buildings used solely for the purposes of such projects qualify for an industrial building allowance.
A resident company engaged in manufacturing or agriculture that exports manufactured products, agricultural produce, or services is entitled to allowances between 10% and 100% of increased exports (subject to satisfying prescribed conditions), which is deductible at up to 70% of statutory income.
A principal hub is a locally incorporated company that uses Malaysia as a base for conducting its regional and global businesses and operations through management, control, and support of key functions, such as management of risk, strategic decisions, finance, and human resources. A principal hub will enjoy a CIT at effective tax rates of 0% or 5% (new companies) of statutory income for a period of 5 + 5 years or 10% of statutory income (existing companies) for 5 years, subject to conditions being met (for applications from 1 January 2019 to 31 December 2020).
Other non-fiscal incentives available include:
- No equity/ownership conditions.
- Foreign exchange administration flexibilities and approval of expatriate positions based on stated policies.
- Customs duty exemption for raw materials, components, or finished products brought into free zones, licensed and bonded warehouses for production or repackaging, cargo consolidation, and integration before distribution to its final customers for goods-based companies.
International trading company
International trading companies are exempted on income equivalent to 20% of increased export value to be set off against a maximum of 70% of statutory income, for a period of five years. To qualify for the incentive, the company must meet the following three conditions:
- Incorporated in Malaysia, with 60% Malaysian ownership.
- Achieve minimum annual sales of MYR 10 million, of which not more than 20% of its annual sales may be derived from the trading of commodities.
- Use local services (banking, finance, and insurance) and infrastructure (local ports and airports) in its operations.
Financial services sector
Islamic banking and takaful business
Effective from year of assessment 2007 until year of assessment 2020, full income tax exemption for ten years is granted to:
- Islamic banks licensed under the Islamic Financial Services Act 2013, on income from Islamic banking business conducted in international currencies.
- Takaful (Islamic insurance) companies licensed under the Islamic Financial Services Act 2013, on income from takaful business conducted in international currencies.
Stamp duty exemption is also provided on instruments executed (from 1 January 2017 to 31 December 2020) pertaining to Islamic banking and takaful business transacted in international currencies.
Islamic fund management
Full income tax exemption is available on statutory income on management fees received by resident fund management companies for managing funds of foreign and local investors established under Syariah principles (until year of assessment 2020). Such funds must be approved by the Securities Commission.
Special purpose vehicle (SPV) for Islamic financing
An SPV established solely for the purpose of issuance of Islamic securities under the Syariah principles (approved by the Securities Commission or established under the Labuan Companies Act 1990) is not subject to income tax and is not required to comply with administrative procedures under the income tax law. The company that establishes the approved SPV is deemed to be the recipient of the SPV’s income and will be taxed accordingly, but that company will be allowed a deduction for the cost of issuance of Islamic securities.
Tun Razak Exchange (TRX) (formerly known as Kuala Lumpur International Financial District)
The TRX is an integrated property development comprising office towers for finance and banking, residences, and retail spaces in Kuala Lumpur. To accelerate the development of the TRX, the following incentives have been given:
- Stamp duty exemption on loan and service agreements for TRX Marquee status companies.
- Industrial building allowance and accelerated capital allowance for TRX Marquee status companies.
- Income tax exemption of 70% of statutory income from the disposal of any building or rights over a building, or part thereof, for five years up to year of assessment 2022, for property developers in TRX.
- Income tax exemption of 70% of statutory income from the rental of any building, or part thereof, for five years up to year of assessment 2027, for property developers in TRX.
- Additional 50% tax deduction of rental payment incurred by TRX Marquee status companies for buildings used for business in TRX.
- Deduction of relocation cost incurred by TRX Marquee status companies to relocate to TRX.
Real estate investment trusts (REIT)/Property trust fund (PTF)
REIT/PTFs are vehicles that mobilise funds from unit holders comprising individuals and companies for investments in the property sector and related assets. REIT/PTFs are exempted from tax on all income, provided that at least 90% of their total income is distributed to unit holders. This exemption only applies to REIT/PTFs that are listed on the Bursa Malaysia. If the 90% distribution condition is not complied with, all income will be taxed at the prevailing income tax rate at the REIT/PTF level and tax credit will be claimed by the unit holders on distributions received from the REIT/PTF.
Unit holders are taxed as follows:
|Unit holders||WHT rate|
|Individuals (whether resident or non-resident), body of persons, or other unincorporated persons||10% (until year of assessment 2025)|
|Resident company||None (income to be included in annual tax return)|
|Foreign institutional investor (pension fund, collective investment scheme, or other person approved by the Minister of Finance), and other unit holders not falling in the above-mentioned categories.||10% (until year of assessment 2025)|
Other incentives available are:
- RPGT and stamp duty exemptions on disposal/transfer of real property to an REIT/PTF.
- Tax deduction given for consultancy, legal, and valuation service fees incurred on the establishment of an REIT.
Foreign fund management company
A foreign fund management company providing fund management services to foreign clients is taxed at a concessionary rate of 10% (until year of assessment 2020) in respect of income derived from the management of foreign funds, while income arising from services rendered to clients in Malaysia is taxed at the prevailing CIT rate.
A foreign fund management company is a Malaysian incorporated company licensed under the Capital Markets and Services Act 2007. Its activities are regulated by the Securities Commission.
Venture capital company (VCC)
A VCC investing in a venture company (VC), which is not the VCC’s related company at the point of first investment, will be given a deduction on the value of investment made in a VC. Where the deduction is not claimed, the VCC is eligible for the following income tax exemption on income from all sources, other than interest income from savings or fixed deposits, and profits from Syariah-based deposits:
||10 years of assessment|
Budget 2018 proposes to reduce the investment limit in a VC at the seed, start-up capital, or early stage financing to 50%, allow the balance of 50% for other investments, and make the exemption period for five years from years of assessment 2018 to 2022, when gazetted.
The following incentives are provided for petroleum operations:
- Accelerated capital allowance on QCE incurred from year of assessment 2010 to 2024 for petroleum operations in marginal fields.
- Investment allowance of 60% of qualifying capital expenditure to be utilised against 70% statutory income for a period of ten years.
- Exemption for a portion of chargeable income from marginal fields resulting in a reduction of the effective tax rate from 38% to 25% for petroleum operations in marginal fields.
Special economic regions
The following special economic regions were launched as part of the Malaysian government’s plan for regional growth and development:
|Iskandar Malaysia (formerly known as Iskandar Development Region [IDR]): www.iskandarmalaysia.com.my||Southern Johor|
|Northern Corridor Economic Region: www.koridorutara.com.my||States of Perlis, Kedah, Penang, and northern Perak|
|East Coast Economic Region: www.ecerdc.com.my||States of Kelantan, Terengganu, Pahang, and district of Mersing in Johor|
|Sabah Development Corridor: www.sedia.com.my||Western, central, and eastern regions of Sabah|
|Sarawak Corridor of Renewable Energy: www.recoda.com.my||Central Sarawak|
Special incentives, on top of the existing incentives given by the Malaysian government, will be customised for the purpose of each economic region. At present, special legislation has been enacted only in respect of Iskandar Malaysia (IM) and East Coast Economic Region (ECER) and the Sabah Development Corridor (SDC).
|Developer||Income tax exemption on rental or disposal of buildings in designated nodes (until year of assessment 2020).|
|Development manager||Income tax exemption on statutory income from the provision of management, supervisory, and marketing services to an approved developer (until year of assessment 2020).|
|Non-resident service provider||Income tax and WHT exemptions on income from technical fees or royalties received from IDR-status companies.|
|Individuals working in IDR||A qualified knowledge worker is taxed at the rate of 15% on chargeable income from employment with a designated company engaged in a qualified activity (e.g. green technology, educational services, healthcare services, creative industries, financial advisory and consulting services, logistics services, tourism) in that specified region. Employment must have commenced between 24 October 2009 and 31 December 2020.|
East Coast Economic Region
|Qualifying person undertaking qualifying activity||
Income tax exemption on statutory income for 10 years or income tax exemption equivalent to 100% of QCE incurred for 5 years (applications received by 31 December 2020). WHT exemption on fees for technical advice, assistance, or services, or royalty paid to non-residents (until 31 December 2020).
Stamp duty exemption on instruments of transfer of real property, or lease of land, or building used for the purpose of carrying on a qualifying activity (executed on or after 13 June 2008 but not later than 31 December 2020).
|Qualifying person undertaking special qualifying activity||
Income tax exemption at a rate of 70% to 100%, for a period as determined by the Minister (applications received by 31 December 2020).
Income tax exemption equivalent to a rate of 60% to 100% of QCE incurred to be utilised against 100% of statutory income and within a period as determined by the Minister (applications received by 31 December 2020).
WHT exemption on fees for technical advice, assistance, or services, or royalty paid to non-residents (until 31 December 2020).
|Approved developer undertaking development in industrial park or free zone||Income tax exemption for 10 years in respect of income derived from:
|Approved park manager||Income tax exemption on statutory income for 10 years, from the provision of park management services in the industrial park or free zones (applications received by 31 December 2020).|
|Approved development manager||Income tax exemption on statutory income for 10 years from the provision of management, supervisory, or marketing services relating to the development of an industrial park or free zone (applications received by 31 December 2020).|
|Investor investing in related company||A deduction equivalent to the value of investment made into a related company carrying out qualifying activity or special qualifying activity (applications received by 31 December 2020).|
|Qualifying person who sponsors a hallmark event||A deduction for an amount not exceeding MYR 1 million per year of assessment in respect of cash contribution or contribution in kind for a hallmark event carried on in ECER from 13 June 2008 to 31 December 2020 (applications received by 31 December 2020).|
Sabah Development Corridor (SDC)
The following incentives are available for qualifying companies operating in the SDC (applications by 31 December 2020):
- 100% income tax exemption for five years of assessment on statutory income in respect of specified qualifying activities in the shipping and creative sectors.
- 100% income tax exemption for ten years of assessment on statutory income in respect of specified qualifying activities in the sectors of hotel and resort, manufacturing, education, and marine.
- Income tax exemption equivalent to 100% of QCE incurred that can be offset against 100% statutory income for five years in respect of specified qualifying activities in the shipping, creative, hotel and resort, manufacturing, education, and marine sectors.
- Income tax exemption equivalent to 100% of QCE incurred that can be offset against 100% statutory income for ten years in respect of specified qualifying activities in the halal sector.
Incentive for less-developed areas
To enhance the special incentive package available in the economic corridors to include more less-developed areas, the following incentives are given to existing companies expanding to less-developed areas or new companies established in the less-developed areas, to undertake manufacturing or services activities (for applications from 1 January 2015 to 31 December 2020):
- 100% income tax exemption for up to 15 years of assessment (5+5+5) commencing from the first year of assessment statutory income is derived, or
- income tax exemption of 100% of qualifying capital expenditure (ITA) that can be offset against 100% statutory income for ten years.
The company must create employment and rural development.
The other incentives available for less-developed areas are:
- Stamp duty exemption on transfer or lease of land or building.
- WHT exemption on fees for technical advice, assistance, or services, or royalty relating to manufacturing and services activities, up to 31 December 2020.
- Import duty exemption on raw materials and components, machinery, and equipment that are not produced locally and used directly in the manufacturing or services activity.
Information and communication technology (ICT)
MSC Malaysia is Malaysia’s initiative for the global information technology (IT) industry and is designed to be the research and development (R&D) centre for industries based on IT. It is an ICT hub equipped with high-capacity global telecommunications and logistics networks. MSC Malaysia is also supported by secure cyber laws, strategic policies, and a range of financial and non-financial incentives for investors. It is managed by the Multimedia Development Corporation (MDeC), a ‘one-stop shop’ that acts as the approving authority for companies applying for MSC Malaysia status.
MSC Malaysia status is awarded to both local and foreign companies that develop or use multimedia technologies to produce or enhance their products and services as well as for process development. MSC Malaysia companies are eligible for incentives, which include the following:
- Income tax exemption (for five years and extendable by five years) on statutory income (or value-added income) derived from services provided in relation to core income generating activities for MSC Malaysia. Intellectual property income (as defined) is excluded from the incentive.
- Unrestricted employment of local and foreign knowledge workers.
- Freedom to source funds globally for investments.
- Protection of intellectual property and cyber laws.
- No censorship of the Internet.
- Globally competitive telecommunication tariffs.
Green technology projects
Companies that undertake any of the following green technology projects will be eligible for an ITA of 100% of QCE against 70% statutory income for QCE incurred from 25 October 2013 for a maximum period of five years or until 31 December 2020, whichever is earlier (applications to be received by 31 December 2020):
- Renewable energy.
- Energy efficiency.
- Green building.
- Green data centre.
- Waste management.
Green technology services
Companies that provide services, such as advisory, design, feasibility study, testing, and commission, in the following areas will be eligible for income tax exemption of 100% of statutory income from year of assessment 2013 for a maximum period of five years or until year of assessment 2020, whichever is earlier (applications to be received by 31 December 2020):
- Renewable energy.
- Energy efficiency.
- Electric vehicle.
- Green building.
- Green data centre.
- Green certification and verification.
- Green township.
Green technology assets
Companies that purchase green technology assets listed on the MyHijau directory will be eligible for an ITA of 100% of QCE incurred from 25 October 2013 to year of assessment 2020, to be set off against 70% of statutory income (applications to be received by 31 December 2020).
Waste eco parks (WEPs)
The following industry players in WEPs will be eligible for incentives for applications received by 31 December 2020. The WEP incentive is to promote waste management in an integrated manner.
|Developer||70% income tax exemption of statutory income derived from rental of buildings, fees from usage of waste collection and separation facilities, and fees from waste water treatment facilities located in the WEP.||Year of assessment 2016 to 2025|
|Manager||70% income tax exemption of statutory income derived from services related to management, maintenance, supervision, and marketing of the WEP.||Year of assessment 2016 to 2025|
Companies undertaking biotechnology activity with approved bionexus status from Malaysian Biotechnology Corporation Sdn Bhd will be eligible for the following incentives:
- 100% income tax exemption on statutory income for ten years from the first year in which the company derives statutory income or income tax exemption equivalent to a rate of 100% on QCE incurred for a period of five years to be utilised against 100% of statutory income.
- Concessionary tax rate of 20% on statutory income from qualifying activities for ten years upon expiry of the original tax exempt period.
- Accelerated industrial building allowance (over ten years) for buildings used solely for the purpose of its new business or expansion project.
- Exemption of import duty and sales tax on import of raw materials and machinery.
Research and development (R&D)
Contract R&D company
Companies that provide R&D services to third parties are eligible for:
- PS of 100% of statutory income for five years (extendable by five years), or
- ITA of 100% of QCE incurred within a period of ten (extendable by ten years) to be utilised against 70% of statutory income.
ITA of 100% of QCE for a period of ten years (extendable by ten years) to be utilised against 70% of statutory income.
Companies undertaking in-house R&D projects are eligible for ITA at the rate of 50% of QCE incurred within a period of ten years (extendable by ten years) to be utilised against 70% of statutory income.
Commercialisation of resource-based R&D findings
A company that invests for the sole purpose of financing a project on commercialisation of resource-based R&D findings (which is wholly owned by a public research institute or public institute of higher learning in Malaysia) is given a deduction equivalent to the value of that investment.
The subsidiary undertaking the commercialisation of R&D findings is granted 100% tax exemption on statutory income for ten years.
A tax-resident person (including a partnership) carrying on shipping business using Malaysian ships is given full income tax exemption on statutory income, determined on a per ship basis. This exemption is available until year of assessment 2020.
Incentives for Mines Wellness City (MWC)
The Malaysian Investment Development Authority has issued guidelines on incentives for MWC:
||Applications received by 31 December 2026.|
|Development manager||PS of 100% exemption on statutory income from management, consultancy, supervisory, or marketing services to MWC developer in MWC from the first year of assessment statutory income is derived until year of assessment 2023.||Applications received on or after 1 January 2013.|
1 and 2: Applications received on or after 1 January 2013.
3: Instruments executed from 1 January 2013 to 31 December 2023.
Capital allowance for increased automation
Manufacturing companies that have been in operation for at least 36 months are eligible for the following incentives, where they have incurred expenditure in more technologically advanced automation equipment used directly in the manufacturing activities and which results in reduced man hours and increased productivity:
- For high labour intensive industries (rubber products, plastics, wood, furniture, and textiles industries): 200% automation capital allowance on first MYR 4 million QCE for years of assessment 2015 to 2017 (proposed extension to year of assessment 2023).
- Other industries: 200% automation capital allowance on first MYR 2 million QCE for years of assessment 2015 to 2020 ( proposed extension to year of assessment 2023).
Foreign tax credit
See Foreign income in the Income determination section for a discussion of the foreign tax credit regime.