Malaysia

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) criteria under the Base Erosion and Profit Shifting (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 IP 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, and 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 and 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:

Notes

1. Tax relief period (in terms of years).
2. Statutory income.
3. Qualifying capital expenditure.

Special incentive schemes

Reinvestment allowance

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.

A special reinvestment allowance of 60% of QCE will be given for years of assessment 2020 to 2024 for companies that have exhausted their existing 15-year reinvestment allowance period and special reinvestment allowance granted for years of assessment 2016 to 2018.

Incentives for relocating to Malaysia

The following incentives are given to encourage investment and relocation of manufacturing or services operations into Malaysia:

• 0% tax rate for 10 or 15 years for new companies that invest a minimum of MYR 300 million or MYR 500 million, respectively, in the manufacturing sector in Malaysia.
• ITA of 100% for five years for existing companies in Malaysia to relocate their overseas manufacturing facility for a new business segment to Malaysia with a minimum investment of MYR 300 million.
• 0% to 10% tax rate for up to ten years for new companies that relocate their services facility or establish new services in Malaysia.
• 10% tax rate for up to ten years for existing companies in Malaysia that undertake services activities for a new business segment in Malaysia.

Applications must be received by 31 December 2022. The government has proposed an extension of this incentive, but details have not been released yet.

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.

Export incentives

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 value of increased exports (subject to satisfying prescribed conditions), which is deductible at up to 70% of statutory income.

Regional operations

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 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 2023). Such funds must be approved by the Securities Commission.

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:

• 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 2025, 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.
• 10% industrial building allowance for TRX Marquee status companies for qualifying building expenditure that is incurred up to 31 December 2025.
• Accelerated capital allowance incentive for renovation costs incurred by TRX Marquee status companies up to 31 December 2025.
• Single deduction for prescribed relocation costs incurred by TRX Marquee status companies for relocation that takes place not later than 31 December 2025.

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:

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.

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 until 31 December 2026. 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:

Petroleum sector

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.
• Investments in late-life asset upstream projects (until 31 December 2029):
  • Petroleum income tax rate at 25%.
  • Accelerated capital allowance within two years.
  • Carryback of losses from decommissioning activities to two consecutive preceding years of assessment.
  • Export duty exemption on petroleum products.

Special economic regions

The following special economic regions were launched as part of the Malaysian government’s plan for regional growth and development:

Various incentives are provided for these special economic regions. The following are some of the incentives available for specific sectors of the special economic region.

Iskandar Malaysia

An Iskandar Development Region (IDR) status company is given income tax exemption on statutory income for ten years from the provision of qualifying services to a person situated within designated nodes in the IDR. Operations must commence on or before 31 December 2024.

Northern Corridor Economic Region

The following are the priority sectors in the region:

• Manufacturing.
• Agribusiness.
• Services.
• Petrochemical.
• Green economy.
• Sustainable mining.

The incentives available are:

• Income tax exemption up to 100% for up to 15 years.
• Investment tax allowance up to 100% of QCE for up to ten years. 
• Import duty exemption on raw materials, components, machinery, and equipment.
• Stamp duty exemption of 50% on instrument of transfer or lease of land. 

East Coast Economic Region

Sabah Development Corridor (SDC)

The competitive sectors in the region are tourism, manufacturing, agri-processing, and logistics. The following incentives are available for qualifying companies operating in the SDC:

• 100% income tax exemption for ten years of assessment. 
• Income tax exemption equivalent to 100% of QCE incurred for five years.
• Stamp duty exemption for land acquired for development (selected sectors).
• Import duty and sales tax exemption for raw materials, components, machinery, and equipment.

Green incentives

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 for three years (applications to be received by 31 December 2023):

• Renewable energy.
• Energy efficiency.
• Green building.
• Green data centre.
• Integrated waste management.

Green technology services

Companies that provide services, such as advisory, design, feasibility study, testing, and commissioning, in the following areas will be eligible for income tax exemption of 70% of statutory income for three years (applications to be received by 31 December 2023):

• Renewable energy.
• Energy efficiency.
• Electric vehicle.
• Green building.
• Green data centre.
• Green certification and verification.
• Green township.
• Integrated waste management.

Solar leasing

Companies engaged in solar leasing are eligible for income tax exemption of 70% of statutory income for five or ten years based on the energy production capacity (applications to be received by 31 December 2023).

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 31 December 2023, to be set off against 70% of statutory income (applications to be received by 31 December 2023).

Biotechnology industry

Companies undertaking biotechnology activity with approved bionexus status from Malaysian Bioeconomy Development 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 70% 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.

R&D company

ITA of 100% of QCE for a period of ten years (extendable by ten years) to be utilised against 70% of statutory income.

In-house R&D

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 or private 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.

Other incentives

Shipbuilding and repairing (SBSR)

The following incentives are available for SBSR (applications to be received by 31 December 2022; the government has proposed an extension of this incentive to 2027 but details have not been released yet):

• Tax exemption of 70% of statutory income for five years, or ITA of 60% of QCE incurred within five years to be set off against 70% statutory income, for new companies.
• ITA of 60% of QCE incurred within five years to be set off against 70% statutory income for existing companies that have not enjoyed the SBSR incentive.

Incentives for Mines Wellness City (MWC)

The following incentives are available for MWC:

Capital allowance for increased automation

Manufacturing companies that have been engaged in manufacturing activities 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 2023).
• Other industries: 200% automation capital allowance on first MYR 2 million QCE (for years of assessment 2015 to 2023).

Foreign tax credit

See Foreign income in the Income determination section for a discussion of the foreign tax credit regime.