Malaysia – Country Guide

Doing Business in Malaysia

Forewords

What Do You Know About MALAYSIA?

Malaysia is a south east Asian region in between the Indian Ocean and the South China Sea. It is located at Peninsular Malaysia and Borneo’s East Malaysia, with 32.7 million population (as of 2021). It has two capitals, Putrajaya as the administrative capital and Kuala Lumpur as the legislative capital. Ringgit Malaysia is the national currency and most common languages are Malay, English and Chinese. 

The Economic After The Pandemic

The Malaysian economy recorded a stronger growth in the first half year of 2022 (1Q 2022: 5.0%; 2Q 2022: 8.9%) despite the economic was being hit badly by the COVID-19 pandemic in the years before. However, as it is happening globally, the inflation rate registered a significant increase from 2.3% in January 2022 to 4.4% in July 2022 and it is projected to trend higher in the coming months due to the demand conditions and global price developments. 

Looking at the exchange rate developments, Ringgit Malaysia depreciated by 4.6% against the US dollar in the second quarter 2022. This is mainly due to the continued strengthening of the US dollar following its aggressive US monetary policy tightening, as well as the military conflict in Ukraine. 

Following the full re-opening of Malaysia’s international border and a successful vaccination measure implemented by the government, the business sentiment continues positive and recorded an increasing in the confidence indicator compared to the first quarter 2022. This is supported by the significant upwards of foreign investments, especially in the manufacturing sector. The overall FDI has increased from MYR 812.1 billion in the first quarter to MYR 836.2 billion in the second quarter 2022.  

With the positive growth rate recorded in the first half year of 2022, supported by the increases in domestic and external demand, and also the healthy recovery in the labour market, the Malaysian economy is projected to expand further for the remainder of the year.

Malaysia’s business environment is governed by several regulatory bodies to maintain an efficient and competitive private sector. To start a business in Malaysia, all entities must be registered with the Companies Commission of Malaysia (CCM) or known as Suruhanjaya Syarikat Malaysia (SSM) in Bahasa Malaysia. 

The following are the legal forms of business structure available, especially to the foreign investors, who wish to expand their operations into Malaysia. 

• Through a SUBSIDIARY (a private limited or Sdn. Bhd.)

Setting-up through a subsidiary in Malaysia is ideally for those entities that wish to expand their operations in Malaysia. The creation of a separate legal identity for the company gives it a legal status and this allows the company to own its property, generate income, maintains a separate set of accounts and so, the liability is limited to the invested amount.

• Through a REPRESENTATIVE OFFICE

A representative office (RO) acts as an extended office of a foreign company approved to gather relevant information on investment opportunities in Malaysia, promote the export of Malaysian goods and services and to carry out market research and development. A RO is not allowed to sign a business contract on behalf of its parent foreign corporation or provide services for a fee.

• Through a REPRESENTATIVE OFFICE

A representative office (RO) acts as an extended office of a foreign company approved to gather relevant information on investment opportunities in Malaysia, promote the export of Malaysian goods and services and to carry out market research and development. A RO is not allowed to sign a business contract on behalf of its parent foreign corporation or provide services for a fee.

OPENING OF A CORPORATE BANK ACCOUNT

In recent years, National Bank of Malaysia (BNM) has tightened up the process of opening a company’s bank account due to the tightening of anti-money laundering and terrorism financing rules. Therefore, banks are more cautious and will conduct customer due diligence, include a comprehensive series of checks and investigations on their potential clients before opening a new account for a company. 

Different banks will have different requirements as to the opening of bank account(s). The basic requirements for opening a corporate bank account include:

• A complete application form from the bank duly signed by authorised signatories;
• Photocopies of the identifications of the company directors and authorised signatories;
• Proof of residential address for directors, authorised signatories and ultimate beneficial owners;
• Certificate of Incumbency of the holding company (for a corporate shareholder);
• Certified true copy by the company’s secretary of the following documents:

• A resolution by the board of directors approving the opening of corporate bank account;
• Super form;
• Company’s constitution (if any); and
• Certificate of Incorporation;
• Organization chart (with the percentage of shareholdings held by each person) (for a corporate shareholder)

The corporate bank account can be opened in MYR and other currencies, such as EUR, SGD, USD and etc. 

Depending on the amount of investigation that a bank carries out to confirm the identity of the directors, the company itself, the ultimate beneficial owners, it may take between few weeks and three months to open a new company bank account. The processing time can be longer for applications without being physically present in Malaysia and the organization chart is complex. 

BUSINESS LICENSE

It is essential for having a valid business license before a business can legally start operating. There are a few forms of licensing and a business may require more than one type of license to be legally operated in Malaysia. Business license are required by the legislation and administered by various government agencies or local authorities. The requirements is vary by the business sector, activity and its location. Business license is categorised into 3 main components as follows:

General License 

General license refers to the necessary license that will be needed by all types of business, and it will apply when a person decides to start a business in Malaysia. A general license include:

• company registration (SSM)
• company and employers’ income tax registration (IRBM)
• registration with Employee Provident Fund (EPF) 
• registration with Social Security Organisation (SOCSO & EIS) 
• registration with Human Resource Development Corporation (HRD Corp)
• business premise license and signboard license (from respective state authorities)

Sector or Industry-Specific License

This license is needed and apply to only certain type of industry or sector specified by the Malaysian’s Government, where to conform the development is in line with the development of government policy. 

• licenses related to the manufacturing sector
• licenses and permission related to wholesale, retail and trade sector
• licenses related to the telecommunication sector
• licenses related to the broadcasting sector
• licenses related to the oil exploration sector
• licenses related to the construction sector
• licenses related to the banking sector

Activity-Specific License

This license regulates particular activities and could be applied to more than one sectors or industries. There are a set of specific guidelines designed to protect the interest of persons such as the citizen, employment, safety of workers, environment and/or the public. Activity-specific license include but not limited to the below items:

• certificate of fitness for certified machinery
• approval of expatriate employment
• approval to install/resite/alter air pollution control equipment
• approval of building plan
• sales and service tax license

BUSINESS COMPLIANCES / OBLIGATIONS

TAXATION

Corporate Income Tax

Malaysia has a territorial tax system, all income accrued in, derived from, or remitted to Malaysia is liable to tax. Hence, an entity’s business profits will be subject to Malaysian income tax if the business income is attributable to a place of business in Malaysia. 

A company is considered as a tax resident in Malaysia in a year of assessment, if, at any time during the basis period of that year of assessment, the management and control of its affairs are exercised in Malaysia. Typically, the management and control are considered to be exercised at the place where the director’s meeting (at least one meeting of Board of Directors) concerning management and control of the company are held. 

* The companies must not be part of a group of companies where any of their related companies have a paid-up capital of more than RM2.5 million.

A special one-off tax – Cukai Makmur is imposed on the companies which have generated huge amount of income during the COVID-19 pandemic. For only the year of assessment 2022, the tax rate of 33% applies on the chargeable income of more than MYR 100 million. 

Business Losses

Business losses can be set off against income from all sources in the current year. With effect from YA2019 onwards, all unutilised business losses can only be carried forward for a maximum period of 7 consecutive years of assessment. Unutilised business losses brought forward from YA2018 can be utilised for another 7 years of assessment up to YA2025 and the unutilised balance will be disregarded in YA2026.

For dormant companies, unutilised business losses and unabsorbed capital allowances can be carried forward only if the shareholder continuity test is met, i.e. shareholders of the company at the beginning of the basis period for that year of assessment must not exceed a change of 50% at the end of the basis period for the prior year of assessment in which the loss was initially ascertained.

Transfer Pricing

Transfer pricing generally refers to the intercompany pricing arrangements when there are transactions between associated persons. Malaysia Transfer Pricing Guidelines is largely based on and makes reference to the OECD Transfer Pricing Guidelines, which is adopted at arm’s length basis. In other words, the transfer price should not differ from the prevailing market price which would be reflected in a transaction between independent persons. 

According to the rules and guidelines, all tax payers who have entered into intercompany transactions are required to prepare and maintain the transfer pricing documentation on an annual basis. The documentation should be in place by seven-months from the financial year end when the time of tax return filing, however, it does not need to be submitted to IRBM. Any non-compliance may be subject to penalties on additional tax payable arising from transfer pricing adjustments.

However, tax payers are allowed to prepare an abbreviated set of documentation, if they fall below the following thresholds:

• Annual gross business income of more than MYR 25 million; and
• The total value of related party transactions exceeding MYR 15 million.

Sales and Service Tax (SST)

Sales and service tax are a single-stage and consumption tax. SST imposed on any taxable goods manufactured locally and/or imported or taxable services provided in Malaysia by a registered person in carrying of his business.

A person is liable to be registered with SST if the total value of his taxable sales/services value for a 12-month period exceeds or is expected to exceed the prescribed registration threshold of MYR 500,000 for most of the industries and MYR 1,500,000 for the operator of restaurants. This also applies to foreign digital service provider. However, any person who is not liable to be registered for SST may apply to the Director General (DG) of Customs for registration as a registered person and it is subject to the approval of the authority.

Certain manufacturing activities are exempted from the registration requirement. These include the developing and printing of photographs and production of film slides, manufacture of ready mixed concrete, preparation of meals, repair of second hand or used goods and the installation of air conditioners in motor vehicles. 

Sales and service tax are ad valorem taxes. The current tax rates are as follows:

Specially for a registered manufacturer, they can apply to DG of Customs for the following amount of sales tax deduction on the taxable raw materials, components or packaging materials acquired from local tax payer, with the conditions where the purchased materials are used solely in the manufacturing of their taxable goods.

• 2% of the total value of taxable goods purchased if the taxable goods were charged and levied with sales tax of 5%;
• 4% of the total value of taxable goods purchased if the taxable goods were charged and levied with sales tax of 10%

Withholding Tax

The tax of a non-resident company on all income (generally all) other than income from a business source is collected by means of withholding tax. Under the regulations of withholding tax, the tax payer in Malaysia is responsible to withhold the prescribed amount from a payment due to a non-resident, and the tax payer requires to remit the payment of the withholding tax to IRBM within one month after paying or crediting such payment to the non-resident. 

When there is a deemed permanent establishment or place of business in Malaysia, there will be no withholding tax on the income such as interest and royalties if these incomes are attributable to the place of business. 

¹ A reduced rate may be provided under the double tax agreement with certain treaty partners.

²This category corresponds to the services rendered in Malaysia and are relating to technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

³ Income not falling under any of the foregoing paragraphs (Section 4(f), ITA 1967)

Taxation Deadline

*A SME will be exempted from this requirement for the first three years of assessments in which the SME commence operations, subject to certain conditions. And also, it is exempted to a newly incorporated entity if the basis period for a year of assessment in which the entity commence operations is less than 6-months.  

ACCOUNTING

Annual Financial Statements & Year-End

As indicated in the earlier section, all entities, except for a RO must comply to the filings of annual accounts with both SSM and IRBM (Inland Revenue Board of Malaysia) or also known as LHDN (Lembaga Hasil Dalam Negeri Malaysia) in Bahasa Malaysia. Malaysian companies are required to prepare and maintain a set of statutory financial statements under the approved accounting standards, such as the Malaysian Private Entities Reporting Standards (MPERS) for a private entity or the Malaysian Financial Reporting Standards (MFRS) for entities that are not private entities. 

According to the Company Act 2016, it is the director’s responsibility to prepare the financial statements within 18 months from the date of the company’s incorporation (first set of financial statements) and subsequently within 6 months of its financial year end. And, the financial statements have to be audited unless otherwise the company fulfills the requirement to be audit exempted. It is the decision of the Company for its financial year end. For example, a company may choose the last day of the calendar year, 31 December, as its financial year end. 

Other than the preparation and lodgment of the financial statements annually, the director of a company must ensure the particulars of the company lodged with the SSM are accurate and updated. It is the responsibility of the company’s secretary for the completion and timely submission of these updated information, such as the lodgment of annual return of the company. 

AUDITING

All companies are required to be audited, except if they fall under any of the following conditions:

• Dormant Company

A company is dormant if it does not carry-on business since its incorporation, or dormant throughout the current financial year and in the immediate preceding year. 

• Zero-revenue Company

It is a zero-revenue company if it does not generate any revenue during the current financial year, did not generate revenue in the immediate past two financial years and the total assets in the statement of financial position of the current or immediate past two financial years does not exceed MYR 300,000.

• Threshold-qualified Company

The following three criteria must be met simultaneously:

1. Annual revenue does not exceed MYR 100,000 during the current financial year and immediate past two years;
2. The total assets in the statement of financial positions does not exceed MYR300,000 in the current financial year and immediate past two financial years; and 
3. The number of employees does not more than 5 at the end of the current financial year and immediate past two financial years.

For those entities which qualifies for audit exemption, must submit its unaudited financial statements with the SSM, accompany with the director’s report, statement by directors and statutory declaration, lodged by the anniversary date of incorporation date. 

Accounting / Auditing Deadline

EMPLOYMENT

In Malaysia, a person can start hiring at any point of time after they are registered with the IRBM as an employer (given with an Employer Reference Number), however, to hire a foreign worker is subject to additional terms and conditions. 

Employment in Malaysia is contractual. An employment contract is required for employment when the service period for the completion of the works exceeds or may exceed one month. It is important and shall be included in the employment contract to setting out the manner in which such contract may be terminated by either party, and also the length of notice of termination of contract shall be the same for both the employer and employee. 

The table below provide the minimum entitlements for an employee:

It makes compulsory for the Malaysian employer to contribute and also, to deduct the following contributions from the employee’s monthly salary.

1. Employee Provident Fund (EPF) or known as Kumpulan Wang Simpanan Kerja (KWSP) in Bahasa Malaysia

• mandatory to register an account with EPF as an employer within 7 working days upon hiring the first employee;
• must register the employees as EPF members;
• make monthly contributions by employer (13% for salary less than MYR 5,000 and 12% for salary more than MYR 5,000) and by employee (11%). However, it is optional for a foreign employee. 

2. Social Security Organization (SOCSO) or known as Pertubuhan Keselamatan Social (PERKESO) in Bahasa Malaysia

• mandatory to register an account with SOCSO as an employer within 30 working days upon hiring the first employee;
• must register the employees as SOCSO members;
• make monthly contributions by employer (1.25% capped at salary MYR 5,000) and by employee (0.5% capped at salary MYR 5,000). It is 1.25% to be contributed by employer for a foreign employee, but the foreign employee is not required to contribute at his own. 

3. Employment Insurance System (EIS) 

• mandatory to register an account with EIS as an employer within 30 working days upon hiring the first employee;
• must register the employees as EIS members;
• make monthly contributions by employer and employee at 0.2% respectively, except for a foreign employee.

4. Monthly Tax Deduction (MTD) or known as Potongan Cukai Bulanan (PCB) in Bahasa Malaysia

It is requiring an employer to deduct individual income tax from their employee’s monthly salary. 

5. Human Resource Development Corporation (HRD Corp)

• mandatory to register an account with HRD Corp as an employee when total number of employees has reached 10 and above;
• make monthly payment at 0.1% on total remunerations, except non-fixed allowance.

A person will be committed to the following responsibilities as an employer when there is the first employee.

IMMIGRATION

To hire a non-Malaysian employee or an expatriate, they must first obtain the approval from the Expatriate Committee Department (ESD) or relevant authorities before a work pass application (i.e. Employment Pass) can be submitted to the Immigration Department of Malaysia. 

There are currently restrictions on the number of foreign workers that an entity can employ, and also, the entity must check their eligibility before an application is made. 

The key requirements for a company are outlined as below:

There are three categories of Employment Pass (EP) available in Malaysia. 

Besides, there is a Professional Visit Pass (PVP), which is to be issued to foreign talents with acceptable professional qualification or skills for the purpose of engaging on short-term contract. 

The validity of the pass should not exceed a twelve -months at any one time. 

All the above work pass can only work for the company named in the work pass. 

MAJOR TAX INCENTIVE PROGRAMS

Incorporation Procedures – a Private Limited (Sdn. Bhd.)