Date: Monday 21-Apr-14


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Invest in Malaysia

Incentives for Investment

In Malaysia, tax incentives, both direct and indirect, are provided for in the Promotion of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Sales Tax Act 1972, Excise Act 1976 and Free Zones Act 1990. These Acts cover investments in the manufacturing, agriculture, tourism (including hotel) and approved services sectors as well as R&D, training and environmental protection activities.

The direct tax incentives grant partial or total relief from income tax payment for a specified period, while indirect tax incentives are in the form of exemptions from import duty, sales tax and excise duty.

1. Incentives for the Manufacturing Sector

1.1 Main Incentives for Manufacturing Companies

The major tax incentives for companies investing in the manufacturing sector are the Pioneer Status and the Investment Tax Allowance.

Eligibility for Pioneer Status and Investment Tax Allowance is based on certain priorities, including the level of value-added, technology used and industrial linkages. Eligible activities and products are termed as "promoted activities" or "promoted products". (See List of Promoted Activities and Products - General)

(i) Pioneer Status

A company granted Pioneer Status enjoys a five year partial exemption from the payment of income tax. It pays tax on 30% of its statutory income*, with the exemption period commencing from its Production Day (defined as the day its production level reaches 30% of its capacity).

Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company.

Applications for Pioneer Status should be submitted to the Malaysian Investment Development Authority (MIDA).

* Statutory Income is derived after deducting revenue expenditure and capital allowances from the gross income.

(ii) Investment Tax Allowance

As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance (ITA). A company granted ITA is entitled to an allowance of 60% on its qualifying capital expenditure (factory, plant, machinery or other equipment used for the approved project) incurred within five years from the date the first qualifying capital expenditure is incurred.

The company can offset this allowance against 70% of its statutory income for each year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised. The remaining 30% of its statutory income will be taxed at the prevailing company tax rate.

Applications should be submitted to MIDA.

1.2 Incentives for High Technology Companies

A high technology company is a company engaged in promoted activities or in the production of promoted products in areas of new and emerging technologies (See List of Promoted Activities and Products - High Technology Companies).

A high technology company qualifies for:

i.
Pioneer Status with income tax exemption of 100% of the statutory income for a period of five years. Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
ii.
Investment Tax Allowance of 60% on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. The allowance can be utilised to offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised.

Applications should be submitted to MIDA.

The high technology company must fulfil the following criteria:

i.
The percentage of local R & D expenditure to gross sales should be at least 1% on an annual basis. The company has three years from its date of operation or commencement of business to comply with this requirement.
ii.
Scientific and technical staff having degrees or diplomas with a minimum of 5 years experience in related fields should comprise at least 15% of the company's total workforce.

1.3 Incentives for Strategic Projects

Strategic projects involve products or activities of national importance. They generally involve heavy capital investments with long gestation periods, have high levels of technology, are integrated, generate extensive linkages, and have significant impact on the economy. Such projects qualify for:

i.
Pioneer Status with income tax exemption of 100% of the statutory income for a period of 10 years; Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
ii.
Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. This allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised.

Applications should be submitted to MIDA.

1.4 Incentives for Small and Medium Companies

Small and Medium Enterprises(SMEs)

Effective from the Year Assessment 2009, for the purpose of imposition of income tax and tax incentives, the definition of SMEs is reviewed as a company resident in Malaysia with a paid up capital of ordinary shares of RM2.5 million or less at the beginning of the basis period of a year of assessment whereby such company cannot be controlled by another company with a paid up capital exceeding RM2.5 million.

SMEs are eligible for a reduced corporate tax of 20% on chargeable incomes of up to RM500,000. The tax rate on the remaining chargeable income is maintained at 25%.

Small Scale Manufacturing Companies

Small scale manufacturing companies incorporated in Malaysia with shareholders' funds not exceeding RM500,000 and having at least 60% Malaysian equity are eligible for the following incentives:

i.
Pioneer Status with income tax exemption of 100% of the statutory income for a period of five years. Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
ii.
Investment Tax Allowance of 60% on the qualifying capital expenditure incurred within five years. This allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised.

A sole proprietorship or partnership is eligible to apply for this incentive provided a new private limited/limited company is formed to take over the existing production/activities.

To qualify for the incentive, effective 2 March 2012, a small-scale company has to comply with the following criteria:

i.
The value-added must be at least 25%; and
ii.
The managerial, technical and supervisory (MTS) ratio must be at least 20%

The company shall carry out the manufacture of products or participate in activities listed as promoted products and activities for small-scale companies (See List of Promoted Activities and Products - Small Scale Companies) or in the General List (See List of Promoted Activities and Products - General )

Applications should be submitted to MIDA.

1.5 Incentives for the Machinery and Equipment Industry

1.5.1 Incentives for the Production of Selected Machinery and Equipment

Companies undertaking activities in the production of selected machinery and equipment (see List of Promoted Activities and Products - Selected Industries) are eligible for:

i.
Pioneer Status with income tax exemption of 100% of the statutory income for a period of 10 years. Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
ii.

Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. This allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised.

Applications should be submitted to MIDA.

1.6 Incentives for the Automotive Industry

1.6.1 Incentives for the Manufacture of Critical and High Value-added Parts and Components for the Automotive Industry

Companies undertaking the manufacture of selected critical and high value-added parts and components for the automotive industry are eligible for:

i.
Pioneer Status with income tax exemption of 100% of the statutory income for a period of 10 years. Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
ii.

Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. This allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until they are fully utilised.

The qualifying critical and high value-added parts and components for the automotive industry are as follows:

tranmission systems;

brake systems;

airbag systems; and

steering systems.

The qualifying critical parts and components supporting the manufacturing of hybrid and electric vehicles are:

electric motors;

electric batteries;

battery management system;

inverters;

electric air conditioning; and

air compressors.

Applications received by 31 December 2014 are eligible fo these incentives.

Applications should be submitted to MIDA.

1.6.2 Incentives for the Assembly or Manufacture of Hybrid and Electric Vehicles

Companies undertaking the assembly or manufacture of hybrid and electric vehicles are eligible for:

Pioneer Status with income tax exemption of 100% of the statutory income for a period of 10 years.  Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or

Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within a period of five years. The allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised

50% exemption on excise duty for locally assembled/manufactured vehicles or provision under the Industrial Adjustment Fund (IAF)

Applications should be submitted to MIDA.

1.7 Incentives for the Utilisation of Oil Palm Biomass

Companies that utilise oil palm biomass to produce value-added products such as particleboard, medium density fibreboard; plywood; and pulp and paper are eligible for the following incentives:

(i) New Companies

a.
Pioneer Status with income tax exemption of 100% of the statutory income for a period of 10 years. Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
b.

Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within a period of five years. The allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised.

See List of Promoted Activities and Products - Selected Industries

(ii) Incentives for Existing Companies that Reinvest

a.
Pioneer Status with income tax exemption of 100% of the increased statutory income arising from the reinvestment for a period of 10 years. Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
b.

Investment Tax Allowance of 100% on the additional qualifying capital expenditure incurred within a period of five years. The allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised.

See List of Promoted Activities and Products - Reinvestment.

Applications should be submitted to MIDA.

1.8 Additional Incentives for the Manufacturing Sector

(i) Reinvestment Allowance

Reinvestment Allowance (RA) is given to existing companies engaged in manufacturing, and selected agricultural activities that reinvest for the purposes of expansion, automation. modernisation or diversification of its existing business into any related products within the same industry on condition that such companies have been in operation for at least 36 months effective from the Year of Assessment 2009.

The RA is given at the rate of 60% on the qualifying capital expenditure incurred by the company, and can be offset against 70% of its statutory income for the year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised.

  • A company can offset the RA against 100% of its statutory income for the year of assessment if the company attains a productivity level exceeding the level determined by the Ministry of Finance. For further details on the prescribed productivity level for each sub-sector, please contact the Inland Revenue Board (see Useful Addresses - Relevant Organisations)

The RA will be given for a period of 15 consecutive years beginning from the year the first reinvestment is made. Companies can only claim the RA upon the completion of the qualifying project, i.e. after the building is completed or when the plant/machinery is put to operational use. With effect from the Year of Assessment 2009, company purchasing an asset from a related company within the same group where RA has been claimed on that asset is not allowed to claim RA on the same asset.

Assets acquired for the reinvestment cannot be disposed off within a period of five years from the time of the reinvestment and effective from the Year of Assessment 2009.

Companies that intend to reinvest before the expiry of its tax relief period, can surrender their Pioneer Status or Pioneer Certificate for the purpose of cancellation and be eligible for RA.

Applications for RA should be submitted to the Inland Revenue Board (IRB), while applications for the surrender of Pioneer Status or Pioneer Certificate for RA should be submitted to MIDA.

(ii) Accelerated Capital Allowance

After the 15-year period of eligibility for RA, companies that reinvest in the manufacture of promoted products are eligible to apply for Accelerated Capital Allowance (ACA). The ACA provides a special allowance, where the capital expenditure is written off within three years, i.e. an initial allowance of 40% and an annual allowance of 20%.

Applications should be submitted to the IRB accompanied by a letter from MIDA certifying that the companies are manufacturing promoted products.

SMEs are eligible for the following incentives:

ACA on expenses incurred on plant and machinery acquired in the Year of Assessment 2009 and 2010. This allowance is to be claimed within one year that is in the year of assessment the asset is fully acquired. This incentive is effective for the Year of Assessment 2009 and 2010; and

SMEs are not subject to the maximum limit of RM10,000 for capital allowance on small value assets effective from the Year of Assessment 2009.

Applications for ACA should be submitted to the IRB.

(iii) Accelerated Capital Allowance on Equipment to Maintain Quality of Power Supply

In order to reduce the costs of doing business companies which incur capital expenditure on equipment to ensure the quality of power supply, are eligible for Accelerated Capital Allowance (ACA) for a period of two years which allows the companies to write off the capital expenditure within two years, i.e. an initial allowance of 20% and an annual allowance of 40%.

Only equipment determined by the Ministry of Finance is eligible for the ACA.

Applications should be submitted to the IRB.

(iv) Accelerated Capital Allowance on Security Control Equipment

Accelerated Capital Allowance (ACA) is given on security control equipment installed in the factory premises of companies licensed under the Industrial Coordination Act 1975. This allowance is eligible to be claimed within one year. Effective from the Year of Assessment 2009, this allowance is extended to all business premises. Security control equipment which are eligible for the allowance are:

anti-theft alarm system;

infra-red motion detection system;

siren;

access control system;

closed circuit television;
video surveillance system;
security camera;
wireless camera transmitter; and

time lapse recording and video motion detection equipment.

Applications submitted to the IRB from the Year of Assessment 2009 to 2012 are eligible for this allowance.

(v) Incentive for Industrial Building System

Industrial Building System (IBS) will enhance the quality of construction, create a safer and cleaner working environment as well as reduce the dependence on foreign workers. Companies which incur expenses on the purchase of moulds used in the production of IBS components are eligible for Accelerated Capital Allowances (ACA) for a period of three years.

Applications should be submitted to the IRB.

(vi) Group Relief

Group relief is provided under the Income Tax Act 1967 to all locally incorporated resident companies. Effective from the Year of Assessment 2009, group relief is increased from 50% to 70% of the current year's unabsorbed losses to be offset against the income of another company within the same group (including new companies undertaking activities in approved food production, forest plantation, biotechnology, nanotechnology, optics and photonics) subject to the following conditions:

a.
The claimant and the surrendering companies each has a paid-up capital of ordinary shares exceeding RM2.5 million;
b.

Both the claimant and the surrendering companies must have the same accounting period;

c.
The shareholding, whether direct or indirect, of the claimant and the surrendering companies in the group must not be less than 70%;
d.
The 70% shareholding must be on a continuous basis during the preceding year and the relevant year;
e.
Losses resulting from the acquisition of proprietary rights or a foreign-owned company should be disregarded for the purpose of group relief; and
f. Companies currently enjoying the following incentives are not eligible for group relief:

Pioneer Status

Investment Tax Allowance/Investment Allowance

Reinvestment Allowance

Exemption of Shipping Profits

Exemption of Income Tax under section 127 of the Income Tax Act 1967; and

Incentive Investment Company

With the introduction of the above incentive, the existing group relief incentive for approved food production, forest plantation, biotechnology, nanotechnology, optics and photonics will be discontinued. However, companies granted group relief incentive for the above activities shall continue to offset their income against 100% of the losses incurred by their subsidiaries.

Claims should be submitted to the IRB.

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