Representative office – overseas presence without suffering taxes
11 Apr 2022
THE Malaysian market of 33 million people is rather small compared with the rest of the world, and any successful business in Malaysia must look beyond our borders to grow. The larger companies have already established a presence overseas. However, the small and medium sized companies are jut actively beginning to explore overseas markets.
Usually, the first stage is to export goods or services without establishing any presence overseas and this is usually done through the appointment of agents and now through the internet or digital platforms. The profits generated through such sales will be taxed in Malaysia.
There is a limit to expanding overseas sales through agents or digital platforms. To move to the next stage of capitalising on market demand overseas, it may be necessary to establish some form of physical presence to penetrate the overseas markets without getting into the bureaucratic entanglements around taxation or other legal matters.
The vehicle that is available in most countries that will allow Malaysian businesses to get a foothold to locate Malaysian personnel overseas and operate without subjecting to corporate taxation and minimal regulatory compliance with the authorities is the representative office.
What is a representative office?
A representative office is an extension of the parent company in a foreign country. It establishes a presence in that overseas country and most countries do not impose corporate taxation. One exception is China where such companies are taxed on the deemed profit rate of 15% on the gross expenses incurred.
Representative offices can carry out a whole list of activities without incurring any taxes and this can range from market research, business development, networking, customer and supplier liaison, develop business channels, displaying and publicising the group’s products and services, gathering and analysing information to feasibility studies.
It is important that representative offices must not trade, conduct businesses or generate revenues, and must not be involved in concluding deals or sales.
In many countries, there will be a requirement for a minimum annual expenditure and in countries like India, there is a requirement that the parent company should have a three-year profit track record and certain net worth requirements of the parent company. All funds incurred by the representative office should be sourced from overseas.
Along with the representative office status, the other benefits will be the entitlement to certain number of work permits for the foreign employees, however please note that the foreign employees are not exempted from personal tax in majority of the countries.
The next stage
Normally the next stage of evolvement of a business in the overseas market would be to establish a company, a branch, or a project office, etc, when the Malaysian businesses are certain that they wish to anchor themselves in the chosen market and grow their business there.
At this stage, the Malaysian businesses will need to comply with the full range of regulatory matters such as filing direct and indirect tax returns, filing annual returns to the company law authorities, filing returns to the local investment bodies, and dealing with a whole plethora of requirements with the local authorities, state authorities and federal authorities. The cost of operating at the next level exponentially increases.
Before any Malaysian business decides to incur financial commitments or investments in overseas markets, they should seriously consider using representative offices to study and understand the overseas markets.
Thisarticle is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
Source: The Sun Daily