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Guide to Foreign Investment Laws in Malaysia

The 2022 Milken Institute Global Opportunity Index ranked Malaysia as the best-performing country among Southeast Asia’s largest economies with the most potential to attract foreign investors.1 In 2021, Malaysia registered a higher Foreign Direct Investment (“FDI”) net inflow of RM48.1 billion as compared to RM13.3 billion in 2022 following the gradual global economic recovery from the COVID-19 pandemic.2 According to the Malaysian Ministry of International Trade and Industry (“MITI”), FDIs are “investment in the form of financial instruments namely equity and investment fund shares (including reinvestment of earnings) and debt instruments (inter-company loans, trade credit, advances, etc) by foreign direct investors in direct investment enterprises in Malaysia.3

Generally, Malaysia does not have legislations, regulations or guidelines that regulate all FDIs as foreign investments in Malaysia. Malaysia is regulated by sector-specific regulations issued by the Government. There are currently minimal restrictions to FDIs in Malaysia and foreign investors can hold up to 100% of the equity in all investments in new projects in certain sectors.4 FDI involvement across sectors are typically regulated by regulatory approvals like permits and licences, foreign equity ownership limits, or a requirement for minimum Malaysian or Bumiputera equity ownership in the proposed investment.

 

Manufacturing Sector

The Malaysian Investment Development Authority (“MIDA”) is the main investment promotion and development agency that oversees investments into the manufacturing and services sectors in Malaysia. Investments in the manufacturing sector have flourished despite the COVID-19 pandemic. In 2020 alone, Malaysia’s manufacturing sector brought in investments worth RM91.3 billion wherein the majority of investments at RM56.6 billion (62%) were brought in by FDIs.5 Presently, manufacturing sector investors must ensure that they have registered a business entity in Malaysia to act as the investing party and obtained a manufacturing licence for manufacturing projects as outlined under the Industrial Coordination Act 1975. Among other policies and requirements by MIDA, there is a liberal expatriate employment policy in the manufacturing sector, however the minimum conditions of employment set out in the Employment Act 1955 must be met.6

With regards to equity holding, foreign investors can now hold 100% of the equity in all investments in new projects, as well as investments in expansion or diversification projects by existing companies, irrespective of the level of exports (“equity policy”).7 According to MIDA, the said equity policy also applies to companies who were previously exempted from obtaining a manufacturing licence but now need to obtain a manufacturing licence as their shareholders’ funds are now RM2.5 million or more, or because the company has now engaged 75 or more full-time employees.8 Moreover, the equity policy also applies to existing licensed companies who were previously exempted from complying with equity conditions as their shareholders’ funds were less than RM2.5 million.9 Further to the above, MIDA has also clarified that companies where the equity participation has been previously approved will not be required to restructure its equity at any time if the company continues to comply with the original conditions of approval and retain the original features of the project.10

 

Services Sector

The services sector is one of the major contributors to Malaysia’s GDP and economy. At the end of 2021, FDIs in Malaysia amounted to RM788.8 billion and this was largely due to foreign investments in the services sector, mainly in the financial and insurance/takaful sub-sector as well as in wholesale and retail trade activities.11 Similar to the manufacturing sector, service sector investors must ensure that they have registered a business entity in Malaysia to act as the investing party. Depending on the sub-sector and activities undertaken, specific equity conditions may be imposed to obtain the required approvals, licences, permits or registrations by the regulating authority.

The regulatory body for the financial and insurance/takaful sub-sector is the Central Bank of Malaysia (Bank Negara Malaysia). Among the liberalisation measures taken by Central Bank of Malaysia are as follows:

(a) existing domestic Islamic banks are given flexibility to enter into strategic partnerships with foreign players through an increased foreign equity limit of up to 70% and will be required to maintain a paid-up capital of at least USD 1 billion; and

(b) Insurance companies and takaful operators are given greater flexibility to tie-up with foreign partners through an increased foreign equity of up to 70%.12

Nevertheless, like the manufacturing sector, a company whose equity participation has been previously approved will not be required to restructure its equity at any time as long as the company continues to comply with the original approval conditions and retains the original features of the project.13

 

Distributive Trade Sector

Distributive trade is regulated by the Ministry of Domestic Trade and Consumer Affairs (“MDTCA”) and comprises of all linkage activities that channel goods and services from the supply chains to intermediaries for the purpose of resale or to the final buyers.14 Foreign investment and participation in the distributive trade sector is welcomed by the Malaysian Government and regulated by the Domestic Trade Division of MDTCA in line with the 2020 Guidelines for Foreign Participation in Distributive Trade in Malaysia.

MDTCA encourages and recommends that all foreign business operators engaged in distributive trade services obtain prior approval from MDTCA before commencing operations in Malaysia.15 According to MDTCA, all companies with foreign investors involved in distributive trade must comply to the following recommendations: 16

(a) appoint Bumiputera or Malay director(s);

(b) employ Malaysian personnel at all levels particularly for the management positions and above;

(c) have only 15% of the total workforce consist of low skilled foreign workers;

(d) develop and provide transparent standard operating procedures for local suppliers to market their goods;

(e) encourage Bumiputera or Malay participation in the distributive trade sector;

(f) employ at least 1% of the total workforce of persons with disabilities in large formats;

(g) increase the utilisation of local airports and ports in the export and import of goods;

(h) encourage utilisation of local professional services which are available in Malaysia;

(i) submit audited annual financial reports to MDTCA;

(j) support the initiatives and the agenda for sustainable development as provided under the Sustainable Development Goals by the Government of Malaysia; and

(k) comply with all the by-laws and regulations of the local authorities.

 

Oil & Gas Sector

Malaysia’s strategic geographical location and natural oil and gas reserves has contributed to the country’s flourishing oil and gas industry. The oil and gas sector continues to be an important sector of Malaysia’s economy17 with statistics indicating that the sector contributes 20% to the country’s annual GDP.

Experienced foreign investors are encouraged by the Malaysian government to collaborate with local entities to enhance the Malaysian oil and gas sector. Foreign investors may involve themselves in this sector by obtaining the relevant licence(s) and/or registration(s) from Petroliam Nasional Berhad (“PETRONAS”). To obtain a licence from PETRONAS, among other requirements, foreign companies must either appoint a Malaysian company to act as its agent, form a Malaysian joint-venture company with a Malaysian entity, or open a local branch of the company in Malaysia.

If the foreign investor chooses to form a joint-venture company or open a local branch, it must comply with the requirements stipulated in the General Guidelines and submit an application for licence and registration via the PETRONAS Licensing Management System.18

 

IT & Technology

Malaysia is strategically situated with easy access to other growing markets and robust infrastructure, connectivity, and economic stability. The IT sector is one of the fastest-growing sectors in the Malaysian market, currently contributing 19.1% of the country’s GDP for the year 2019 and is expected to reach 22.6 percent by 2025.19

Malaysia is of interest because the Malaysian Government has implemented financial incentives in the national budget to motivate the government and private enterprises to invest more in IT.

For example, RM2.0 billion has been allocated by the Malaysian Government, and provisions were made under the loan guarantee scheme of businesses to motivate firms to adopt more technology.20

For investment in the IT sector, the Malaysian Government has introduced the Automation Capital Allowance (“Automation CA”) initiative which allocated a capital allowance of 200% of the first RM2.0 million expenditures incurred for the year of assessment 2020 until the year of assessment 2023. Among the eligibility criteria for the Automation CA is that the company must be incorporated under the Companies Act 2016.

 

Tax Incentives

The Malaysian Government offers several tax incentives to ensure continued interest in the Malaysian economy and attract FDIs into the country. These tax incentives are governed by the Promotion of Investments Act 1986, the Income Tax Act 1967, the Customs Act 1967, the Excise Act 1976, and the Free Zones Act 1990, and cover investments in the manufacturing, agriculture, tourism and approved services sectors as well as research and development, training, and environmental protection activities.21 The main tax incentives available to investors who wish to invest in the manufacturing or services sectors are the Pioneer Status and the Investment Tax Allowance and eligibility for these two tax incentives are dependent on certain priorities and requirements.

The Pioneer Status is a tax exemption which allows companies to enjoy a partial exemption from the payment of income tax for five years. Eligible companies involved in the manufacturing of promoted activities or products only pay tax on 30% of its statutory income,22 whilst eligible companies that undertake approved service sector activities only pay tax on 70% of its statutory income.23

Alternatively, a company may apply for the Investment Tax Allowance (“ITA”) which provides for an allowance of 60% on the qualifying capital expenditure within five years wherein the ITA can be offset against 70% of the statutory income for each year of assessment and any unutilised allowance can be carried forward to subsequent years until fully utilised.24

 

Concluding Remarks

Malaysia is a strategic and unique country for FDI investment. The liberalisation measures implemented by the Malaysian Government and the tax treatments offered would be favourable for foreign investors. The footsteps of big companies such as Intel, ST Microelectronics, Infineon, Micron, TF-AMD and Osram that chose Malaysia for FDI would surely set great footsteps for others to follow.25

 

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1. Page 17, Milken Institute Global Opportunity Index 2022, accessible at: https://milkeninstitute.org/sites/default/files/2022-01/global%20opp%20indexFINAL.pdf.

2. Statistics of Foreign Direct Investment in Malaysia 2021, accessible at: https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=322&bul_id=enJVb2NyWUlaNmtaRFdCR3N1WkJSUT09&menu_id=azJjRWpYL0VBYU90TVhpclByWjdMQT09#:~:text=Foreign%20Direct%20Investment%20(FDI)%20in,of%20the%20COVID%2D19%20pandemic.

3. https://www.miti.gov.my/index.php/pages/view/4916?mid=743.

4. https://www.mida.gov.my/setting-up-content/equitypolicy-protect-foreign-investment/.

5. https://www.mida.gov.my/industries/manufacturing/.

6. Ibid.

7. https://www.mida.gov.my/setting-up-content/equitypolicy-protect-foreign-investment/.

8. Page 19, MIDA Policy Booklet 2021 Edition, accessible at: https://www.google.com/url?q=https://www.mida.gov.my/wp-content/uploads/2022/03/MIDA-Policy-Booklet-2021-Edition Web.pdf&sa=D&source=docs&ust=1657705860163983&usg=AOvVaw1apY3CPYjBDvDOem3F2iwe.

9. Ibid.

10. Ibid.

11. Statistics of Foreign Direct Investment in Malaysia 2021, accessible at https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=322&bul_id=enJVb2NyWUlaNmtaRFdCR3N1WkJSUT09&menu_id=azJjRWpYL0VBYU90TVhpclByWjdMQT09#:~:text=Foreign%20Direct%20Investment%20(FDI)%20in,of%20the%20COVID%2D19%20pandemic.

12. https://www.bnm.gov.my/-/liberalisation-of-thefinancial-sector.

13. https://www.mida.gov.my/setting-up-content/equitypolicy-protect-foreign-investment/.

14. Guidelines for Foreign Participation in Distributive Trade in Malaysia 2020, accessible at: https://www.kpdnhep.gov.my/images/FINAL_GP_2020.pdf, page 8.

15. Ibid, page 7.

16. Ibid, page 10.

17. https://www.mida.gov.my/industries/services/oil-and gas/.

18. https://www.petronas.com/be-our-partner/licensing-and-procurement-in-malaysia#petronaslicense-registration-requirement-in-malaysia.

19. https://www.trade.gov/country-commercial-guides/malaysia-information-communications-technology.

20. https://www.tandfonline.com/doi/pdf/10.1080/23311975.2022.2055906.

21. https://www.mida.gov.my/setting-up-content/incentives/.

22. https://www.mida.gov.my/wp-content/uploads/2020/07/Chapter-2-Incentives-for-New-Investments.pdf.

23. https://www.mida.gov.my/wp-content/uploads/2021/04/BOOKLET-1-GENERAL-POLICIES-FACILITIESAND-GUIDELINES-Chapter1-Getting-Started-Services.pdf.

24. Ibid.

25. https://themalaysianreserve.com/2022/06/26/ee-remains-malaysias-key-growth-economic-driver-mida/amp/.

 

Written by:

Umar Izat Nubli (Associate) umar.izat@azmilaw.com

Dhanya Laxmi Sivanantham (Associate) dhanya@azmilaw.com