The New Tax Incentive Framework: Shifting from the PIA 1986 to a New Era of Tax Incentives
Introduction
As Malaysia strives to position itself among the world’s advanced digital nations, strengthening its digital ecosystem has now become a national priority. Previously, Malaysia’s investment incentives mainly relied on the Promotion of Investments Act 1986 (“PIA 1986”), in which, within the framework, tax incentives were granted only to companies involved in specific “promoted activities” or “promoted products”.1 As such, this reflects a more conventional, list-based approach.
However, as the global economy continues to evolve rapidly, alongside the accelerating shift toward sustainable and low-carbon development, the Malaysian Government, in response to such transformation, has introduced a more flexible, contemporary, and outcome-based incentive framework known as the New Incentive Framework (“NIF”) governed under the provisions of the Income Tax Act 1967 (“ITA 1967”).
Unlike the previous framework under the PIA 1986, the NIF represents a strategic shift in policy orientation. It is guided by two (2) national strategies,2 namely:
1. The National Investment Aspirations (“NIA”); and
2. The New Industrial Master Plan 2030.
More importantly, the government’s policy of the NIF objective also reflects this shift. This is affirmed by Malaysia’s Minister of International Trade and Industry (“MITI”) in a media release, which highlighted that the NIF is intended to enhance Malaysia’s economic resilience by tying tax incentives to measurable outcomes that support the nation’s strategic priorities.3
As further announced by MITI, the NIF will be implemented in phases beginning on 1 March 2026, starting with the manufacturing sector, followed by the services sector in the second quarter of 2026. This means any incentive application submitted by manufacturing companies after 1 March 2026 will be evaluated under the new NIF framework.
A New Arsenal of Tax Incentives
Under the NIF, companies must select between two (2) primary, mutually exclusive tax incentives for each qualifying project based on its specific financial profile and investment strategy. The selection of the incentive is final once the application is accepted by MIDA and it cannot be changed.4
1. Special Tax Rate (“STR”)
The STR is an income-based incentive that represents the most significant departure from the traditional Pioneer Status (“PS”) previously granted under the PIA 1986. While PS historically offered a fixed partial tax exemption (typically 70% or 100%) for five (5) to ten (10) years, it is no longer available for new manufacturing applications as the PIA 1986 has been phased out for new applications effective 1 March 2026.5
Under the NIF, the STR provides a reduced corporate income tax rate on taxable income for a specified period. The rates are structured as follows:6
- New Investment: 0% to 10% for a period of up to 15 years;
- For projects located in Less Developed Areas (being districts classified as having below-average development levels under Malaysia’s Composite Development Index): 0% to 15% for a period of up to 15 years; and
- Small Companies (entities with shareholders’ funds of up to RM2.5 million and subject to certain Malaysian equity conditions): 3% to 12% for a period of up to 15 years.
The STR operates on a performance-linked tiered system evaluated annually via the NIA Scorecard.
2. Investment Tax Allowance (“ITA”)
The ITA remains a core incentive, but it has been modernised under the NIF to align with the outcome-based philosophy. While the previous ITA was under Section 26 of the PIA 1986, the new NIF-compliant ITA is provided under Section 127(3)(b) of the ITA 1967.
The ITA is a capital expenditure-based incentive designed for projects with high upfront costs. Under the NIF, companies can claim an allowance of up to 100% on Qualifying Capital Expenditure (“QCE”), which can be used to offset 70% to 100% of statutory income for up to 15 years.7 Further, similar to the STR, the specific quantum and offset percentage for the ITA are determined by a company’s annual performance and compliance with Tier 1 or Tier 2 conditions, as verified by independent external auditors.8
Global Minimum Tax (“GMT”) Consideration
When choosing between any of the above incentives, companies must remain mindful of Malaysia’s participation in the Global Anti-Base Erosion Model Rules under Pillar Two. Effective 1 January 2025, Malaysia has incorporated the GMT rules into the ITA 1967, which introduced Part XI of the Act governing the Domestic Top-up Tax and the Multinational Top-up Tax.9
Accordingly, multinational enterprise groups with consolidated annual revenue of at least EUR 750 million in at least two (2) of the four (4) preceding financial years may be subject to a top-up tax if their effective tax rate in Malaysia falls below 15%.10 This means the benefit of any chosen incentive above must be assessed against these prevailing statutory minimum tax requirements, as a reduction in effective tax rate below the 15% threshold may trigger a top-up liability.
General Requirements and Eligibilities
Access to the NIF incentives is restricted to companies that meet specific requirements. The NIF currently prioritises the following fifteen (15) manufacturing sub-sectors.11
Beyond sectoral classification, eligibility under the NIF is contingent upon satisfying a primary set of general requirements. To be deemed an eligible applicant, a company must be incorporated under the Companies Act 2016 and be a tax resident in Malaysia.12 Further, applicants are also required to satisfy the following pre-qualifying conditions:
1. New13 or existing14 companies undertaking new investments in manufacturing.15
2. New or existing companies must have a valid manufacturing licence issued by the MIDA throughout the duration of the incentive period.16
3. Companies shall keep separate accounts for the activities approved with tax incentives and activities without tax incentives.17
NIA Scorecard
Once the eligibility requirements above are satisfied, the applicant will then be assessed via the NIA Scorecard. The NIA Scorecard is a structured performance-linked assessment tool that measures and quantifies the tangible outcomes and overall impact of an investment against key national performance indicators.18
Under this framework, the applicant’s projects will be assessed based on their contribution to the following six (6) strategic pillars:19
1. Increasing economic complexity and technological capability;
2. Creating high-value employment opportunities;
3. Strengthening domestic supply chains and industry linkages;
4. Developing industrial clusters;
5. Promoting workforce inclusivity; and
6. Enhancing sustainability practices.
Each of these pillars would reflect a distinct dimension of economic and social impact, encompassing from technological advancement and productivity growth, inclusive workforce development, and environmental sustainability. Collectively, these pillars form a structured framework for measuring the extent to which an investment may contribute to Malaysia’s long-term strategic priorities.
During the assessment process, each pillar serves as a performance indicator to evaluate the investment’s quality and impact.20 The aggregate score would then ultimately determine the investment’s overall quality and impact and the project’s classification into a tiered incentive structure.21
- Tier 1: Represents premium benefits for projects that achieve higher scores by complying with both minimum and additional conditions, rewarding investors that exceed their baseline commitments.
- Tier 2: Represents base benefits for projects that comply with the minimum conditions stipulated in the principle approval letter.
This score plays a crucial role in determining the level of tax incentives granted, including the applicable tax rate under the STR and the allowance percentage under the ITA. Accordingly, investments that achieve higher scores will be eligible for more favourable incentive packages, thereby encouraging projects that generate substantial economic value and align closely with national policy objectives.
Implications for Companies and Investors Under the NIF
The transition to the NIF signals a fundamental shift of the PIA 1986 to a performance-linked regime. Effective 1 March 2026, the manufacturing sector will no longer accept incentive applications under the PIA 1986. Instead, all new approvals will be granted under the ITA 1967 using the new NIF mechanism. While the PIA 1986 remains in force to cater to existing approved incentives, certain sections of that Act will no longer apply to new submissions.22
Further, previously under the PIA 1986, once a project was approved as a promoted activity, the incentive benefits were largely predictable for the duration of the term. However, under the NIF, principle approval is merely the starting point of an ongoing performance monitoring process. For new manufacturing projects, tax outcomes are now directly tied to annual performance across the six (6) pillars of the NIA Scorecard. Failure to meet the required conditions in any given year may result in the company being taxed at the prevailing corporate rate for that year, effectively losing the incentive for that assessment year.
Meanwhile, for existing companies with current approvals under the PIA 1986, the NIF does not affect these arrangements. However, these existing companies are eligible to apply for new incentives under the NIF when undertaking new or diversification projects that are distinct from their current operations.23
Conclusion
The transition to the NIF heralds a sophisticated new chapter for Malaysian investments, aimed at attracting foreign direct investments and strengthening Malaysia’s economic resilience, where benefits are earned through depth, innovation, and ecosystem contribution over mere production volume. To access NIF and its benefits, companies must submit a complete application before commencing operations, undergo MIDA’s NIA Scorecard evaluation to determine project quality and tier potential, receive a principal approval letter detailing the tax incentive, tier, and compliance conditions, and maintain ongoing compliance with the NIF framework.24
1. Deloitte, ‘Update on implementation of New Incentive Framework’ Tax@hand (2026) <https://www.taxathand.com/article/40953/Malaysia/2026/Update-on-implementation-of-New-Incentive-Framework> accessed 9 June 2026.
2. Malaysian Investment Development Authority (MIDA), ‘New Incentive Framework (NIF)’ <https://www.mida.gov.my/media-release/new-incentive-framework-nif/> accessed 9 June 2026.
3. Ministry of Investment, Trade and Industry (MITI), Implementation of the New Incentive Framework (NIF) Effective 1 March 2026 (Media Release, 29 January 2026) https://www.miti.gov.my/miti/resources/Media%20Release/PR_NIF_2026.pdf accessed 9 June 2026.
4. Ministry of Investment, Trade and Industry (MITI), ‘Guidelines of Tax Incentives for New Investment in the Manufacturing Sector under the New Incentive Framework (NIF)’ (15 January 2026) <https://www.miti.gov.my/miti/resources/NIF/Guideline_Tax_Incentive_NIF_as_at_15.01_.2026_Manufacturing_Only_.pdf> accessed 9 June 2026.
5. Paragraphs 1 and 8, ibid.
6. Paragraph 2.2, ibid.
7. Paragraph 2.2, ibid.
8. Paragraph 5.4, ibid.
9. Paragraph 7, ibid.
10. Paragraph 7.4, ibid.
11. Malaysian Investment Development Authority (MIDA), ‘Frequently Asked Questions about New Incentive Framework (NIF)’ (updated 19 January 2026) <https://www.mida.gov.my/wp-content/uploads/2026/01/NIF-FAQ-U.pdf> accessed 9 June 2026. The sub-sectors includes the following: electrical and electronics (E&E), chemical and chemical products, pharmaceuticals, medical devices, aerospace, machinery and equipment (M&E), automotive, petroleum products and petrochemicals, oleochemicals and their derivatives, food production and processing, wood, paper, and furniture, textile, apparel, and footwear, strategic minerals-based products, rubber-based products, and metal.
12. (n 4).
13. New Company refers to a company which is newly incorporated or has not yet commenced any commercial operations; and which does not have any related entity in Malaysia prior to the submission of application being made; or which has any related entity in Malaysia and the related entity is carrying on a different project in Malaysia.
14. Existing Company refers to a company which is already operating in Malaysia carrying on a different project in Malaysia.
15. Ibid.
16. RSM, ‘Asia Pacific’ <https://www.rsm.global/asia-pacific> accessed 9 June 2026.
17. (n 12).
18. Ibid.
19. Ibid.
20. (n 17).
21. (n 4) Paragraph 5.3.
22. (n 12).
23. Malaysian Investment Development Authority (MIDA), ‘Malaysia’s New Incentive Framework: From Strategic Approval to Measurable Outcomes’ (15 March 2026) <https://www.mida.gov.my/malaysias-new-incentive-framework-from-strategic-approval-to-measurable-outcomes/> accessed 9 June 2026.
24. (n 4) Paragraph 4.
Written by:
Dato’ Azmi Mohd Ali (Senior Partner) azmi@azmilaw.com
Nur Qistina Zainal Ariffin & Farah Hana Joharuddin general@azmilaw.com
Corporate Communications, Azmi & Associates – 5 August 2026
