Malaysia, with a total land area of 329,613sqkm, is the 66th largest country in the world with a population estimated at 30.33 million. Malaysia has a total of 13 states and three federal territories, and has been divided into Peninsular Malaysia and East Malaysia. Sabah, Sarawak, and the Federal Territory of Labuan are in East Malaysia and the remaining 11 states and the two federal territories of Kuala Lumpur and Putrajaya are in Peninsular Malaysia.
The GDP of Malaysia was USD296.22 billion in 2015 and the GDP value of Malaysia represents 0.48% of the world economy. GDP in Malaysia averaged USD79.67 billion from 1960 until 2015, reaching an all time high of USD338.1 billion in 2014 and a record low of USD2.42 billion in 1961. Malaysian GDP per capita in 2015 based on IMF numbers is USD26,211. It ranks 47th in those terms, just below Hungary, but immediately above Russia and Kazakhstan.
According to the IMF and the World Bank, Malaysia is ranked in the top-20 economies in the world in terms of competitiveness. Malaysia is also the seventh-largest economy amongst Islamic countries according to GDP. Malaysia's economic system is principally a laissez-faire, free economy with government control for national interests and for realignment of national wealth, focusing on trade, investment, manufacturing, and services. Malaysia's economic development is largely due to its wealth of natural resources in agriculture and forestry. Some major produces in the country include cocoa, rice, rubber, palm, and oil. On top of that, Malaysia also has abundant natural resources including minerals, liquefied natural gas (LNG), petroleum, and tin. Oil production stood at 619,000 bbl/day in October 2015. Electronic components contribute a significant share of Malaysia's manufacturing and exports. It is the largest exporter of semiconductor devices and electrical goods and appliances in the world. The service sector of Malaysia predominantly comprises Islamic banking, finance, telecommunications, education, and tourism.
Malaysia is situated at the heart of ASEAN, a vibrant region with promising growth prospects. The establishment of the ASEAN Economic Community (AEC) in 2015 is a major milestone in the regional economic integration agenda of ASEAN, offering opportunities in the form of a huge market of USD2.6 trillion and over 622 million people. In 2014, AEC was collectively the third-largest economy in Asia and the seventh largest in the world.
Reasons behind Vibrancy of the Malaysian Economy
Malaysia has a highly open, upper-middle-income economy. Malaysia today has a diversified economy and has become a leading exporter of electrical appliances, electronic parts and components, palm oil, and natural gas. The pragmatic business policies that the government has adopted have created a business environment with opportunities for growth and profits that have made Malaysia an attractive manufacturing and export base in the region bolstered by relatively low costs due to the competitive Malaysian ringgit. The private sector in Malaysia has become a major partner with the public sector in achieving the nation's development of objectives. The Liberal Equity Policies, introduced since June 2003, have allowed foreign investors to hold 100% of the equity in all investments in new projects, as well as investments in expansion/diversification projects by existing companies irrespective of the level of exports and without excluding any product or activity. Last but not least, foreign companies in the manufacturing sector are allowed to employ expatriates where certain skills are not available in Malaysia. A company with foreign paid-up capital of USD2 million and above will be allowed up to 10 expatriate posts, including five key posts; that is, posts that are permanently filled by foreigners.
Malaysia's Legal System
Malaysia's legal system is largely based on the English common law system. The English common law system was introduced in the late 19th Century and was very much in place at the date of independence. Malaysian Civil Law Act 1956 allows the implementation of English common law as applied in England before 1956. However, the Malaysian Courts will generally accept guidance from English law and Australian law and some instances of US law.
The Malaysian legal system desires to be compatible in terms of international legal standards. New legislation relating to anti monopoly, data protection, whistleblowing protection, anti money laundering, and anti terrorism have been introduced and a new corporation law has started to come into effect in stages from January 1, 2017. Best practices for dispute settlement such as adjudication, arbitration, and mediation are being adopted through legal framework with the Kuala Lumpur Regional Centre of Arbitration as a key driving force. The legal profession is also incrementally opening up to the hiring of foreign lawyers and foreign experts. There is also an endeavor to harmonize the legal system of ASEAN countries to facilitate business and trade among member countries.
General View on Corporate Law in Malaysia
There are several types of corporate entity available in Malaysia, including sole proprietorship or partnership, unlimited liability company, company limited by shares, company limited by guarantee, and limited liability partnership. A company limited by shares is the most common type of company among foreign invested entities. Alternatively, a foreign entity may opt for registration of a foreign company as a branch office or representative office.
There are no restrictions on foreign ownership of a corporate entity. A foreign entity can hold 100% of shares in a private company limited by shares in Malaysia. Following the Companies Act 2016, companies can be incorporated and operated with a single individual or corporate shareholder. A minimum of one resident director is required for a private company and the sole director may also be the sole shareholder of the company. Meanwhile, for a public company, a minimum of two resident directors are required.
Individual and Corporate Tax Rate
For a company with paid-up capital not more than MYR2.5 million, there is a 20% tax imposed on the first MYR500,000 net profit and 25% for MYR500,001 and above. As for a company with paid-up capital more than MYR2.5 million, a tax rate of 25% will be imposed. With regard to the individual income tax rate, a flat-rate tax of 28% will be imposed on a non-resident individual while a resident individual will be liable for the progressive rates up to 28%, effective from the year of assessment 2016.
Attractive Tax Incentives
Malaysia offers a wide range of tax incentives for the promotion of investments, which aims to attract foreign direct investment to Malaysia. The main tax incentives are Pioneer Status and the Investment Tax Allowance. Firstly, through the introduction of Pioneer Status, companies engage in promoted activities or products under the Malaysia Promotion of Investment Act 1986 and may choose to apply for Pioneer Status. A company approved with a Pioneer Status certificate can enjoy income tax exemption between 70 and 100% of statutory income for five to 10 years. Unabsorbed capital allowances and accumulated losses incurred during the pioneer period can be carried forward and deducted from the post-pioneer status of the company. The Malaysian Investment Development Authority (MIDA) has identified a long list of activities and manufactured products as “promoted activities" and “promoted products." The list of promoted products and activities is under constant review and is updated from time to time to bring the list in line with the government's investment policies. As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance (ITA). A company granted with ITA is entitled to get allowances between 60 and 100% on qualifying capital expenditure incurred within a period of five to 10 years. If the company falls within the category of manufacturing company, it is entitled to an allowance of 60% in respect of 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 unutilized allowance can be carried forward to subsequent years until fully utilized. The remaining 30% of its statutory income will be taxed at the prevailing company tax rate. For projects with longer gestation periods and high capital expenditure, it would be more beneficial to opt for ITA. Companies should study the options before applying either for Pioneer Status or ITA. A 100% ITA may be able to reduce 100% of the statutory income of a company for certain promoted products or activties in promoted areas. A company can only apply either for Pioneer status or ITA but not for both.
Another form of incentive, such as Reinvestment Allowance (RA), is given to existing companies engaged in manufacturing, and selected agricultural activities that reinvest for the purposes of expansion, automation, modernization, 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 unutilized allowance can be carried forward to subsequent years until fully utilized.
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. The incentive period for RA is 15 years from the first year of claim by a company. Companies that enjoy Pioneer Status or ITA are not eligible for RA. Companies that reinvest in the manufacturing of promoted products are eligible to apply for Accelerated Capital Allowance.
After the 15-year period of eligibility for RA, companies that reinvest in the manufacturing 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%.
Malaysia continues to be an attractive market for foreign investors thanks to financial and political stability, physical security, and sound infrastructure. The diversity in Malaysia may be one of its greatest assets and, with a population that is both multi-ethnic and multilingual, it is well placed to succeed in an increasingly integrated global economy.
This article was first published on The Business Year.