Doing Business In: Doing Business in Malaysia
Raja, Darryl & LohView firm profile
Located south of Thailand and north of Indonesia, Malaysia comprises Peninsular Malaysia (sometimes called the Malay Peninsula) and the 2 states of Sarawak and Sabah on the island of Borneo. Peninsular Malaysia (formerly called Malaya) had been colonised by the British and became independent in 1957. In 1963, Sarawak and Sabah joined Malaya and Malaysia was born. (Strictly speaking, Singapore also joined in 1963, but seceded in 1965.) Malaysia consists of 13 states and 3 federal territories – Kuala Lumpur (the commercial capital), Putrajaya (the administrative capital) and Labuan (an island off Sabah), which is a tax haven. As at 2018, Malaysia’s population is 32,400,000.
The system of government is parliamentary democracy with a constitutional monarch. The head of state is the “Yang di-Pertuan Agong” – this is a largely ceremonial position, the head of government being the Prime Minister who comes to power through a general election held at least once every 5 years.
As part of the government’s fight against corruption, the Malaysian Anti-Corruption Commission Act 2009 has been amended to introduce Section 17A which will come into force on 1st June 2020. Among other things, this obligates commercial organisations to ensure that they have adequate procedures in place for the prevention of corrupt acts by their employees and service providers, failing which the companies and their directors/top management may be liable to fines/imprisonment.
The Legal System
The Court hierarchy consists of the Magistrates’ Courts, Sessions Courts, High Courts, the Court of Appeal and the Federal Court. Civil law is applicable to everyone, but there is a separate Islamic law system in regard to certain areas of life (such as family and inheritance) that only applies to Muslim individuals. Malaysia being essentially a common law country, the Courts are often guided by caselaw from other Commonwealth countries.
The Malay language, or “Bahasa Malaysia”, is the official language of Malaysia, used in administration and communication by the government. However, English is widely used in the urban areas and in business throughout the country. (Indeed, although officially, Bahasa Malaysia is to be used as the medium in the Courts, in practice, in the High Court, Court of Appeal and Federal Court, proceedings are often conducted in English.) Other languages used include Mandarin, various Chinese dialects and Tamil.
The World Bank’s Doing Business Guide 2020 has ranked Malaysia in 12th place.
AT Kearney’s Global Services Location Index (GSLI), a ranking of 50 countries based on their potential and ability to deliver business services to global companies, has since inception in 2004 identified locations that can best provide information technology, business process outsourcing and voice services based on countries’ financial attractiveness, people skills, availability and business environment. The 2019 edition of the GSLI included a new digital resonance category to capture the effects of digital transformation, especially automation and cybersecurity, on the global services landscape. It is noteworthy that Malaysia has been in the top 3 of the GSLI since 2004.
The Global Innovation Index measures the innovation performance of some 130 countries, using over 80 indicators including political environment, education, infrastructure and business sophistication. In 2019, Malaysia ranked 35th, being categorised as an “Upper Middle income” country based on its gross national income per capita.
Membership in ASEAN
Malaysia is a member state of ASEAN – the Association of South-East Asian Nations – which has established the ASEAN Free Trade Area (AFTA) among its members, to inter alia attract foreign direct investments and expand intra-ASEAN trade and investments.
Among AFTA’S benefits is the “Common Effective Preferential Tariff” system which promotes the free flow of goods among members with the gradual reduction and elimination of tariffs within ASEAN. Free trade agreements have also been signed by ASEAN with some Asia-Pacific countries.
Restrictions on foreign investment have been progressively reduced for sectors such as business services, departmental and specialty stores, healthcare, technology and tourism. However, there are still limits placed on foreign ownership in sectors such as insurance and banks.
Generally speaking, Malaysian residents are able to freely transfer foreign currency to non-residents to settle payments. Likewise, the transfer of Ringgit Malaysia (“RM”) from residents to non-residents to pay for goods and/or service is permitted; however, this must be done using the non-resident’s external account opened with any bank in Malaysia.
Private companies limited by shares are able to repatriate their dividends out of Malaysia, with notification to Bank Negara (the Central Bank of Malaysia).
Common business vehicles
Common business vehicles used by foreign investors in Malaysia are:
(a) locally incorporated companies;
(b) branches of foreign companies;
(c) unincorporated joint ventures.
A foreign investor desiring to do business would typically opt to incorporate a private company limited by shares since the company would be a separate legal entity, shielding shareholders from liability for the debts of the company.
The accounting profession in Malaysia is regulated by the Malaysian Institute of Accountants (MIA). MIA sets the by-laws and auditing standards for the accountancy profession which are in line with the standards issued by the International Federation of Accountants and the International Auditing and Assurance Standards Board. Accounting standards are issued by the Malaysian Accounting Standards Board (MASB) as empowered by the Financial Reporting Act 1997. The MASB’s standards are generally consistent with the International Financial Reporting Standards issued by the International Accounting Standards Board.
There is a considerable body of laws for the protection of employees in Malaysia. For example, aside from statutory benefits for employees in the lower-income bracket, the Industrial Relations Act 1967 provides that an employee (regardless of his salary) who alleges that he has been dismissed without “just cause or excuse” may refer to the relevant authority to seek reinstatement. Proceedings are conducted in the Industrial Court.
Statutory Employment Benefits
The Employment Act 1955 (“EA”) lays down mandatory employees’ benefits and rights in Peninsular Malaysia and the Federal Territory of Labuan (labour law in Sabah and Sarawak is governed by separate state laws). The EA applies to the following:
- Malaysian/foreign employees each earning RM2,000 or less monthly; and
- employees in certain classes, such as labourers (including supervisors), drivers, mechanics, seafarers and domestic servants.
The employment benefits available under the EA include:
- paid annual leave;
- paid annual sick leave (non-hospitalisation);
- paid hospitalisation leave;
- paid maternity leave;
- regulated overtime pay; and
- maximum work hours.
Employees who do not fall under the EA can enforce their employment rights under common law.
The law on minimum wages in Malaysia, revised effective 1st February 2020, applies to all employees except domestic servants.
The Minimum Wages Order 2020 (“MWO”) categorises the minimum wages according to the mode of pay (monthly/daily/hourly) and the place of employment, the prescribed minimum wages for employees working in any of the urban locations named in the MWO being higher than for those working in other locations.
Foreign employees (i.e. who are not citizens nor permanent residents of Malaysia) are classified as “foreign workers” and “expatriates”. Employment passes (ie work permits) are required to be held by foreign employees.
Employers may only employ foreign workers for certain approved sectors, namely, manufacturing, plantation, agriculture, construction, mining and quarrying and the services sector, whereas expatriates may be employed in all sectors, subject to certain conditions.
At present, a company that wishes to hire expatriates must submit a projection to the Expatriates Services Division (“ESD”) of the Malaysian Immigration Department as to the number of expatriates it intends to hire for the year. This projection should be based on:
- the number of potential expatriates the company has identified as well as existing expatriates already hired; and
- its annual business plan and/or project requirements.
The employment passes for expatriates are:
- the employment pass which permits a maximum 5-year term of employment for an expatriate earning at least RM10,000 monthly;
- the employment pass which permits a maximum 2-year term of employment for an expatriate earning between RM5,000 and RM9,999 monthly.
Expatriates who are employed on a temporary basis should obtain Professional Visit Passes – valid for 12 months (non-renewable).
The minimum educational qualification and experience required for applying for the relevant passes are:
- a degree, with 3 years of relevant experience;
- a diploma, with 5 years of relevant experience; or
- a technical certificate or equivalent, with 7 years of relevant experience.
Subject to any minimum share capital requirement that may be imposed in respect of a specific sector, the present policy appears to be that a wholly foreign-owned Malaysian incorporated company applying to employ an expatriate must have a minimum share capital of RM500,000.
Contributions to the Employees’ Provident Fund
Pursuant to the Employees’ Provident Fund Act 1991, employers in the private sector must make monthly contributions (from their own funds and also by deducting a portion of the employees’ salaries) to the Employees’ Provident Fund (“EPF”) for the benefit of employees who are Malaysian citizens or permanent residents, regardless of their salaries. In regard to non-permanent residents, although EPF contributions are not mandatory, they may opt to receive and contribute to their EPF by providing written notice to both the EPF Board and their employers.
The amounts of contributions vary according to the employee’s age, salary and citizenship.
Social Security Contribution
Employers must make monthly contributions (from their own funds and also by deducting a portion of the employees’ salaries) to the Employees’ Social Security Organization for the benefit of employees (other than those excluded by law) who are Malaysian citizens or permanent residents, capped at a monthly salary of RM4,000, in accordance with the rates set out in the Employees’ Social Security Act 1969.
Employment insurance system
Further, employees (other than those excluded by law) in the private sector receive the benefit of mandatory contributions by their employers (and from their own salaries) to an employment insurance fund pursuant to the Employment Insurance System Act 2017.
The minimum retirement age in Malaysia is 60 years old.
Income tax is the primary form of direct taxation in Malaysia. The scope of income tax is essentially territorial, tax being chargeable upon the income of any person accruing in or derived from Malaysia. The rate for companies is 24%, charged on the net chargeable income (i.e. gross income deducted by allowable deductions/expenses).
Taxpayers must assess themselves to tax. A rigorous tax audit and investigation system complements the self-assessment system.
Companies are required to pay tax in advance by way of an estimate of tax; penalties apply for underestimation.
A separate form of income tax on upstream petroleum activities applies in the form of Petroleum Income Tax.
Personal Income Tax
The number of days the individual is present in Malaysia determines whether he/she is resident in Malaysia for personal income tax purposes. The concepts of nationality and domicile are irrelevant.
Resident individuals are taxed at graduated rates on income with a Malaysian source, after deduction of personal reliefs, the highest rate being 30% for chargeable income above RM2,000,000. Non-resident individuals are taxed at a flat rate of 30% and are not eligible for personal reliefs.
Double Tax Treaties
Malaysia has executed Double Tax Agreements with some 75 countries with another 25 under negotiation.
Withholding tax applies in certain cases, particularly in relation to:
(a) special classes of income;
(b) contract payments; and
(c) interest and royalty income.
Broadly speaking, gross income of non-residents falling within any of the above is deemed to be derived from Malaysia if responsibility for the payment lies with a resident or if the payment is charged as an outgoing or expense in the accounts of a business carried on in Malaysia.
Special Classes of Income
The following income of non-residents is caught under section 4A of the Income Tax Act, 1967 (“ITA”):
(a) amounts paid in consideration of services rendered by the person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any plant, machinery or other apparatus purchased from, such person;
(b) amounts paid in consideration of any advice given, or assistance or services rendered in connection with the management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; or
(c) rent or other payments made under any agreement or arrangement for the use of any moveable property.
The Inland Revenue has interpreted section 4A extremely widely to cover any type of service (whether technical or non-technical). The tax here is the final tax, the rate being a flat 10% of the gross payment.
Services that are performed and rendered outside Malaysia are exempted.
Contract payments made to non-residents in respect of services under a contract are subject to withholding tax at the rate of 10%. Where a non-resident has employees in Malaysia involved in the contract, a further 3% withholding tax is to be deducted. The withholding tax is not the final tax. On submission of the relevant return, the non-resident can claim a refund of any tax overpaid by withholding.
Interest and Royalty Income
Income of a non-resident consisting of interest (other than interest on an approved loan or a long term loan or interest paid or credited by any person carrying on banking business in Malaysia) derived from Malaysia is taxed at 15% of the gross amount. Income of a non-resident consisting of royalty derived from Malaysia is taxed at 10% of the gross amount.
Base Erosion and Profit Shifting (BEPS)
A special team established to address BEPS issues has been actively and aggressively assessing multi-nationals and has taken an interest in the e-commerce industry. There are plans to amend the ITA to cover the taxation of digital economy and e-commerce activities based on BEPS recommendations.
Capital Gains Tax
Malaysia has a limited form of capital gains tax: gains from the disposal of real properties and shares in real property companies are subject to real property capital gains tax. The following rates apply:
Disposal by a company incorporated in Malaysia or trustee of a trust
From 30% – 10% for disposals within the first 3 years after acquisition to disposals in the 6th year and thereafter.
Disposal by a non-citizen or non- permanent resident, or an executor of the estate of a non-citizen or non-permanent resident, or a company not incorporated in Malaysia
From 30% – 10% for disposals within the first 5 years to disposals in the 6th year and thereafter.
Disposals by others
From 30% – 5% for disposals within the first 3 years to disposals in the 6th year and thereafter.
Stamp duty is chargeable on instruments. Generally, stamp duty is fixed (i.e. RM10) or at ad valorem, applying, e.g. to a conveyance of property, loan and security transactions and contracts for services at rates of 0.1% to 0.4% of the value of the transaction. .
Sales Tax and Service Tax
Sales tax is charged and levied on all taxable goods:
(a) manufactured in Malaysia by a registered manufacturer and sold, used or disposed by him; or
(b) imported into Malaysia by any person.
The sales tax rate ranges from 5% to 10%, depending on the goods.
Service tax is charged on:
(a) any taxable service provided in Malaysia by a registered person in carrying on his business; or
(b) any imported taxable service.
Only service providers that provide taxable services with turnover exceeding RM500,000 in a 12-month period and food and beverage related businesses with turnover exceeding RM1,500,000 in a 12-month period are required to be registered for service tax.
Further, service tax is charged on any digital service provided by a foreign registered person. Any foreigner providing any digital service to a consumer must be registered if the total value of all digital services provided in a 12-month period exceeds RM500,000.
The service tax rate (other than for credit card or charge card services) is 6% of the value of the taxable service.
Sales and service tax is a single-tier type of tax that can have a multiplying effect across the supply chain.
Customs Duty and Excise Duty
Customs duty is payable on goods imported into or exported from Malaysia. Excise duty is payable on certain goods imported into Malaysia.
Malaysian has a complex labyrinth of tax incentives including double deductions, capital investment based allowances and tax holidays. Specialised and tailor-made incentives for large scale and strategic investment are also available.
Intellectual property protection
The work of regulating and supervising matters relating to intellectual property (“IP) and IP laws, including the enforcement of IP laws and the protection of IP rights, is the responsibility of the Intellectual Property Corporation of Malaysia (“MyIPO”), a statutory body established under the Intellectual Property Corporation of Malaysia Act 2002.
The IP rights capable of protection in Malaysia are:
- industrial designs;
- trade secrets and confidential information.
The creator of any literary work, music, film, broadcast, artistic work and/or sound recording is entitled to protect his work in Malaysia under the Copyright Act 1987 (“CA”) and/or common law. If he is a citizen or permanent resident of Malaysia, he may register his copyright by submitting a notification under the Copyright (Voluntary Notification) Regulations 2012. If the Director General of MyIPO approves the submission, he will inform the copyright owner in writing that the notification of copyright has been entered into the Register of Copyright. A certified extract from the said Register or an affidavit or a statutory declaration prepared in accordance with section 42 of the CA shall serve as prima facie evidence in a Malaysian Court of copyright over the work.
As Malaysia is a contracting state to the Berne Convention for the Protection of Literary and Artistic Works 1886, a work first published in another contracting state or where the author of the work is a national of another contracting state must be given the same protection in Malaysia which that other state gives its own nationals.
Trademarks are protected in Malaysia:
- pursuant to the Trademarks Act 2019 (“TMA”) through registration with the Trademark Registry, under the MyIPO; or
- under common law, by using the mark in business (“unregistered trademarks”).
A trademark registration is good for 10 years, but can be renewed by applying 6 months before expiry. Although unregistered trademarks may be protected to an extent under common law, organisations are advised to register their trademarks for maximum protection. Under the TMA, certain causes of action for infringement can only be initiated if the trademark is registered.
Malaysia is a member of the World Intellectual Property Organisation (“WIPO”) and has recently acceded to the Madrid Protocol. This means that a foreign investor intending to do business in Malaysia, and whose existing trademarks have been registered in a territory which is also a signatory to the Madrid Protocol, can file an international trademark protection application with WIPO designating Malaysia as an additional territory of protection and thereby protect its trademarks in Malaysia.
Inventions are protected in Malaysia through the Patents Act 1983 and its subsidiary regulations, provided that they do not fall within the list of non-patentable inventions provided in the Act. A patent is protected for 20 years from the filing date of the application, subject to payment of the yearly annuity fees. A utility innovation is protected for 10 years from the filing date, subject to payment of the yearly annuity fees and may be extended for 2 further period of 5 years each, provided the owner can prove that the innovation is still in commercial use in Malaysia.
Malaysia is a contracting state to the Patent Cooperation Treaty, a unified procedure for filing patent applications to protect inventions in each of its contracting states.
Industrial designs are protected in Malaysia through the Industrial Designs Act 1996 and its subsidiary regulations. Once registered, the industrial design can be protected up to 25 years, subject to extension fees being paid every 5 years
Trade secrets and confidential information
Trade secrets and other confidential information are protected under common law, not statute
Personal Data protection
The Personal Data Protection Act 2010 (the “PDPA”) governs “persons” (ie individuals or other entities):
- established in Malaysia; and
- not established in Malaysia, but which use equipment in Malaysia for processing personal data otherwise than for the purposes of transit through Malaysia.
In a nutshell, the PDPA regulates the “processing” (which includes collecting, recording, holding, storing, disclosing and destroying) of an individual’s personal data in commercial transactions by any “data user” – being a person who processes any personal data or has control over or authorises the processing of any personal data, but does not include a data processor who processes personal data solely on behalf of the data user and not for his own purpose. The PDPA does not apply to any personal data processed outside Malaysia unless it is intended to be further processed in Malaysia.
Under the PDPA, data users must comply with the following “Data Protection Principles”:
- process an individual’s personal data only with his consent and if the processing is “necessary” and for a lawful purpose directly related to an activity of the data user;
Notice and Choice Principle:
- inform individuals in writing as soon as practicable, in both English and Malay, that their personal data is being processed (providing a description), the purposes for which their personal data is being collected and processed and other matters listed in the PDPA;
- save with the data user’s consent, not to disclose the personal data for any purpose other than (i) that for which the personal data was to be disclosed at the time of collection or (ii) a purpose directly to (i), or to any party other than one in a specified class;
- take practical steps to protect personal data being processed from any loss, misuse, modification, unauthorised or accidental access or disclosure, alteration or destruction and ensure that any data processor it engages provides sufficient guarantees in respect of the technical and organisational security measures governing the processing to be carried out;
- not keep any personal data longer than necessary to fulfill the purpose for which it was processed and take all reasonable steps to ensure that personal data which is no longer required is destroyed or permanently deleted;
Data Integrity Principle:
- ensure that all personal data is accurate, complete, not misleading and kept up-to-date, by having regard to the purpose, including any directly related purpose, for which the personal data was collected and further processed;
- ensure that individuals are given access to their personal data and would be able to correct/update it except where compliance with a request to such access or correction is refused under the PDPA.
Registration of data users
Certain classes of data users, including banking/financial institutions, communications and insurance, are required to register under the PDPA.
Cross-border transfer of data
A data user may only transfer an individual’s personal data outside of Malaysia with the individual’s consent or in certain limited situations.
Date: 10th February 2020