Setting Up A Business In Malaysia

A. Entity form

When establishing a business presence in a new jurisdiction, it is crucial to choose the right entity form. The entity forms most commonly used by foreign investors are: the representative office or the regional office;

• the branch office;
• the Sendirian Berhad ("Sdn. Bhd."), a company with limited liability; and
• the Limited Liability Partnership ("LLP").

I. The representative/regional office

The simplest way for foreign entities to establish a business presence in Malaysia is the registration of a representative or regional office. The entity form serves only as a transitional structure and cannot be used for any commercial activities.

1. What is a representative/regional office?

The representative office ("RO") is the appropriate legal entity for entities active in the manufacturing or servicing sector wishing to "test the water" before entering the Malaysian market. The RO has the benefit of enabling a non-Malaysian company to study the local business environment and relevant market without establishing a new legal entity. This structure allows for more flexibility but also has its disadvantages. An RO is registered by a foreign entity and forms part of its company. In other words, the RO is not a separate legal entity and, therefore, the foreign entity is liable for its RO in Malaysia.

A regional office ("RGO") is an office of a foreign entity that serves as the coordination centre for the entity's affiliates, subsidiaries and agents in South-East Asia and the Asia Pacific region. The established RGO is responsible for the designated activities of the entity within the region it operates.

2. For how long can one operate an RO/RGO?

An RO/RGO can be registered for an initial period of two years – after which it can be renewed for up to a maximum of three more years, subject to the authorities' discretion. An RO thus remains a transitional structure as its maximum period of validity will be limited to five years.

Once that period has elapsed, if the business chooses to maintain its presence in Malaysia, it must either incorporate a subsidiary or register a branch office as outlined below.

3. Eligibility criteria

The following conditions must be met for the creation of an RO/RGO:

• the project must be entirely funded by sources exterior to Malaysia; and
• the expected operational expenditure must be at least MYR 300,000 per annum

4. Restricted activities

Since ROs/RGOs are only meant to be preliminary/transitional structures, they are not allowed to undertake any commercial activities. The following are activities expressly allowed or disallowed:

a. Allowed

• planning and coordination of business activities in Malaysia or the region;
• collection and analysis of data, undertaking feasibility
• studies pertaining to investment and business opportunities in Malaysia and the region;
• identification of sources of raw material, components and
• industrial products;
• research and product development;
• coordination of subsidiaries, affiliates and agents in the region;
• liaison office;
• identification of suitable partners and agents/distributors;
• sponsor expatriates, after having obtained the relevant Expatriate Post Approvals and Support Letters; and
• other activities which will not result directly in actual commercial transactions (e.g. local or technical support to Malaysian firms without fees).

b. Not allowed

• engaging in any trading (including import and export), business or any form of commercial activity;
• leasing warehousing facilities; any shipment/transshipment or storage of goods shall be handled by a local agent or distributor;
• signing business contracts on behalf of the foreign corporation or providing services for a fee; and
• participating in the daily management of any of its subsidiaries, affiliates or branches in Malaysia

5. Registration

The application for the registration of an RO/RGO in Malaysia should be addressed to the Malaysian Investment Development Authority ("MIDA") or Bank Negara Malaysia (if related to banking and financial services) and must be accompanied by three sets of the following documents:

• cover letter signed by authorised signatory;
• application forms;
• certificate of incorporation of the parent company;
• latest audited financial statements of the parent company (last two years); and
• company profile (in .pdf or .ppt).

The examination of the application usually takes four to six weeks.

II. The branch office

1. What is a branch office?

The Malaysian Companies Act 2016 allows foreign entities to register a branch office with the Companies Commission of Malaysia ("SSM"). Unlike an RO/RGO, a branch office is able to act independently and to engage in legitimate profit-making activities. However, a branch office will not be viewed as a separate legal entity from the foreign parent company it represents. Consequently, any and all contracts that it enters into, as well as the legal obligations, debts and liabilities arising therefrom, shall be binding and enforceable against the foreign parent company.

The registration of a branch office requires substantially more information to be filed with SSM compared to what is required for the incorporation of a limited liability company. The first step in the registration process is to apply for approval of the business name. The branch office will have to use the same name as its parent entity. The parent entity's main place of business, date of incorporation/ establishment, amount of share capital (if any) and core business activities also need to be provided in the filing documents.

2. Registration

Provided that the business name is approved, which usually takes about one to two days, the following documents/ information need to be submitted to SSM in order to complete the registration:

• a certified true copy of the foreign parent entity's certificate of incorporation/establishment, or its equivalent;
• a copy of the latest audited annual financial statement of the foreign parent entity;
• a copy of the foreign parent entity's current constitution, or its equivalent;
• personal particulars and certified true passport copies of
• the foreign parent entity's current directors and the dates of appointment of their respective appointment; and
• information as to the address under which the branch office shall be registered.

All of the above documents must be submitted in English. If any of the original documents (e.g. the certificate of incorporation) are in another language, an official translation must be provided. Where necessary, Luther can of course provide translation services.

The company is furthermore required to appoint a branch agent. It is important to note that such branch agent can be held personally liable in case of any breach of the provisions of the Companies Act 2016.

There is no formal requirement for a branch office to appoint a company secretary. However its compliance and filing obligations are similar to those of a private limited company where such requirement exists. In order to ensure compliance, we therefore recommend appointing someone to provide company secretarial services.

Compared to a private limited company, the on-going requirements for maintaining a branch office are more cumbersome. Since the branch office is not a separate legal entity, changes related to the parent entity, such as change of its officers as well as its audited annual accounts, must be filed with SSM.

If these documents are not in English, official translations must be provided. Furthermore, a separate set of audited accounts reflecting the branch office's annual "financials", need to be drawn-up and filed with SSM.

In summary, due to the higher filling requirements for a branch office and the corresponding costs, and since the branch office's liability is not separate from its parent entity, most foreign investors tend to prefer setting up a private limited company (for details, please refer to Part A.IV. below) rather than a branch office

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.