Before establishing a footprint in Malaysia, it is vital that overseas-based multinationals have a deep understanding of the investment environment, and the legal, accounting and taxation frameworks. Here are a few key considerations you need to know.
Malaysia's excellent infrastructure, talented and multi-lingual labour force — of which 26% have tertiary educations — and well-developed banking and financial services sectors offer overseas investors a business-friendly environment.
The government actively encourages inward investment as part of its push to achieve developed nation status by 2020, and has already attracted over 5,000 foreign companies.
In its 2018 budget, the government announced that a Digital Free Trade Zone (DFTZ) will be developed at Kuala Lumpur International Airport, in a move that will be sure to attract tech companies looking to manufacture and distribute goods as cost effectively as possible.
According to the World Bank Group's latest 'Doing Business' report, Malaysia ranks 24th globally in the 2017 ease of doing business rankings and fourth in Asia, after Singapore, Hong Kong and Taiwan. In our Financial Complexity Index 2017 , which ranks 94 jurisdictions globally based on their complexity for accounting and tax compliance, Malaysia comes in at 59. Overall, Malaysia is improving its performance across multiple business rankings, reflecting an increased confidence in the business and investment environment.
Despite this, it is vital that overseas-based multinationals have a deep understanding of the local investment environment, alongside the legal, accounting and taxation frameworks, before they look to establish a footprint in this dynamic market:
Setting up a business
Setting up a business takes less than a week to complete. An application must be sent to the Companies Commission of Malaysia (CCM) to check the availability of the proposed company's name before your Company Secretary can start to file company incorporation documents with the CCM. To facilitate new business registrations, Malaysia has created a one-stop shop service and made the registration process more efficient through the implementation of E-lodgement.
Registering property requires the assistance of a lawyer. The Memorandum of Transfer (14A) must to be sent to the Stamp Office and evaluated by Jabatan Penilaian Dan Perkhidmatan Harta (JPPH) before the transfer is registered at the Land Office/Registry.
Complying with local tax rules
To comply with tax requirements, tax payments are made eight times annually - a marked reduction compared to the 35 required payments in 2006. The Goods and Services (GST) tax—Malaysia's equivalent to VAT—is set at a rate of 6%. The Royal Malaysian Customs Department (RMCD) fines organisations that make late GST payments, starting with a penalty rate of 5% for GST that are one to 30 days overdue. Since 2006, the government has gradually lowered the corporate tax rate to 24% in order to boost competitiveness both globally and regionally. Malaysia's membership in the ASEAN Free Trade Area (AFTA) is also expected to increase Malaysia's competitiveness by removing tariffs among members.
To stimulate trade, Malaysia's offshore jurisdiction of Labuan has a corporate tax rate of 3% of audited net profit, and a flat rate of MYR 20,000 (US$ 4,902) for trading activities. In addition, corporate tax is not levied on investment holding activities, and Labuan does not charge GST.
With Malaysia committed to joining the OECD's Base Erosion and Profit Shifting (BEPS) and Common Reporting Standard (CRS) information-sharing initiatives in September 2018, multinationals have to start preparing to meet these financial reporting and tax compliance requirements. With these changes on the horizon, organisations are moving now to make sure they are up to speed with the latest reporting requirements by testing documentation, systems and knowledge – all of which can involve a significant upskilling of internal resources. While failure to comply with BEPS and CRS will result in penalties, their implementation is largely seen as a positive move as they have been created to promote transparency and better corporate governance.
Changes to Companies Act
Another significant development that will impact organisations doing business in Malaysia are changes to Malaysia's Companies Act 2016, which include:
- a reduction in the minimum number of shareholders from two to one
- the requirement to have just one resident director instead of two
- the elimination of authorised capital
- it is no longer necessary for private companies to hold annual general meetings (AGMs). This means that private companies need not table audited financial statements at the AGM.
These measures to ease both statutory requirements and the compliance burden will increase the attractiveness and affordability of establishing a business in Malaysia. However, fulfilling local compliance and reporting standards still present a significant challenge for multinationals.
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.