Guide To Foreign Investment Laws In Malaysia - Inward/ Foreign Investment

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The 2022 Milken Institute Global Opportunity Index rankedMalaysia as the best-performing country among Southeast Asia'slargest economies with the most potential to attract foreigninvestors.¹ In 2021, Malaysia registered a higherForeign Direct Investment ("FDI") netinflow of RM48.1 billion as compared to RM13.3 billion in 2022following the gradual global economic recovery from the COVID-19pandemic.² According to the Malaysian Ministry ofInternational Trade and Industry("MITI"), FDIs are "investmentin the form of financial instruments namely equity and investmentfund shares (including reinvestment of earnings) and debtinstruments (inter-company loans, trade credit, advances, etc) byforeign direct investors in direct investment enterprises inMalaysia."³

Generally, Malaysia does not have legislations, regulations orguidelines that regulate all FDIs as foreign investments inMalaysia. Malaysia is regulated by sector-specific regulationsissued by the Government. There are currently minimal restrictionsto FDIs in Malaysia and foreign investors can hold up to 100% ofthe equity in all investments in new projects in certainsectors.⁴ FDI involvement across sectors are typicallyregulated by regulatory approvals like permits and licences,foreign equity ownership limits, or a requirement for minimumMalaysian or Bumiputera equity ownership in the proposedinvestment.

Manufacturing Sector

The Malaysian Investment Development Authority("MIDA") is the main investmentpromotion and development agency that oversees investments into themanufacturing and services sectors in Malaysia. Investments in themanufacturing sector have flourished despite the COVID-19 pandemic.In 2020 alone, Malaysia's manufacturing sector brought ininvestments worth RM91.3 billion wherein the majority ofinvestments at RM56.6 billion (62%) were brought in byFDIs.⁵ Presently, manufacturing sector investors mustensure that they have registered a business entity in Malaysia toact as the investing party and obtained a manufacturing licence formanufacturing projects as outlined under the IndustrialCoordination Act 1975. Among other policies and requirements byMIDA, there is a liberal expatriate employment policy in themanufacturing sector, however the minimum conditions of employmentset out in the Employment Act 1955 must be met.⁶

With regards to equity holding, foreign investors can now hold100% of the equity in all investments in new projects, as well asinvestments in expansion or diversification projects by existingcompanies, irrespective of the level of exports("equity policy").⁷ Accordingto MIDA, the said equity policy also applies to companies who werepreviously exempted from obtaining a manufacturing licence but nowneed to obtain a manufacturing licence as their shareholders'funds are now RM2.5 million or more, or because the company has nowengaged 75 or more full-time employees.⁸ Moreover, theequity policy also applies to existing licensed companies who werepreviously exempted from complying with equity conditions as theirshareholders' funds were less than RM2.5 million.⁹Further to the above, MIDA has also clarified that companies wherethe equity participation has been previously approved will not berequired to restructure its equity at any time if the companycontinues to comply with the original conditions of approval andretain the original features of the project.¹⁰

Services Sector

The services sector is one of the major contributors toMalaysia's GDP and economy. At the end of 2021, FDIs inMalaysia amounted to RM788.8 billion and this was largely due toforeign investments in the services sector, mainly in the financialand insurance/takaful sub-sector as well as in wholesale and retailtrade activities.¹¹ Similar to the manufacturing sector,service sector investors must ensure that they have registered abusiness entity in Malaysia to act as the investing party.Depending on the sub-sector and activities undertaken, specificequity conditions may be imposed to obtain the required approvals,licences, permits or registrations by the regulating authority.

The regulatory body for the financial and insurance/takafulsub-sector is the Central Bank of Malaysia (Bank NegaraMalaysia). Among the liberalisation measures taken by CentralBank of Malaysia are as follows:

existing domestic Islamic banks are given flexibility to enterinto strategic partnerships with foreign players through anincreased foreign equity limit of up to 70% and will be required tomaintain a paid-up capital of at least USD 1 billion; and
Insurance companies and takaful operators are given greaterflexibility to tie-up with foreign partners through an increasedforeign equity of up to 70%.¹²

Nevertheless, like the manufacturing sector, a company whoseequity participation has been previously approved will not berequired to restructure its equity at any time as long as thecompany continues to comply with the original approval conditionsand retains the original features of the project.¹³

Distributive Trade Sector

Distributive trade is regulated by the Ministry of DomesticTrade and Consumer Affairs ("MDTCA") andcomprises of all linkage activities that channel goods and servicesfrom the supply chains to intermediaries for the purpose of resaleor to the final buyers.¹⁴ Foreign investment andparticipation in the distributive trade sector is welcomed by theMalaysian Government and regulated by the Domestic Trade Divisionof MDTCA in line with the 2020 Guidelines for Foreign Participationin Distributive Trade in Malaysia.

MDTCA encourages and recommends that all foreign businessoperators engaged in distributive trade services obtain priorapproval from MDTCA before commencing operations inMalaysia.¹⁵ According to MDTCA, all companies withforeign investors involved in distributive trade must comply to thefollowing recommendations: ¹⁶

appoint Bumiputera or Malay director(s);
employ Malaysian personnel at all levels particularly for themanagement positions and above;
have only 15% of the total workforce consist of low skilledforeign workers;
develop and provide transparent standard operating proceduresfor local suppliers to market their goods;
encourage Bumiputera or Malay participation in the distributivetrade sector;
employ at least 1% of the total workforce of persons withdisabilities in large formats;
increase the utilisation of local airports and ports in theexport and import of goods;
encourage utilisation of local professional services which areavailable in Malaysia;
submit audited annual financial reports to MDTCA;
support the initiatives and the agenda for sustainabledevelopment as provided under the Sustainable Development Goals bythe Government of Malaysia; and
comply with all the by-laws and regulations of the localauthorities.

Oil & Gas Sector

Malaysia's strategic geographical location and natural oiland gas reserves has contributed to the country's flourishingoil and gas industry. The oil and gas sector continues to be animportant sector of Malaysia's economy¹⁷ withstatistics indicating that the sector contributes 20% to thecountry's annual GDP.

Experienced foreign investors are encouraged by the Malaysiangovernment to collaborate with local entities to enhance theMalaysian oil and gas sector. Foreign investors may involvethemselves in this sector by obtaining the relevant licence(s)and/or registration(s) from Petroliam Nasional Berhad("PETRONAS"). To obtain a licence fromPETRONAS, among other requirements, foreign companies must eitherappoint a Malaysian company to act as its agent, form a Malaysianjoint-venture company with a Malaysian entity, or open a localbranch of the company in Malaysia.

If the foreign investor chooses to form a joint-venture companyor open a local branch, it must comply with the requirementsstipulated in the General Guidelines and submit an application forlicence and registration via the PETRONAS Licensing ManagementSystem.¹⁸

IT & Technology

Malaysia is strategically situated with easy access to othergrowing markets and robust infrastructure, connectivity, andeconomic stability. The IT sector is one of the fastest-growingsectors in the Malaysian market, currently contributing 19.1% ofthe country's GDP for the year 2019 and is expected to reach22.6 percent by 2025.¹⁹

Malaysia is of interest because the Malaysian Government hasimplemented financial incentives in the national budget to motivatethe government and private enterprises to invest more in IT.

For example, RM2.0 billion has been allocated by the MalaysianGovernment, and provisions were made under the loan guaranteescheme of businesses to motivate firms to adopt moretechnology.²⁰

For investment in the IT sector, the Malaysian Government hasintroduced the Automation Capital Allowance("Automation CA") initiative whichallocated a capital allowance of 200% of the first RM2.0 millionexpenditures incurred for the year of assessment 2020 until theyear of assessment 2023. Among the eligibility criteria for theAutomation CA is that the company must be incorporated under theCompanies Act 2016.

Tax Incentives

The Malaysian Government offers several tax incentives to ensurecontinued interest in the Malaysian economy and attract FDIs intothe country. These tax incentives are governed by the Promotion ofInvestments Act 1986, the Income Tax Act 1967, the Customs Act1967, the Excise Act 1976, and the Free Zones Act 1990, and coverinvestments in the manufacturing, agriculture, tourism and approvedservices sectors as well as research and development, training, andenvironmental protection activities.²¹ The main taxincentives available to investors who wish to invest in themanufacturing or services sectors are the Pioneer Status and theInvestment Tax Allowance and eligibility for these two taxincentives are dependent on certain priorities andrequirements.

The Pioneer Status is a tax exemption which allows companies toenjoy a partial exemption from the payment of income tax for fiveyears. Eligible companies involved in the manufacturing of promotedactivities or products only pay tax on 30% of its statutoryincome,²² whilst eligible companies that undertakeapproved service sector activities only pay tax on 70% of itsstatutory income.²³ Alternatively, a company may applyfor the Investment Tax Allowance ("ITA")which provides for an allowance of 60% on the qualifying capitalexpenditure within five years wherein the ITA can be offset against70% of the statutory income for each year of assessment and anyunutilised allowance can be carried forward to subsequent yearsuntil fully utilised.²⁴

Concluding Remarks

Malaysia is a strategic and unique country for FDI investment.The liberalisation measures implemented by the Malaysian Governmentand the tax treatments offered would be favourable for foreigninvestors. The footsteps of big companies such as Intel, STMicroelectronics, Infineon, Micron, TF-AMD and Osram that choseMalaysia for FDI would surely set great footsteps for others tofollow.²⁵

Footnotes

1. Page 17, Milken Institute Global Opportunity Index2022, accessible at:https://milkeninstitute.org/sites/default/files/2022-01/global%20opp%20indexFINAL.pdf.

2. Statistics of Foreign Direct Investment in Malaysia2021, accessible at:https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=322&bul_id=enJVb2NyWUlaNmtaRFdCR3N1WkJSUT09&menu
_id=azJjRWpYL0VBYU90TVhpclByWjdMQT09#:~:text=Foreign%20Direct%20Investment%20
(FDI)%20in,of%20the%20COVID%2D19%20pandemic.

3.https://www.miti.gov.my/index.php/pages/view/4916?mid=743.

4. https://www.mida.gov.my/setting-up-content/equitypolicy-protect-foreign-investment/.

5.https://www.mida.gov.my/industries/manufacturing/.

6. Ibid.

7.https://www.mida.gov.my/setting-up-content/equitypolicy-protect-foreign-investment/.

8. Page 19, MIDA Policy Booklet 2021 Edition, accessibleat:https://www.google.com/url?q=https://www.mida.gov.my/wp-content/uploads/2022/03/MIDA-Policy-Booklet-2021-Edition
Web.pdf&sa=D&source=docs&ust=1657705860163983&usg=AOvVaw1apY3CPYjBDvDOem3F2iwe.

9. Ibid.

10. Ibid.

11. Statistics of Foreign Direct Investment in Malaysia2021, accessible at https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=322&bul_id=enJVb2NyWUlaNmtaRFdCR3N1WkJSUT09&menu_id=azJjRWpYL0VBYU90TVhpcl
ByWjdMQT09#:~:text=Foreign%20Direct%20Investment%20(FDI)%20in,of%20the%20COVID%2D19%20pandemic.

12.https://www.bnm.gov.my/-/liberalisation-of-thefinancial-sector.

13.https://www.mida.gov.my/setting-up-content/equitypolicy-protect-foreign-investment/.

14. Guidelines for Foreign Participation in DistributiveTrade in Malaysia 2020, accessible at:https://www.kpdnhep.gov.my/images/FINAL_GP_2020.pdf, page8.

Guide To Foreign Investment Laws In Malaysia - Inward/ Foreign Investment - Malaysia (2024)