Introduction
Under Malaysian laws, foreign entities are allowed to acquire any property in Malaysia. However, the acquisition is subject to the requirements under the National Land Code (“NLC”) 1965, Economic Planning Unit (“EPU”) i.e. EPU Guidelines, and relevant rules and regulations (that may be imposed by the State Authority).
What is a “foreign company”
According to Section 433A of NLC 1965, a “foreign company” is a company incorporated under Companies Act 1965 with 50% or more of its voting shares being held by a non-citizen, or by a foreign company or both at the time of land acquisition whereas under the EPU Guidelines it defines “foreign interest” as any interest, group of interests or parties hold more than 50% of voting rights in that local company or institution.
In simple terms, if a company not incorporated in Malaysia or by non-Malaysian individuals has majority control of an entity, such an entity is deemed as a ‘foreign company’ and will have to comply with the requirements set out below. The first requirement with regards to property ownership by a foreign company is stated under Section 433B of NLC 1965. It states that a foreign company can only acquire land with the approval of the State Authority.
Prior to the amendment of NLC in 2017, the acquisition of industrial land by foreign companies is exempted. But now, for all categories of land use, a foreign acquisition is subject to the approval by the State Authority (where the land is located).
In granting the approval, any decision is at the absolute discretion of the State Authority. From our experience, approval from State Authority will most likely be granted. It is merely an administrative process of submitting an application and the necessary documentation.
In circ*mstances where the disposal or transaction relates to state agencies, government-linked companies, large scale industrial projects, the State Authority may require additional documents, confirmations and time to process the application.
Prior to the submission to a State Authority, a foreign company will have to obtain approval from EPU, otherwise a State Authority through the land office will be unable to process the application.
Under the EPU Guidelines, any acquisition of the property where the acquisition price is more than Ringgit Malaysia Twenty Million (RM20,000,000.00) and if such acquisition will result in diluting Bumiputera ownership on the property, it is subject to prior written approval from EPU.
There are many parameters that EPU will consider, such as locality of the assets, whether the land is freehold or leasehold, capital outlay of the foreign companies, the purpose of investment and the current owner(s) of the property, amongst others.
A compulsory condition that EPU will impose based on the EPU Guidelines, is that a foreign company must get 30% Bumiputera equity partner on board. It means such foreign company must get 30% Bumiputera equity prior to the transfer of the property. In addition, any attempt or appeal to get an exemption on this 30% Bumiputera equity condition is almost impossible.
In respect of this 30% Bumiputera equity condition, it is seen as a major concern to foreign investors. In the early days of the applicability of the EPU Guidelines, it was still possible for foreign applicants to get a waiver.
Nowadays, it is not the case, especially in the current environment where disposal of national assets to foreign interests are highly publicized (and politicized), hence, the regulators (EPU) have taken a stricter approach in processing each application.
It is fair to note that this current EPU Guidelines is one of the initiatives of the previous administration. Will the current government continue to apply this requirement? That remains to be seen. Nonetheless, we have noticed that since the new government took over the administration of the country, EPU processes have been very slow and almost at a stand still.
It is our hope that the government will address this sooner rather than later, because this has somewhat created a perception of instability and uncertainty for foreign interests that would want to invest in real properties in Malaysia.
Conclusion
In conclusion, Malaysia remains an attractive investment destination among foreign investors, supported by the strong fundamentals value that the government is creating today. Our Prime Minister, Tun Dr. Mahathir Mohamad has again reiterated that Malaysia welcomes Foreign Direct Investment (FDI) from investors with open arms, provided that it would also benefit Malaysians.
He pointed out that FDI to Malaysia is meant to bring in capital and technology to provide the country with investment benefits and most importantly to create opportunities for Malaysian and to contribute to the growth of the nation.
Written by:
Zuhaidi Mohd Shahari (Partner) zuhaidi@azmilaw.com
Mohd Sallahudin Abdullah (Partner) mohd.sallahudin@azmilaw.com
