Malaysia Tax & Business Guide - Deloitte

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Basic facts
Population 25.5m Inflation 1.5% (2004)*
Main languages Bahasa Melayu (official), English GDP per head US$4,600*
Currency Malaysian ringgit (MYR) GDP growth 7.1% (2004)*
Economic communities Asia Pacific Economic Co-operation, Association of South-East Asian Nations, WTO
GDP sources 7.4% agriculture, 33.8% industry, 58.8% services
*Economist Intelligence Unit estimate.
Political environment

MalaysiaÌs constitutional monarchy has an appointed Senate and an elected House of Representatives. Since independence in 1957, Malaysia has been ruled by coalition governments dominated by the principal Malay party, the United Malays National Organisation (UMNO).

The prime minister is Abdullah Badawi, head of the Barisan Nasional (BN) coalition, of which the UMNO is the largest member. Mr Badawi replaced Mahathir Mohamad, who stepped down in October 2003 after 22 years in power. The ruling coalition won by a wide margin in the March 2004 general election; new elections are due in 2009.
Foreign trade and investment
Exports US$125.9bn (2004)* Imports US$98.9bn (2004)*
*Economist Intelligence Unit estimate.

Leading export markets: the US (largest), Singapore and Japan.

Major exports: Electronic equipment, petroleum and liquefied natural gas, chemicals, palm oil and textiles.

Malaysia ranks 31st of 60 countries in the Economist Intelligence UnitÌs business environment rankings.

Foreign investment involving technology transfer, creation of skilled jobs and contribution of capital is welcome. Investment in equipment and electronics, oil and gas, and chemicals is particularly encouraged. Approval is rarer for labour-intensive ventures as well as in sectors such as airlines, automotive and telecommunications.
Business and financing
Business forms Limited companies, local branch of foreign companies, partnerships

Foreign investors favour the limited company form. Use of branches is also possible but requires government approval.

Foreign firms tend to rely on parent companies and home-country banks for funds, employing local banks for working capital and cash-management services. With effect from April 1st 2005, non-resident controlled companies are allowed to raise Ringgit credit facilities without any restriction. There is also no restriction on repatriation of capital, profits, dividends, interest, etc by foreign investors. More exchange controls have been liberalised.

Investment incentives (but few forms of subsidised credit) are available to foreigners.

Kuala Lumpur is the business and financial centre.
Labour environment
Unemployment rate 3.5% (2004)* Minimum wage None
*Economist Intelligence Unit estimate.

There are no nationwide or industry-wide standards for fixing wage rates, and there is no legal minimum rate.

Only 8% of workers are unionised.

Employers and employees contribute 12% and 11% of payroll for retirement benefits, respectively. Affirmative-action policies oblige firms to employ bumiputras (Malays and other indigenous peoples) at all levels in proportions reflecting the local ethnic composition. All foreign-invested firms are also required to set up training programmes for their Malaysian staff and plan for the gradual replacement of expatriates (except those holding key posts) by Malaysians, particularly in managerial and white-collar positions.
Taxation
Corporate tax
Main rate 28%

Resident and non-resident companies are taxed only on income accruing in or derived from Malaysia. The corporate tax rate is 28%, with a lower rate of 20% on the first MYR 500,000 for companies with capital of MYR 2.5m and below. Lower tax rates are available in the Labuan offshore financial centre. When a company pays a dividend, an equalisation tax is deducted from the dividend. The dividend is then taxable in the hands of the shareholder, but with an imputation credit.
Individual tax
Progressive rates up to 28%

Resident and non-resident individuals are taxed on income accruing in or derived from Malaysia. Remittances of foreign sources of income into Malaysia by resident or non-resident individuals are not taxable. Currently, residents are taxed at progressive rates to 28%; non-residents are taxed at a flat rate of 28%.

The residence status of an individual for tax purposes is determined by reference to his/her length of stay in Malaysia. An individual will be resident in Malaysia if he or she:

* Is in Malaysia for 182 days or more in the basis year;
* Is in Malaysia for less than 182 days but that period is linked to a period of residence of at least 182 days in the following or preceding year;
* Is in Malaysia for 90 days or more during the basis year, and in any three out of four immediately preceding years he/she was either resident in Malaysia or in Malaysia for a period or periods amounting to 90 days or more in the relevant year; or
* Is a tax resident for three immediately preceding years as well as the year immediately following that particular year.

Capital gains
Gains on real property are taxed at rates between 0% and 30%

Gains from the disposal of real property or shares in a real property company are subject to real property gains tax. Resident companies and individuals pay tax at 30% if the property is sold within two years of acquisition; 20% if within three years; 15% if within four years; and 5% if within five years. Companies also pay tax at 5% on property held for more than five years, but individuals are exempt. However, non-Malaysian citizens or non-permanent residents are required to pay tax at 30% if the property is sold within five years of acquisition and 5% on property held for more than five years.
Indirect tax
Standard rate 10% Other rates 15%, 5%

All manufacturers and importers are subject to the sales tax. The standard rate is 10%, and a 5% rate applies to certain foodstuffs, building materials and timber. The higher 15% rate applies to beer, wine and cigarettes. Exemptions from sales tax include computers and computer components, basic medical equipment, bicycles, mineral products and certain essential food items. A 5% service tax applies to certain goods or services, including professional and consultancy services, insurance, advertising, entertainment and motor vehicle service and repair. The threshold for service tax registration is between MYR 150,000 and MYR 300,000, depending on the nature of the services. A goods and services tax (GST) is under discussion and expected to be introduced in 2007.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

Companies pay monthly instalments of tax, based on estimates of tax payable provided to the tax authorities before the beginning of the period. A tax return must be submitted within seven months of the year-end, and any balance of tax payable is due on the last day of the seventh month from the date following the close of the accounting period.

Employment income is taken as income of the year in which it is earned. All employees are subject to a scheme of monthly tax deduction from their salaries on a Ïpay-as-you earnÓ basis. Any balance of tax payable is due on April 30th each year, which is also the filing date for employeesÌ tax returns.
Additional tax information
Withholding taxes Dividends 0%, Interest 15%, Royalties 10%, Technical fees 10%.
Tax treaties Malaysia has concluded more than 50 tax treaties.
Dividends Dividends are taxable, with an imputation credit available. There is no withholding tax on dividends.
Revenue protection There is no transfer-pricing legislation. However, transfer-pricing guidelines have been issued by the Malaysian tax authorities. A general anti-avoidance law exists.
Groups Loss transfers between group companies are possible in some industries. From 2006, loss transfers are available to all Malaysian resident companies with not less than 70% shareholding within a group, subject to certain conditions.
Incentives Export promotion; research and development; regional distribution centres; Labuan offshore financial centre; pioneer status; investment tax allowances; reinvestment allowance; approved operational headquarters; Malaysia international trading company; biotechnology; energy conservation; renewable energy resources; double deduction of certain expenses.
Other taxes Contractors levy, Excise duty, Foreign workersÌ levy, Import and export duties, Property tax, Registration duties, Service tax, Stamp duty.