Why choose to incorporate a Private Limited Company (Sdn. Bhd.) instead of other business structure?
Sole Proprietorship and Partnership VS Private Limited Company (Sdn. Bhd.)
As many might know, most Malaysian prefer to incorporate a sole proprietorship or partnership compared to a private limited Company (Sdn. Bhd.) due to the cheap cost and easy registration as well as cheaper cost to maintain the business annually. However, such option is not opened for foreigner as only Malaysian citizen or Permanent Resident (PR) is allowed to operate such business structure.
Other drawbacks that these two business structures impose are:
Owner/Partners are liable towards all the debts accumulated by the business
Creditors have the power to sue owners/partners if they filed for bankruptcy in order to claim the debt owed
It is not so easy to encourage third party investors or bankers to fund the business
The cost and annual compliance to maintain a sole proprietorship and partnership might be less compared to private limited Company (Sdn. Bhd.), however, the risk of the owner/partners facing bankruptcy is definitely a lot at stake.
Subsidiary VS Private Limited Company (Sdn. Bhd.)
A subsidiary and a private limited Company (Sdn. Bhd.) are quite similar with each other. However, setting up a subsidiary can be difficult and rigorous compared to incorporating a private limited Company (Sdn. Bhd.). More documents are needed such as:
Company particulars of parent Company certified by the appointed Company Secretary
Board of resolution from parent Company to approve the incorporation of a subsidiary Company
Memorandum of appointment or power of attorney authorising the person residing in Malaysia to accept the notices on behalf of the parent Company
Statutory declaration by the agent of the parent Company
And the price of to incorporate a subsidiary is depending on the authorised share capital unlike incorporating a private limited Company (Sdn. Bhd.). For example, the authorised share capital is MYR 400,000, the incorporation fee is only MYR 1,000. The higher the authorised share capital is, the higher the fees chargeable.
As for annual compliance, a subsidiary is deemed to be more complex compared to a private limited Company (Sdn. Bhd.). They not only need to file annual return, but it is also a compulsory for them to file audited financial statement of the subsidiary. Whereas a private limited Company (Sdn. Bhd.) have the option to choose to file an audited or unaudited financial statement as long as they meet the criterion.
Branch VS Private Limited Company (Sdn. Bhd.)
As for a branch office, it is considered an extension for a parent Company. Meaning to say, they are not allowed to:
Use different name from parent Company
Use different business activities from parent Company
Normally, a branch is used in order for the parent Company to test the market in a foreign land. The branch will be 100% owned by the parent Company. Similar to subsidiary, a branch office has a more complex annual compliance that they need to meet. They are required to file annual return, audited financial statement for branch as well as the audited financial statement of parent Company.
As for tax treatment, branches are not given the opportunity to enjoy local tax benefits. They are treated as a non-resident entity which will be charged at 24% flat rate.
Compared to private limited Company, an entrepreneur has the chance to explore other market and has the privilege to enjoy a simpler annual compliance.
Types of businesses foreign investors are not allowed to venture into post Covid-19
According to The Star newspaper published on 03 September 2020, the Kuala Lumpur City Hall (DBKL) has listed 20 types of businesses which are off limits to foreigners in order to support the local businesses during pandemic time. The list of businesses is as follows:
- Hypermarket/Supermarket/Mini Mart
- Sundry shop
- 24 hours convenience store
- Petrol station
- Wet market
- Bag shop
- Jewellery shop
- Car workshop
- Computer and accessories shop
- Laundry services
- Hair salon and barber shop
- Five-foot-way kiosk
- Food and drinks kiosk
- Teak wood furniture shop
- Retail shop (clothing and shoes)
- Mobile phone and prepare phone card shop
- Herbal and Chinese medicine shop (KKM Approved)
According to the mayor, this ruling only applies to new applications and will not impact the existing ones. The regulation not only aimed to control number of foreign-owned businesses that has impacted the revenues of local businesses but also to control foreigners without legitimate permits in conducting such businesses.
However, foreign investors are still able to venture into other industries available in Malaysia.
Industries urge for foreign investment in Malaysia
Based on the information above, potential foreign investors might re-think of their strategy to expand their business from their home country into Malaysia. Worry not as Malaysia still offers many other industries available for you to venture into. The Malaysian Investment Development Authority (MIDA) has also listed some incentives for new investments. Some of the industries are:
1. Manufacturing sector
A Company will be granted a Pioneer Status (PS) to enjoy five years partial exemption from the payment of income tax. They are only taxable on 30% of its statutory income with the exemption period commencing from its Production Day.
Unabsorbed capital allowances incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the Company. Accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the Company for a period of 7 consecutive years.
Investment Tax Allowance
A Company granted with Investment Tax Allowance (ITA) is entitled to an allowance of 60% on its qualifying capital expenditure (factory, plant and machinery approved for the project) incurred within 5 years from the date of first qualifying capital expenditure is incurred.
The Company may also offset this allowance against 70% of its statutory income for each year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised. The remaining 30% of its statutory income will be taxed at the prevailing company tax rate (between 17% to 24%).
2. Agricultural sector
Incentive for food production
Specific incentives are introduced to attract investment into food projects both at farm level as well as at production/processing level. These will enhance the supply of raw material for the food processing sector, thus reducing reliance on imports of such raw materials.
- A Company which invests in its subsidiary company engaged in food production activities can be considered for tax deduction equivalent to the amount of investment made in that subsidiary for that year of assessment
- The subsidiary Company undertaking food production activities can be considered for full tax exemption on its statutory income for 10 years of assessment for new project or 5 years of assessment for expansion projects
Incentive for Production of Halal Product
To encourage new investments in halal food production and to increase the use of modern and state-of-the-art machinery and equipment in producing high quality halal food that comply with international standards, companies which invest in halal food production and has already obtained halal certification from JAKIM are eligible for the investment tax allowance (ITA) of 100% of qualifying capital expenditure incurred within a period of 5 years.
3. Biotechnology industry
- An exemption of 100% statutory income derived from a new business or an expansion project that is equivalent to an allowance of 100% qualifying capital expenditure incurred for 5 years
- Concessionary tax rate of 20% on statutory income from qualifying activities for 10 years upon expiry of tax exemption period
- Exemption from import duty and sales tax on raw materials/components/machineries/equipment
- Double deduction on expenditure incurred for R&D
- Double deduction on expenditure incurred for promotion of exports