Can Foreigners Open Company in Malaysia?

Most entrepreneurial-minded small business owners who are looking to expand their business to foreign countries will find it difficult to resist wanting to establish a business in the very bustling commercial environment in Malaysia. 

The answer is a big yes. According to the Company Act 2016, a foreigner is allowed to incorporate a certain type of business entities and solely own said entity so long as they have a legitimate residential address in Malaysia.

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:

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.

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:

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.

As for a branch office, it is considered an extension for a parent Company. Meaning to say, they are not allowed to:

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.  

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:

1. Hypermarket/Supermarket/Mini Mart 
2. Sundry shop 
3. 24 hours convenience store 
4. Petrol station 
5. Wet market 
6. Cybercafe 
7. Bag shop 
8. Spa 
9. Jewellery shop  
10. Car workshop 
11. Computer and accessories shop 
12. Laundry services 
13. Hair salon and barber shop 
14. Five-foot-way kiosk 
15. Food and drinks kiosk 
16. Restaurants/Bistro/Café 
17. Teak wood furniture shop 
18. Retail shop (clothing and shoes) 
19. Mobile phone and prepare phone card shop 
20. 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.  

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:

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. 

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%).

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 

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. 

• 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

Malaysia is a country moving towards high-income country by the year 2030. One of the approaches moving towards that goal is by granting direct tax incentives partially or total relief from income tax payment for a specified period for foreign investments venturing into specific industries.

It is a norm for potential foreign investors to trust hearsay they read up from numerous websites pertaining incorporating a Company in Malaysia which leads to misinterpretation. It normally relates to the items below:

The steps to incorporate a Company such as private limited Company (Sdn. Bhd.) are the same for both local and foreign alike.

The registration of a Company can be done online by the appointed licensed Company Secretary without the need of you to come down to Malaysia.

Once a Company is incorporated, they are allowed to open a bank account. Due to the restriction of travelling these days, most banks have opted to communicate online with most of their clients. This shows how committed the bankers are in easing the bank account opening procedure from their clients, regardless of where they are. 

For local Malaysian, opening a corporate bank account can be slight easier compared to foreigner. This is because we have an identity card or known as “MyKad” which is normally used for any official business made by the citizen. 

The banker is able to run a background check by keying in the unique 12 number associated with the “MyKad” to ensure the individual is not an exposed person as well as their credit score is clean.  

A credit score of a Malaysian citizen can be checked in two systems which are:

A CCRIS report portrays information regarding outstanding payments, special attention accounts as well as a loan application status made by a Malaysian. Whereby a CTOS report provide information on legal matters such as bankruptcy status, legal actions, and case status. It also portrays a Malaysian involvement in businesses and corporations. If a Malaysian CCRIS and CTOS report is clean, a corporate bank account opening will be smooth and might only take around 1 to 2 weeks to open. 

However, the same cannot be said to a foreigner. Bankers normally tap into their international database to ensure the foreign clients have a clean background. Aside from that, there are some nationalities where Malaysia bank policy does not allow to open a bank account. Some of them are:

The central bank of Malaysia (BNM) has issued a direction stating that “no person in Malaysia shall undertake or engage in any dealing or transaction with or involving a Specified Person.” The direction also stated that “no person in Malaysia shall undertake or engage with any person in any dealing or transaction using or involving Restricted Currency.” 

The term “Specified Person” and “Restricted Currency” refers to the countries sanctioned as involved with political unrest or civil war or high-risk countries.

However, if your country is not listed as a high-risk country by the central bank of Malaysia (BNM), the procedure should be more straightforward after the bankers ensure your background check is clear and the business plan is encouraging.

It is common knowledge that once a Company is incorporated, they will need to apply for some licenses before they can start operating their business. Most Company who wishes to rent an office to operate will need to apply business premise license and signboard license from the respective state authorities. 

This applies for both local and foreign owned Companies alike. The cost depends on the square feet of the office rented. A floor plan information is needed to submit for the City Hall to assess the fee based on the size. A starting cost from MYR 100 to MYR 1,000, depending on the finalisation of City Hall assessment.  

However, there is a distinct difference in paid-up capital if a Company ventures into sector/industry specific businesses. For example, the Company ventures into wholesale business. A local owned Company can apply the Wholesale, Retail and Trade (WRT) license with only paid-up capital of MYR 250,000. For a 100% foreign owned Company, in order for them to apply the WRT license, they need a MYR 1,000,000 paid-up capital.  

This shows that even though the Company need to apply a sector/industry specific business license, they still do not need to appoint a local nominee director within the Company, unless stated otherwise by the local authority.

The Employees Provident Fund (EPF) profile must be registered by a Company within 7 days when Company first hires an employee at any available counter or online via the official website. The Company will need to compile these documents for registration application: 

• Form KWSP 1 (available in EPF website) 
• Section 14 – Superform 
• Section 15 – Notice of registration 
• Section 17 – Certificate of Incorporation 
• Copy of director passport/NRIC 

Once registration is done, the Company will be given: 

• Employer’s reference number 
• Notice of employer registration 
• Employer’s registration certificate (to be displayed at employer’s premises) 

Registering the EPF is mandatory for employers to make the required contribution to employee retirement benefit scheme based on their monthly wages. 

Once EPF is registered, the Company is also liable to register Social Security Organisation (SOCSO) profile. This must be done within 30 days when Company first hires an employee via email application to idportalperkeso.gov.my Similar to registration of EPF, the Company will need to compile these documents for registration application: 

• Employer registration form 1 (available in SOCSO website) 
• Employee’s registration form 2 (available in SOCSO website) 
• Section 14 – Superform 
• Section 15 – Notice of registration 
• Section 17 – Certificate of Incorporation 

The SOCSO profile is also mandatory as it was founded to provide the employees in private sector with social security protection in accordance with the Employees’ Social Security Act 1969. 

Commonly, once a Company begin hiring employees, they might appoint an internal Human Resource team or a third-party human resource team to handle such registration on behalf of the Company.  

Next, registration of Company profile with Inland Revenue Board (LHDN). Not only it is crucial for a Company to complete its annual tax filing, but the Company is also compulsory to perform the monthly tax deduction (MTD) against the employees’ salaries.  

A MTD is an income tax deduction mechanism where a certain amount is deducted from the employee’s current remuneration package. Purpose of these deductions is to minimize the financial burden on employees of paying lump sum when the actual tax amount has been determined by end of the year.  

This profile is normally the last to be created because it will need the information below: 

• Number of employees (including director) 
• Number of employees with annual income less than MYR 30,000 
• Number of employees with annual income more than MYR 30,000 
• Company SOCSO registration number 
• Company EPF registration number 

Currently, the Company Act 2016 has eased the annual compliance requirement for private limited Company (Sdn. Bhd.). All private limited Company (Sdn. Bhd.) local and foreign owned alike must abide to the annual compliance filing as below:

In Malaysia, the Malaysian Development Investment Authority (MIDA) has mapped out several different visa options for entrepreneurs depending on the circumstances.   

If you are planning a long-term stay in Malaysia, the Malaysia My Second Home (MM2H) Programme is a great option. They are allowed to stay and invest in Malaysia for a long period of time. However, these participants are not allowed to work/be employed while staying in Malaysia except those who were issued with special work passes.  

Depending on the type of job and skills, different working passes are issued when obtaining a work permit.

Any private limited Company (Sdn. Bhd.), local and foreign alike is able to apply an Employment Pass for their foreign candidates. You only need to apply for a business license if the authority deems the business is listed for such licenses. The estimate duration to apply an Employment Pass can be 6 months or more.

In Malaysia, the tax structure is territorial. Residents and non-residents alike are taxed on their Malaysian-sourced income while any foreign-sourced income is normally not taxable. This is applicable to both local and foreign owned Companies alike.  

Based on the year assessment (YA) 2020, the tax rate is as follows:

However, for Company with paid-up capital > than MYR 2.5 million, the tax rate is flat at 24%.

After venturing into Corporate Specialist service for the past 10 years, we understand the auto conclusion made by foreign investors when it comes to expanding their business in a foreign land. The feeling of alarmed, lack of local knowledge as well as the hearsay from numerous websites out there can definitely make you think multiple times before venturing into something new. And that is okay. Paul Hype Page & Co. are always ready to serve our clients at the best of our capabilities. 

Based on our observation, to expand your business in Malaysia is still quite easy compared to its neighbouring countries such as Thailand and Indonesia. The Malaysia government welcomes foreign businessmen by making it relatively easy for them to incorporate a Company, especially a private limited Company (Sdn. Bhd.) in Malaysia.  

The requirements, annual compliance as well as the cost is the same for both local and foreigners alike. Even the tax structure is beneficial for a private limited Company (Sdn. Bhd.) because it uses a territorial tax structure where all Malaysian sourced income is taxable while foreign sourced income is not. 

This not only shows the transparency of the Malaysia government agencies to ensure the incorporation process for both local and foreigners are similar but also shows they are welcome in the country.