Free Trade Zones in Malaysia: Purpose & Types

8 min read|Last Updated: April 9, 2024|

There are a lot of advantages for businessmen to start a business in Malaysia. Not only does the Malaysian government offers great tax incentives and reliefs for newly incorporated Companies, but there also are countless business options one can choose from to operate in Malaysia.

Besides this, operating a free trade makes Malaysia more appealing to businessmen seeking to run a business here.

Definition of Free Trade Zone

According to Britannica, a free trade zone (also known as a free port) is basically an area where bundles of items may be landed, handled, manufactured, or reconfigured and re-exported without any intervention from the customs authority. Once the item is moved to a consumer within the country in which the zone is located, they become the subject to custom duties.

Purpose of Free Trade Zone

The purpose of a Free Trade Zone is to remove from a seaport, airport, or border that caused high tariffs and complex custom regulation. One of the benefits of having free trade zone is the quicker turnaround of ships and planes through the reduction of formalities customs examinations and the ability to fabricate, refinish, and store goods freely.

Digital Free Trade Zone in Malaysia

Malaysia not only offer Free Trade Zone such as Pasir Gudang (Manufacturing), Port Klang (Logistics) or Bayan Lepas (Manufacturing), the country also has a Digital Free Trade Zone (DFTZ).

The Digital Free Trade Zone is a strategic national initiative, led by the Malaysia Digital Economy Corporation (MDEC) to drive seamless cross-border trade through digitalisation and to facilitate access of local SMEs to vast opportunities in global markets via e-commerce.

The purpose of Digital Free Trade Zone is to intensify Malaysia’s participation in cross border e-commerce. It focuses on driving export for local SMEs capitalising on digitalisation and opportunities in e-commerce and attracting investment to set up regional e-Commerce fulfilment hubs in Malaysia.

Types of Free Trade Zone in Malaysia

In general, there is a total of 3 types of Free Trade Zones in Malaysia. They are:

1. Free Industrial Zones (FIZ)

Free Industrial Zone (FIZ) is specifically for importing raw materials for manufacturing of products for exportation purposes. A company that wishes to set up in a FIZ must export a minimum of 80% of its output and raw materials unless it has received approval from the Ministry of International Trade and Industry to reduce this requirement to 60%.

Setting up in a FIZ allows duty-free imports of specific raw materials and equipment, as well as an exemption from sales tax, excise tax and GST. Some of the popular FIZs include the Bayan Lepas Free Industrial Zone and the Pasir Gudang Free Industrial Zone.

2.Free Commercial Zones (FCZ)

Free Commercial Zone is specifically for importing general goods for subsequent sorting, mixing, re-bagging, re-labeling, or further processing into finished products for re-export.

Most FCZs in Malaysia are located near ports to facilitate the transport of goods and products. Like FIZs, FCZs are exempted from customs duties, sales tax, and service tax for all imports that are re-exported or re-packaged for sale to other consumers.

Some popular FCZs include the Port of Tanjung Pelepas Free Zone, Port Klang Free Zone, and the Digital Free Trade Zone.

3. Service Free Zone

The Service Free Trade Zone provides services to operators and Companies operating outside the Free Trade Zone.

Benefits of Free Trade Zone in Malaysia

1. Deferral, reduction, and elimination of certain types of duties

Free Trade Zones in Malaysia have allowed most duty deferral of any kind of custom program. Hence, it makes it a smoother process for Companies to bring goods into the Free Trade Zones without duties and fees. This also includes exemptions from inventory tax.

2. Duty exemption on re-exports

Free Trade Zones are considered outside the commerce of Malaysia. Hence, Company importing components or raw materials into the Free Trade Zones will not be liable to pay custom duty until it enters the receiving country.

3. Duty elimination on waste, scrape, and yield loss

Since a manufacturer operating in Free Trade Zones does not pay duties on imports until goods leave the Free Trade Zones, it is essentially paying for duties on the raw materials after it is processed.

4. Improved compliance, inventory tracking and quality control

Free Trade Zones in Malaysia allow Companies to work closely in tracking their inventories. By bringing in goods into the Free Trade Zones warehouse a Company owns, it may identify and classify goods at the warehouse instead of at the port.

5. Indefinite storage

A Company can hold its goods indefinitely in Free Trade Zone until a port opens or if there are quotas on the goods.

6. Waived customs duties on zone-to-zone transfers

Free Trade Zones in Malaysia can be used to manage transhipping operations, saving money on manufacturing processing fees. While Companies in Malaysia focused on using Free Trade Zones for export purposes, it can also be used for crossdocking and transferring goods from one Free Trade Zones to another without the need to pay custom duties.

Malaysia Tax Expert Lera

Drawbacks of Free Trade Zones in Malaysia

While there are many advantages of the Free Trade Zones in Malaysia, one should also consider the disadvantages:

  • Comprehensive rules and regulations to abide to
  • Customs department may conduct regulatory audits whenever they deem fit
  • High paid up capital requirement depending on business activities the Company wish to venture into
  • Specific permit and licenses are required which may take quite a while to secure
  • Must maintain physical office in the Free Trade Zones (increase operating cost in annual financial report)

Free Trade Zone in Malaysia 2023

When it comes to registering a Company within Malaysian’s Free Trade Zones, such entities will benefit from multiple taxes, and it also allows foreign investors to export their products across Southeast Asian markets smoothly. The Free Trade Zones in Malaysia are known for foreign entities intending to use Malaysia as a regional manufacturing or distribution case.

Hence, Malaysia has several Free Trade Zones for specific activities:

Port Klang Free Zone

  • It is located in Port Klang town, Selangor and has the largest gateway by seas into Malaysia
  • It is a 1,000-acre free industrial and commercial zone providing specifically international cargo distribution and consolidation facilities
  • Permits local and international Companies to establish manufacturing facilities to engage in production of goods for export purposes
  • It is most suitable for investors and entrepreneurs to establish either a manufacturing base, warehousing, or international cargo distribution

Port of Tanjung Pelepas Free Zone

  • It is in South-West Johor between the intersection of the East and West international trade routes nearing Malaysia-Singapore second crossing
  • It is 500 hectares of land for warehousing, distribution, and logistics activities as well as light, medium and heavy manufacturing industry
  • It offers modern state of the art facilities for storage of goods and merchandise for redistribution, packaging, repackaging, grading and repair
  • It is most suitable for investors looking to establish manufacturing base for export-oriented products intended for international export

Why establish an entity within the Malaysia Free Trade Zone?

There are many advantageous for an entrepreneur to consider establishing an entity within the Free Trade Zones in Malaysia. Some of them are:

  • Tax free environment
  • Close proximity to deep seaports, airports, highways and railways
  • Malaysian government does not impose stringent foreign exchange controls
  • Enjoy simplified and flexible import export procedures and cost-effective measures for industrial, manufacturing, and commercial activities
  • Absence of customs duty on products imported into free zone for re-exportation purpose

Comparison of all Free Trade Zones available in Malaysia 2023

There are slight differences for each Free Trade Zones available in Malaysia. You may read in detail here:

Malaysia free zones Pasir Gudang, Johor Port Klang, Selangor Port Tanjung Pelepas, Johor Bayan Lepas, Penang Kulim Hi-Tech Park, Kedah
Ranking of preference 1 2 3 4 5
Total 1 year engagement set up cost USD$ 20,050 USD$ 20,050 USD$ 20,050 USD$ 20,050 USD$ 20,050
Total annual cost USD$ 6,470 USD$ 6,470 USD$ 6,470 USD$ 6,470 USD$ 6,470
Minimum paid up capital USD$ 125,000 USD$ 125,000 USD$ 125,000 USD$ 125,000 USD$ 125,000
Suitable industry Manufacturing Logistics Logistics Manufacturing Hi-Tech manufacturing
Total engagement period 3 months 3 months 3 months 3 months 3 months
Exempt from corporate tax and GST? Depends on business activities Depends on business activities Depends on business activities Depends on business activities Depends on business activities
Exempt from import export tax duty Depends on business activities Depends on business activities Depends on business activities Depends on business activities Depends on business activities
100% foreign owned? Yes Yes Yes Yes Yes
Manufacturing allowed in free zone? Yes Yes Yes Yes Yes
Branch office or LLC recommended? LLC LLC LLC LLC LLC
How long to complete incorporation? 5 weeks 5 weeks 5 weeks 5 weeks 5 weeks
Require special permit and license? Yes Yes Yes Yes Yes
How long to secure license? 3 months 4 months 3 months 3 months 4 months
Must maintain physical office? Yes Yes Yes Yes Yes
Corporate tax rate on local sales? 24% 24% 24% 24% 24%
Annual audit financial statement? Yes Yes Yes Yes Yes
Government grants for manufacturing? Yes Yes Yes Yes Yes
Average customs tax on imports? 7.7% 7.7% 7.7% 7.7% 7.7%

Free Trade Zones

Free Trade Zones in Malaysia offer a lot of advantage for those keen in venturing into the export import and manufacturing businesses. There are also a lot of procedure and jurisdiction business owners must understand before expanding their business in Malaysia. To ensure all are in order, Paul Hype Page offers services such as business incorporate in Malaysia, corporate secretarial, accounting services and taxation services.

Licensed manufacturing Warehouses (LMW)

Business owners that are unable to set up a company in an FTZ can opt for a Licensed Manufacturing Warehouse (LMW) instead. It is also known as a Manufacturing Bonded Warehouse and primarily caters to export-oriented industries.

LMWs enjoy the same benefits as factories operating in a FIZ in Malaysia. To be eligible to apply for an LMW company, the company must export at least 8-0% of its output and have raw materials or components that are mostly imported.


Come down to our office or connect with us virtually to discuss your company incorporation, and other corporate services today.


What is the purpose of free zone?2024-04-04T12:55:47+08:00

Free Trade Zone optimizes the movement of goods between individual countries in the zone and offers opportunity to either secure or disallow imports from third party countries.  

Does free trade benefits local economies?2024-04-04T12:55:54+08:00

Free trade will lead to higher economic output as an increase in demand for local goods results in higher exports. This in turn creates more jobs for local economy and the country enjoys higher economic growth 

How does the Free Trade Zone benefit the importers and exporters in Malaysia?2024-04-04T12:55:56+08:00

The Free Trade Zone are established to increase the exports and boost the country foreign direct investment. These zones have the advantage to provide low-cost supply and diminish unemployment and gain more exchange earnings 

What are the benefits of trading in the Free Trade Zone?2024-04-04T12:55:59+08:00

Free Trade Zones offers unique opportunity to defer, reduce or eliminate customs duties on products resulting to significant cost savings. Custom duties will come into effect once the product leaves the Free Trade Zone and enters a local market 

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  1. Profile Picture For Timothy
    Gayatri Pandey July 30, 2022 at 9:43 pm - Reply

    Dear Team,

    I am looking to set up an Agriculture Trading company in Malaysia Freezone and am looking for partners who can assist and guide us with the process.
    It’s a bit urgent, and therefore we require you to share the details with us asap:

    Can you please share relevant details with regards to the same:

    Can I have a company as a foreigner with 100% ownership?
    Is there any limit to the number of shareholders?
    Is physical office mandatory? Can I operate using a virtual office?
    What are tax laws?
    What’s the cost of incorporation & renewal?
    Do I need to be physically present to start the company?
    How many days does it take for company formation?
    What are the documents required?
    Do I need to submit my book of accounts to the authority?
    Is there any additional expense I need to incur to operate my company?

    Please share all details regarding setting up a company and bank account; if you can organise a call with one of your Consultants, it would be appreciated.

    • Profile Picture For Timothy
      Paul Hype Page August 2, 2022 at 11:07 am

      Hello Gayatri,

      Thanks for reaching out to us. Much appreciated if you schedule a call appointment via our website or call us directly instead so that we will be able to understand your situation and address your queries easily.

      Looking forward to hearing back from you

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