Step by Step Guide for Foreigners to Start a Business in Malaysia

Want to start a business in malaysia as a foreigner? Entrepreneurial-minded small business owners eyeing international expansion, often find Malaysia an appealing destination to start a company. Due to its vibrant commercial environment, and comparatively lower cost of living.

Moreover, in addition to tax breaks and streamlined registration processes, Malaysia offers incentives and support for foreign businesses. These factors collectively make it an attractive choice for entrepreneurs seeking to establish a presence in Southeast Asia. Additionally, the country’s strategic location and robust infrastructure further enhance its appeal as a business destination.

Can a foreigner own a business 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 entity and solely the entity so long as they have a legitimate residential address in Malaysia.

Which type of business structure is best suited for foreigners starting a company in Malaysia?

The recommended business structure for foreigners starting a company in Malaysia is a private limited company, also known as the term Sdn. Bhd.

Here are some comparisons between private limited companies, and other business structures in Malaysia to highlight why private limited company is the best option.

Sole Proprietorship and Partnership VS Private Limited Company (Sdn. Bhd.)

As many might know, most Malaysians prefer to incorporate a sole proprietorship or partnership compared to a private limited Company (Sdn. Bhd.) due to the cheap cost to incorporate and maintain, and easy registration. However, such an option is not open for foreigners as only Malaysian citizens or Permanent Residents (PR) are allowed to operate such a business structure.

Other drawbacks that these two business structures are:

• Owner/Partners are liable towards all the debts accumulated by the business
• Creditors have the power to sue owners/partners if they file for bankruptcy to claim the debt owed
• It is not so easy to encourage third-party investors or bankers to fund the business

While the cost and annual compliance requirements for maintaining a sole proprietorship or partnership may indeed be lower compared to a private limited company (Sdn. Bhd.), it’s crucial to consider the higher risk of personal bankruptcy for the owner or partners in these structures.

Subsidiary VS Private Limited Company (Sdn. Bhd.)

A subsidiary and a private limited Company (Sdn. Bhd.) are quite similar. 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:

• Board of resolution from the 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
• Company particulars of the parent Company certified by the appointed Company Secretary

Incorporating a subsidiary in Malaysia differs from incorporating a private limited company (Sdn. Bhd.), in that the incorporation fee is dependent on the authorized share capital. For instance, with an authorized share capital of MYR 400,000, the incorporation fee is MYR 1,000. The fee increases with higher authorized share capital.

As for tax treatment, branches are not allowed to enjoy local corporate tax benefits. Thus, they are treated as a non-resident entity whereby the corporate tax rate will be 24% flat.

Branch VS Private Limited Company (Sdn. Bhd.)

As for a branch office, it is considered an extension of a parent Company. That is to say, they are not allowed to engage in any bank account opening without conforming to specific regulations.

• Use a different company name that is unique and reflects your business activities for the Malaysian market. from parent Company
• Use different business activities from the parent Company
• Use for long-term

Typically, a branch serves as a means for the parent company to assess and explore foreign markets. Fully owned by the parent company, a branch office operates similarly to a subsidiary but with distinct annual compliance obligations. These obligations entail the filing of an annual return, audited financial statements for the branch itself, as well as audited financial statements for the parent company.

As for tax treatment, branches are not allowed to enjoy local corporate tax benefits. Because they are treated as a non-resident entity whereby the corporate tax rate will be 24% flat.

Best Industries for Foreign Investments in Malaysia

Based on the information above, potential foreign investors might re-think their strategy to expand their business from their home country into Malaysia. Do not worry, as Malaysia still offers numerous other industries available for you to venture into. Additionally, the Malaysian Investment Development Authority (MIDA) has listed some incentives for new investments.

Some of the industries are poised for growth, attracting foreign investments and potential for permanent residency for investors.

1. Manufacturing sector

Pioneer Status

A company granted Pioneer Status (PS) in Malaysia benefits from a five-year partial exemption from income tax. During this period, starting from its Production Day, only 30% of its statutory income is taxable. Additionally, any unabsorbed capital allowances and accumulated losses incurred during the pioneer period can be carried forward and deducted from the company’s post-pioneer income for subsequent years. This provision allows companies to offset previous losses and investment costs against future taxable income, thereby facilitating long-term financial sustainability and growth. Moreover, it encourages investment in innovation and development within the Malaysian business landscape.

Investment Tax Allowance

A company awarded Investment Tax Allowance (ITA) in Malaysia receives a 60% allowance on qualifying capital expenditure, including approved factory, plant, and machinery expenses incurred within five years from the initial qualifying expenditure date. As a result, this allowance can be offset against 70% of the company’s statutory income for each assessment year. Any unused allowance can be carried forward to subsequent years until fully utilized, possibly affecting financial strategies for ASEAN companies. The remaining 30% of the statutory income is subject to taxation at the prevailing company tax rate, which ranges between 17% to 24%. This incentive aims to encourage investment in capital assets and boost economic growth by providing tax relief on qualifying expenditures for eligible companies.

2. Agricultural sector

Incentive for food production

Specific incentives are introduced to attract investment into food projects both at the farm level as well as at the production/processing level. Consequently, these incentives will enhance the supply of raw materials for the food processing sector, thereby 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 projects or 5 years of assessment for expansion projects

Incentive for Production of Halal Product

The government is also actively encouraging new investments in halal food production and, consequently, aiming to increase the use of modern and state-of-the-art machinery and equipment in producing high-quality halal food that complies with international standards. Moreover, companies that invest in halal food production and have already obtained halal certification from JAKIM are conversely eligible for the investment tax allowance (ITA) of 100% of qualifying capital expenditure incurred within 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 the tax exemption period
• Exemption from import duty and sales tax on raw materials/components/machinery/equipment
• Double deduction on expenditure incurred for R&D
• Double deduction on expenditure incurred for the promotion of exports is a significant advantage for companies looking to set up a business in Malaysia.

Malaysia is a country moving towards a 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, which may include eligibility for permanent residency under certain conditions.

Company Types for Foreigners

The most prevalent business structure favoured by foreigners seeking to establish a company in Malaysia is the Private Limited Company (Sdn Bhd). You can find out more about the requirements to set up a Sdn Bhd here.

Below are also other options that they are allowed to set up:

• Branch office
• Representative office setup is an initial step in exploring business opportunities in Malaysia, requiring adherence to company registration protocols for foreign entities.
• Private limited company
• Sole proprietorship
• Partnership
• Limited liability partnership

What to do after setting up a company in Malaysia as a foreigner?

After starting a company in Malaysia as a foreigner, you will need to adhere to the local regulations that you may not be familiar with. Here, you will find the steps and the business plan that you will need to follow to be fully operational.

Step 1: Opening a Corporate bank account

Once a company is incorporated, the next step typically involves opening a corporate bank account. Amid travel restrictions imposed by the pandemic, most banks have transitioned to online communication with clients. Bankers often utilize their international databases to verify the backgrounds of foreign clients, a practice that underscores the importance of transparency in company incorporation. However, it’s important to note that Malaysia’s bank policies may prohibit certain nationalities from opening bank accounts. For examples:

• Israel
• Iran
• Iraq
• Serbia

Step 2: Business license

Following incorporation, companies typically require business licenses before commencing operations, including business premise and signboard licenses from state authorities if renting an office. Notably, sector-specific businesses may necessitate distinct paid-up capital requirements.

For instance, when a local company ventures into the wholesale business, it can obtain a Wholesale, Retail, and Trade (WRT) license with a paid-up capital of MYR 250,000. Conversely, however, a 100% foreign-owned company seeking the same license must have a MYR 1,000,000 paid-up capital. Importantly, unless mandated by local authorities, foreign-owned companies are not obliged to appoint a local nominee director despite applying for sector-specific business licenses. This aspect underscores the regulatory distinctions between local and foreign entities, highlighting the nuances of doing business in Malaysia.  This aspect makes Malaysia an attractive location for setting up a business as a foreigner, offering flexibility and ease of operation.

Step 3: Registration of EPF and SOCSO

After establishing a company in Malaysia as a foreigner, the process of hiring local employees entails registering their Employees Provident Fund (EPF) profile within 7 days of the first employment. This can be done either at a physical counter or online through the official website, ensuring compliance with regulations and facilitating seamless integration into the workforce. EPF registration is mandatory for employers to contribute to the employee retirement benefit scheme based on their monthly wages. Subsequently, following the establishment of the company, the next step entails registering the Social Security Organisation (SOCSO) profile within 30 days of hiring the first employee. This can be done via email application to idportalperkeso.gov.my.

Furthermore, SOCSO registration is obligatory as it provides social security protection to private sector employees by the Employees’ Social Security Act 1969. Additionally, compliance with this requirement ensures the welfare and security of the workforce, promoting a conducive working environment.

You can read more about EPF, SOCSO, and other employee contributions in our article here.

Step 4: Registration with Inland Revenue Board (LHDN)

Following the establishment of your company in Malaysia, the next step involves registering your company profile with the Inland Revenue Board (LHDN). This registration is essential not only for completing annual tax filings but also for mandatory monthly tax deductions (MTD) from employees’ salaries. MTD, a mechanism for income tax deduction, aims to lessen the financial burden on employees by deducting a portion of their current remuneration package. These deductions aim to alleviate the need for employees to pay a lump sum when the actual tax amount is determined at the end of the year. Consequently, this system provides employees with a more manageable approach to fulfilling their tax obligations.

Step 5: Annual Business Reporting

Currently, the Company Act 2016 has eased the annual business reporting requirement for private limited companies. Some of the filings to do include:

1. File annual return according to the Company anniversary date – date of when the Company was initially incorporated. Example: The Company was incorporated in 21.07.2018, the first annual return must be filed by 21.07.2019 or before 20.08.2019 (30 days). Late filing penalty may be imposed if the filing is done after 30 days.
2. Lodge unaudited financial statement with the Companies Commission of Malaysia – Suruhanjaya Syarikat Malaysia (SSM) is the authority for company registration and shareholder information in Malaysia.. This type of business entity is exempted from preparing an audited report if they meet one of the criteria:
   • Dormant companies
   • Zero-revenue companies
   • Threshold-qualified companies – Revenue < MYR 100,000, total assets < MYR 300,000 and employee < 5 people

File the annual tax return filing with Inland Revenue Board – Lembaga Hasil Dalam Negeri (LHDN) even though the Company was deemed dormant for the annual period

Application of work visa – Employment Pass

Basically, in Malaysia, the Malaysian Development Investment Authority (MIDA) oversees various work visa options tailored to different circumstances, with the Malaysia Employment Pass in particular being the most common. Besides for individuals seeking a long-term stay with the opportunity to invest, the Malaysia My Second Home (MM2H) Programme is a particularly excellent option. Participants in this program are permitted to reside and invest in Malaysia for an extended duration. However, it’s important to note that MM2H participants are generally not allowed to work or be employed in Malaysia, unless they have been issued special work passes by the relevant authorities.

Depending on the type of job and skills, various working passes are issued when obtaining a work permit. These passes are tailored to the specific requirements and qualifications of the applicant, ensuring appropriate authorization for employment in Malaysia.

• Employment Pass: This pass is issued to employees with specific skills, usually for technical or managerial jobs. The minimum period is usually 2 years.
• Temporary Employment Pass: Issued for employment for less than 2 years or for jobs with a monthly salary less than MYR 5,000
• Professional Visit Pass: Issued to foreign nationals who remain employed by the company in the home country but are required by a Malaysian company to provide certain services for a period up to 6 months.

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, making it an important consideration for those seeking permanent residency in Malaysia.

Tax Structure in Malaysia

In Malaysia, the tax structure is territorial. Although, both residents and non-residents alike are taxed on their Malaysian-sourced income, whereas any foreign-sourced income is normally not taxable. Additionally, this principle applies uniformly to both local and foreign-owned companies alike. Moreover, it underscores the equitable treatment of all entities operating within Malaysia’s tax jurisdiction.

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

1. Company with paid-up capital < than MYR 2.5 million
2. On the first MYR 600,000 profit is taxed at 17%
3. Subsequent balance will be taxed at 24%

However, for companies with paid-up capital exceeding MYR 2.5 million, the tax rate is flat at 24%. Additionally, this provision applies irrespective of the company’s size or industry.

Our thoughts

The requirements, annual compliance obligations, and costs for establishing a private limited company (Sdn. Bhd.) in Malaysia, tax regulations are consistent for both local and foreign entities. Furthermore, the tax structure is advantageous for such companies, as it utilizes a territorial tax system. Under this system, only income sourced within Malaysia is subject to taxation, while foreign-sourced income remains untaxed.. This demonstrates the transparency of Malaysian government agencies in ensuring a level playing field for incorporation processes between local and foreign entities, ultimately showcasing the country’s welcoming attitude towards foreign investment.