How to Start a Company in Malaysia as a Foreigner?

Most entrepreneurial-minded small business owners who are looking to expand their business to foreign countries often see Malaysia as a great place to start a company. Its bustling commercial environment and low cost of living make it an attractive destination for foreigners to live and work in the country.

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.

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

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

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 to incorporate and maintain, and easy registration. 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 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 higher.

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:

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 tax treatment, branches are not given the opportunity to enjoy local corporate tax benefits. They are treated as a non-resident entity whereby the corporate tax rate will be 24% flat.

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 corporate tax benefits. They are treated as a non-resident entity whereby the corporate tax rate will be 24% flat.

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 the pandemic.

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

• Car workshop
• Computer and accessories shop
• Laundry services
• Hair salon and barber shop
• Five-foot-way kiosk
• Food and drinks kiosk
• Restaurants/Bistro/Café
• 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.

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 

The government is also encouraging 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.,
Ccompanies 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.

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 things that you will need to do to be fully operational.

Once a Company is incorporated, you can proceed to open a corporate bank account. Due to the restriction of travelling since the pandemic, most banks have opted to communicate online with most of their clients.

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:

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

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.

After setting up a company in Malaysia as a foreigner, you may look to hire local employees. 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.

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.

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.

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

Next, you will need to register your 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.

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

In Malaysia, the Malaysian Development Investment Authority (MIDA) has mapped out several work visas depending on the circumstances. The most common is the Malaysia Employment Pass.

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 corporate tax rate is as follows:

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

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.