Tax Incentives in Malaysia: Types, Eligibility, and 2024 Updates

Malaysia offers various tax incentives to attract foreign and local investments, specifically in manufacturing, agriculture, tourism, approved services sectors, R&D, training, and environmental protection activities. These incentives are provided through profits exemptions, allowances for capital expenditures, or double expense deductions.

The tax incentives are available under several laws:

• Promotion of Investments Act 1986
• Income Tax Act 1967
• Customs Act 1967
• Excise Act 1976
• Free Zones Act 1990

In this blog, we will discuss the major types of tax incentives in Malaysia and the business sectors eligible for these incentives.

Types of Tax Incentives

There are many incentives, but we will talk about the following major incentive schemes.

Pioneer Status (PS)

Pioneer Status (PS) is a major tax incentive provided by the Malaysian government to attract investments in specified businesses involved in promoted activities or producing promoted products. 

PS Tax Incentive Details

• Form: Direct exemption of profit from the payment of income tax.
• Duration: Typically, 5 years, extendable to 10 years for certain companies.
• Exemption Rate: Generally, up to 70% of a company’s statutory income. Some companies may qualify for a 100% exemption.

Eligibility Criteria PS is available to companies engaged in activities or producing products that are deemed promoted by the Malaysian Investment Development Authority (MIDA). 

Examples include manufacturing, agricultural projects, hotel projects, and high-technology industries. You can check the complete list at https://www.mida.gov.my/setting-up-content/promoted-activities/.

Investment Tax Allowance (ITA)

The Investment Tax Allowance (ITA) is a tax incentive provided by the Malaysian government to encourage investments in specific promoted activities or products. This incentive is particularly beneficial for capital-intensive projects that may not generate substantial profits in the short term. 

Like Pioneer Status, ITA is also available to companies involved in "promoted activities" or producing "promoted products.”

Form: The ITA incentive is an allowance on qualifying capital expenditures incurred during the ITA period, typically covering plant and equipment investments. This allowance is in addition to the normal capital allowances available to the company.

Duration: The initial duration for the ITA is 5 years, but it can be extended to 10 years if specific conditions are met.

Rate: Generally, the standard allowance rate is 60%, but it can go up to 100% for activities or products considered critical to national interests, such as high technology, renewable energy, and certain manufacturing sectors. 

Eligibility Criteria: Eligibility for ITA is restricted to new companies engaged in promoted activities or producing promoted products as listed by the Malaysian Investment Development Authority (MIDA). 

Reinvestment Allowance (RA)

The Reinvestment Allowance (RA) is a significant tax incentive available under Schedule 7A of the Income Tax Act 1967. It is designed to encourage manufacturing companies to reinvest their capital into qualifying projects. These projects can include expanding existing production capacity, modernising or automating production facilities, and diversifying into related products.

Form: The RA is granted as an allowance on qualifying capital expenditures, in addition to the standard capital allowance. 

Duration: The RA incentive period spans 15 years from the first year the company makes a claim, providing a long-term benefit for sustained reinvestment activities.

Rate: The allowance rate for RA is 60% of the qualifying capital expenditure. This allowance can be used to offset up to 70% of the statutory income derived from the company's business related to the qualifying project. Notably, if a company demonstrates that its process efficiency ratio exceeds the industry average, it can claim RA up to 100% of its statutory income for the assessment year. 

Eligibility Criteria: To qualify for the RA, companies must be involved in manufacturing or agricultural activities and must have been in operation for at least 36 months. The qualifying capital expenditures must be related to projects aimed at expanding production capacity, modernising or automating existing facilities, or diversifying production lines into new but related products. 

RA does not require prior approval from authorities, making it more accessible for companies that meet the basic eligibility requirements. However, it is important to note that a company cannot claim RA in the same basis period it is also enjoying Pioneer Status (PS) or Investment Tax Allowance (ITA) incentives, ensuring that the benefits are mutually exclusive and properly utilised.

PS, ITA, and RS are the major tax incentives provided by the Malaysian Government. Other tax incentives exist in Malaysia.

Industrial Adjustment Allowance (IAA)

The Industrial Adjustment Allowance (IAA) is available to companies in specific manufacturing sectors (wood-based, textile, machinery and engineering, stamping, mold, tools and dies, and machinery) that existed before December 31, 1990, and engaged in activities like reorganisation, reconstruction, or amalgamation within the sector. Companies can receive an allowance of 60% to 100% of the qualifying capital expenditure incurred within 5 years. This allowance can offset 100% of the adjusted income in the assessment year.

Infrastructure Allowance (IA)

The Infrastructure Allowance (IA) is available to companies in Malaysia engaged in manufacturing, agriculture, hotel, tourism, or other industrial/commercial activities in Sabah, Sarawak, and the designated Eastern Corridor of Peninsular Malaysia. Companies can receive a 100% allowance on capital expenditure for infrastructure projects (e.g., reconstruction, extension, or improvement of permanent structures like bridges, jetties, ports, or roads). This allowance can offset up to 85% of statutory income in the assessment year, with the balance taxed at the prevailing company tax rate. 

Besides these, there are other incentives as follows.

Other Tax Incentives

• Industrial Building Allowance (IBA)
• Group Relief
• Audit Fees Deduction
• Tax Incentive for Angel Investors
• Capital Allowance on Costs of Dismantling and Removing Assets
• Acquiring Proprietary Rights Deduction
• Import Duty and/or Sales Tax Exemption
• Environmental Protection Deduction
• Employees’ Accommodation (IBA)

Key Sectors Eligible for Tax Incentive

The Government of Malaysia offers tax incentives to various industries, sectors, projects, and businesses operating within Special Economic Zones (SEZs) and other designated areas. These incentives are designed to stimulate economic growth and development across the country.

Promoted Activities

The Malaysian government has identified specific services and manufacturing activities as national priorities under the Promotion of Investment Act 1986. Only businesses engaged in these promoted activities are eligible for Pioneer Status (PS) and Investment Tax Allowance (ITA). These activities are categorized into five major groups, detailed on the MIDA website:

• General (Download PDF)
• High Technology Companies (Download PDF)
• Small Scale Companies (Download PDF)
• Selected Industries (Download PDF)
• Promoted Activities and Products for Reinvestment (Download PDF)

Other Eligible Sectors and Industries

In addition to the promoted activities, the government provides incentives to various sectors and industries, including:

1. Investment Incentives for Specific Industries:
   • Aerospace Industry
   • Automotive Industry
   • Shipbuilding & Ship Repair (SBSR)/Shipping Industry
   • Machinery and Equipment (M&E) Industry
   • Industrialised Building System (IBS)
   • Biotechnology and Bio-Based Industry
   • Agricultural Produce (Food Production chain – Upstream and Downstream)
   • Utilization of Oil Palm Biomass to Produce Value-Added Products
2. Incentives for Environmental Management:
   • Waste Recycling Activities
   • Green Technology Incentives
   • Incentives for Research and Development (R&D)
3. Services Sector:
   • Regional Operations
   • Research and Development (R&D)
   • Oil and Gas (O&G) Services
   • Hospitality Services
   • Education and Industrial Training Services
   • Medical and Healthcare Services
   • Logistics and Supply Chain Services
   • Digital Services

For a detailed overview of Tax incentives for each industry or business refer to the following document released by MIDA: 

https://www.mida.gov.my/wp-content/uploads/2024/01/ENG-MIDA_Policy-Booklet_MK-2022_Updated_11_01_Chapter-2.pdf

Incentives in Special Economic Zones

Special Economic Zones (SEZs) in Malaysia offer an array of fiscal incentives and tax relief tailored to businesses operating within these zones. These incentives aim to stimulate economic growth and development in specific sectors and regions of the country.

SEZs in Malaysia provide benefits such as income tax exemption ranging from 70% to 100% for up to 10 or 15 years, investment tax allowances equivalent to 100% of total expenditure for five years, and stamp duty exemptions on land or buildings acquired for approved activities. These incentives are available across various industries, including manufacturing, oil and gas, tourism, agriculture, education, and information and communication technology (ICT).

Investors in SEZs like the East Coast Economic Region (ECER), Northern Corridor Economic Region (NCER), and Iskandar Malaysia can enjoy sector-specific incentives aligned with the priorities of each economic corridor. These incentives include tax exemptions, allowances, and reductions in stamp duty, import duties, and lease fees, fostering a conducive environment for business growth and investment within Malaysia's SEZs.

Conclusion

In Malaysia, tax incentives are available for small businesses, enterprises involved in promoted activities, capital-intensive ventures, newly registered startups, as well as those in green energy, environmental management, exports, and businesses within Special Economic Zones (SEZs). 

However, understanding the eligibility criteria and calculating the actual payable tax can be complex. Therefore, it is advisable to seek guidance from your chartered accountant or tax lawyer for detailed information on eligibility requirements and calculations.