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Malaysia: Tax-Efficient Sectors

Investment Tax Allowances

Investment tax allowances are a means of effecting a substantial artificial reduction in taxable profits. In Malaysia there is a very wide variety of investment tax allowances. Broadly speaking, they are an alternative to Pioneer Status, but they are in addition to the right of every company to depreciate assets over their useful lives and set the depreciation off against taxable profits.

Investment tax allowances are transferred into an "exempt income account" where they are exempt from corporate income tax.

Dividends paid to shareholders out of the "exempt income account" are free of withholding taxes on distribution. Dividends from the "exempt income account" paid to a parent corporation which in turn distributes them to its shareholders are also free of withholding taxes.

Some of the main types of investment tax allowances (ITA) are as follows:

  • Manufacturing Companies. A company granted ITA gets an allowance of 60% (at the time of writing) of qualifying capital expenditure (such as factory, plant, machinery or other equipment used for the approved project) incurred within five years from the date on which the first qualifying capital expenditure is incurred. Companies can offset this allowance against 70% of their statutory income for each year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised. The remaining 30% of statutory income will be taxed at the prevailing company tax rate. 

    To encourage investment in the promoted areas i.e. the States of Sabah and Sarawak and the designated "Eastern Corridor" of Peninsular Malaysia, applications received from 13 September 2003 from companies located in these areas receive an allowance of 100% on the qualifying capital expenditure incurred within a period of five years. The allowance can be utilised to offset against 100% of the statutory income for each year of assessment. Companies which have been granted approval for this incentive but have not commenced commercial production, or applications under consideration, are also eligible. All project applications received by December 31, 2010 are eligible for this enhanced incentive.

    Applications received from September 13, 2003, from existing locally-owned companies that reinvest in the production of heavy machinery such as cranes, quarry machinery, batching plant and port material handling equipment, were eligible for Investment Tax Allowance of 60% (100% for promoted areas) on the additional qualifying capital expenditure incurred within a period of five years. The allowance can be offset against 70% (100% for promoted areas) of the statutory income for each year of assessment. 

  • High Technology Companies A high technology company is a company engaged in defined activities or in the production of defined products in areas of new and emerging technologies. A high technology company qualifies for Investment Tax Allowance of 60% of qualifying capital expenditure incurred within five years from the date the first capital expenditure is incurred. Any unutilised allowance can be carried forward to subsequent years until the whole amount has been fully utilised. The allowance can be utilised to offset against 100% of its statutory income for each year of assessment. A Malaysian-owned company that acquires a foreign-owned company abroad to acquire high technology for production within the country or to gain new export markets for local products will be granted an annual allowance of 20% of the acquisition cost for five years. 

  • SMEs Effective from the year of assessment of 2009, small- and medium-scale companies with paid-up capital of RM2.5 million and below are eligible for a reduced corporate tax on chargeable income of up to RM500,000. The tax rate on the remaining chargeable income is maintained at the normal rate. Dividends distributed will be given a tax credit (20% at the time of writing) in the hands of the shareholders. To qualify for the incentive, the small-scale company has to comply with any one of the following criteria :
    • The company’s finished products should be used as raw materials or components by manufacturing industries;
    • The company’s products shall substitute imports and the local material content is more than 50% in terms of value;
    • The company exports at least 50% of its output; or
    • The project contributes towards the socio-economic development of the rural population.

  • Tourist Development A company granted ITA gets an allowance of 60% of qualifying capital expenditure incurred within five years from the date on which the first qualifying capital expenditure was incurred.

    Companies can offset this allowance against 70% of the statutory income in the year of assessment. Any unutilised allowance can be carried forward to subsequent years until the whole amount has been used up. The remaining 30% of the statutory income will be taxed at the prevailing company tax rate.

    As an added incentive, companies that locate in the States of Sabah, Sarawak, the Federal Territory of Labuan and the designated “Eastern Corridor” of Peninsular Malaysia get an allowance of 80% on qualifying capital expenditure incurred. The allowance can be utilised to offset 85% of the statutory income in the year of assessment. This additional incentive applies to all applications received by December 31, 2010.

  • R & D Expenditure An R&D company, i.e., a company that provides R&D services in Malaysia to its related company or to any other company, is eligible for an ITA of 100% on qualifying capital expenditure incurred within 10 years. The allowance can be offset against 70% of the statutory income in the year of assessment. Should the R&D company opt not to avail itself of the allowance, its related companies can enjoy a double deduction for payments made to the R&D company for services rendered. Contract R&D and R&D companies can apply for the various incentives as long as they fulfill the following criteria:
    • Research undertaken should be in accordance with the needs of the country and bring benefit to the economy
    • At least 70% of the income of the company should be derived from R&D activities
    • For manufacturing-based R&D, at least 50% of the workforce of the company must be appropriately qualified personnel performing research and technical functions; and
    • For agriculture-base R&D, at least 5% of the workforce of the company must be appropriately qualified personnel performing research and technical functions
    • A company can enjoy double deduction on revenue (non-capital) expenditure for research which is directly undertaken and approved by the Minister of Finance. This double deduction applies to payment for the use of services of approved research institutes, R&D companies or contract R&D companies. It also applies to cash contributions to approved research institutes.

 

 

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