Malaysia: Tax-Efficient Sectors
A company which is granted "pioneer status" obtains very favorable fiscal treatment in respect of income derived from "promoted activities" or "promoted products". What constitutes a "promoted activity" or a "promoted product" is determined by the Minister of Finance and published in the Government Gazette.
Fiscal Regime of Pioneer Status Companies
As a general rule income derived by pioneer status companies from "promoted activities" or "promoted products" at the time of writing received the following fiscal treatment:
- Only 30% of the income derived by a pioneer status company from "promoted activities" or "promoted products" is subject to the Malaysian corporate income tax (currently 25%). The remaining 70% of income is tax exempt. The exemption is generally granted for a period of 5 years. Where large amounts of income are tax exempt the company may incur taxable losses during the pioneer status period which losses can be carried forward to the post pioneer status period and set off against future taxable profits;
- 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 will enjoy a 100% tax exemption on their statutory income during their 5-year exemption period. 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.
- Dividends representing the distribution of profits which are exempt from corporate income tax are free of all withholding taxes. Furthermore when the recipient of the dividends in turn distributes that income as dividends no withholding taxes are deducted on the same.
Both the 70% exempt income rule and the 5 year exemption period are basic guidelines which depending on the industry seeking pioneer status can be upwardly increased. For example:
- Where a manufacturing company is capable of achieving world class standards in terms of product quality, product price and capacity it will be eligible for pioneer status with a 100% tax exemption on statutory income for a period of up to 10 years. Smaller manufacturing companies are eligible for a 100% tax exemption on statutory income for a period of 5 years;
- Pioneer status is also available for the construction, modernization or expansion of 3 star medium and small sized hotels. Where the projects are located in Labuan or the Eastern corridor of Peninsular Malaysia 100% of statutory income is exempt from corporate income tax for a period of 10 years (N.B. measures introduced in 2008 permit full income tax exemption or full income tax allowance for four and five-starred hotels in Sabah and Sarawak);
- High technology companies can apply for pioneer status, being defined as companies in which at least 7% of the work force are science and technical graduates and of which research and development costs amount to 1% of gross sales. 100% of the statutory income of high technology companies is exempted from tax for a period of 5 years;
- Pioneer status is also available to strategic projects defined as projects of national importance which involve heavy capital expenditure, long gestation periods, high levels of technology and have a significant impact on the economy. 100% of the statutory income of a company engaged in a strategic project is exempted from taxes for a period of 10 years;
- Applications received from 13 September 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, are eligible for Pioneer Status with a tax exemption of 70% (100% for promoted areas) on the increased statutory income arising from the reinvestment for a period of five years.
- Research & Development Companies: Such companies as defined by law are entitled to pioneer status with full tax exemption on statutory income for a period of 5 years;
- Companies engaged in software development can obtain pioneer status for a period of 5 years with a 100% exemption from taxes on business income provided that the software is for a general purpose and not customized (i.e. for only one client) and where existing software has been modified provided the cost of acquiring the existing package does not exceed 25% of the modification expenditure;
- Companies wanting to create, distribute and employ multimedia products and services are entitled to a pioneer company status exempting 100% of their income from taxation for a period of 10 years.
Renewal of Pioneer Status Exemption Period
A pioneer status company exemption period can be renewed on expiry provided the Government is satisfied that:
- The company employs more than 500 persons;
- The company has fixed assets (excluding land) with a value in excess of 25m Malaysian Ringitts ( USD6.6m);
- The government is of the opinion that the company contributes to the economic and technological development of the country.
In the 2006 Malaysian budget, it was proposed to further enhance the effectiveness of the Pioneer Status incentives by allowing accumulated losses and unabsorbed capital allowances incurred by companies during the pioneer period to be carried forward and deducted from post-pioneer income of a business relating to the same promoted activity or promoted product. The proposal is effective for companies whose pioneer period expired on and after 15th October 2005.