Pioneer
Status
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 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.
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Double
Deduction Tax Incentives
Expenses
incurred on certain activities can be set off twice
against taxable profits. Among those activities are
included:
Promotion
of Exports - Expenses which are aimed at promoting
exports and the supply of goods overseas can be deducted
twice from taxable profits. The list of allowable expenses
are set out in the income tax legislation and include
overseas advertising, export market research, preparation
of tenders for the supply of goods overseas, overseas
travel and accommodation, cost of maintaining overseas
offices & approved industrial exhibitions. This
incentive is available to manufacturing & agricultural
companies producing "promoted products" or
engaged in "promoted activities". The allowance
is also available to the tourist industry in respect
of costs incurred in the overseas promotion of Malaysia
as a tourist destination.
Employee
Training Programs - Expenditure incurred by
manufacturing companies on government approved training
programs designed to develop and upgrade skills to modernize
manufacturing processes can be deducted twice from taxable
profits. This incentive is available to manufacturing
companies & companies engaged in the hotel and tourist
industry.
Disabled
Persons - All remuneration payable to physically
or mentally disabled employees can be deducted twice
from taxable profits. This incentive is available to
manufacturing companies.
Research
& Development - All expenditure incurred
on government approved research, payments made for the
use of services of approved research institutes and
voluntary cash contributions made to approved research
institutes can be deducted twice from taxable profits.
Freight
Charges - Certain manufacturing industries
located in certain regions of the country (e.g. timber
companies in Sabah) can deduct double the amount of
freight charges incurred.
Brand
Promotion Advertising - Expenditure incurred
promoting an export quality standard Malaysian owned
product is subject to double tax deduction. Promotion
of a brand name means making a name internationally
known and therefore would include such expenditure as
bill-boards in international airports or highways. The
company must be 70% Malaysian owned and the product
must achieve export quality standards. This incentive
is available to manufacturing companies.
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Operational
Headquarter Companies (OHC)
In order
to qualify for the favorable fiscal incentives that
apply to OHC the following criteria must be met:
- The
OHC must be wholly owned by foreigners;
- The
OHC must have a minimum capital of 0.5m Malaysian
Ringitts (USD130,000) or a minimum expenditure of
1.5m Ringitts (USD395,000) per annum;
- The
OHC must both offer to and carry out for its offices
or related companies outside Malaysia 3 of the following
"specified services": general management
and administration, business planning, procurement
of raw materials and components, technical support,
treasury and fund management services, corporate financial
advisory services, marketing, control and sales promotion,
training and personnel management, research and development
work & assistance in the obtaining of credit facilities.
An OHC
which meets the qualifying preconditions is entitled
to the following fiscal benefits:
- Profits
are taxed at a 10% corporate income tax rate (instead
of the national rate) provided the income is derived
from the provision of "specified services"
to companies located outside Malaysia.
- Irrespective
of any change in the current law, foreign source dividends
received by an OHC from a foreign subsidiary are exempt
from corporate income tax in the hands of the OHC
for a period of 10 years.
- Irrespective
of any change in the current law, dividends which
are distributed by the OHC are exempt from withholding
tax for a period of 5 years irrespective of whether
those dividends represent profits remitted to the
OHC or profits earned by the OHC.
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Malaysian
Shipping Companies
Malaysian
ships are exempt from all taxes in Malaysia. A Malaysian
ship is a ship registered under the Merchant Shipping
Ordinance 1952 as amended. It does not include ferries,
barges, tugboats, supply vessels, crew boats, lighter
dredgers, fishing boats or other similar vessels.
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Malaysian
Venture Capital Companies
The
Securities Commission Malaysia (SC) has released new Venture
Capital Tax Incentives Guidelines (VC Tax Incentives Guidelines),
to incorporate the new tax incentives for the venture
capital industry as stipulated in the Income Tax (Exemption)(Amendment)
Order 2009 (Tax Order 2009). Under
the Tax Order 2009, venture capital companies (VCCs)
registered with the SC are eligible for tax exemption
for five years of assessment subject to them investing
at least 30% of their invested funds in the form of
seed capital, start-up and/or early stage financing
in qualified investee companies. Application for this
exemption must be submitted to the SC by December 31,
2013.
This
new and more attractive tax exemption incentive supplements
existing incentives, where VCCs registered with the
SC are eligible for tax exemption for ten years of assessment
if they invest either at least 70% of their invested
funds in the form of seed capital, start-up or early
stage financing or at least 50% of their invested funds
in the form of seed capital in qualified investee companies.
In
addition to tax incentives in the form of tax exemption
for VCCs registered with the SC, the current venture
capital tax framework also provides tax deduction for
an amount equivalent to the value of the investment
made by an individual or a company in qualified investee
companies.
Venture
capital management companies (VCMC) registered with
the SC can also enjoy tax exemption on income arising
from a profit-sharing agreement between the VCMC and
the VCC. The VCMC, however, need not obtain certification
from the SC provided that the VCC under the profit-sharing
agreement is registered with the SC and has received
certification for tax exemption from the SC.
Financing
for the venture companies must be utilised at seed,
start-up or early stage for various technology based
activities, including products or activities promoted
under the Promotion of Investments Act 1986 where the
venture companies may have been granted special status
and/or have received incentives such as the following:
- Pioneer
status or investment tax allowance incentive granted
by MIDA or Ministry of International Trade and Industry;
-
High technology incentives granted by MIDA;
-
MSC status granted by MDeC; or
-
Financial assistance from Small and Medium Industries
Development Corporation.
Malaysia
Special Economic Zones
In
August 2009, Prime Minister, Najib Razak, opened Malaysia’s
first Special Economic Zone (SEZ) in the East Coast
Economic Region (ECER). Through the SEZ’s special
incentives, it is hoped to attract MYR90bn (USD26bn)
in domestic and international investments by 2020, and
to create more than 220,000 new job opportunities.
The
Prime Minister said that, although the SEZ covers only
6% of the total ECER area, its economic impact would
be very large, with a capacity to contribute 50% of
the employment opportunities and 80% of the production
for the whole of the ECER.
Four
zones are be established within the SEZ to promote and
focus on groupings of industries:
- Manufacturing
-
Agro industry
-
Petrochemical
-
Tourism
-
ICT
-
Logistics
The
Prime Minister made it clear that the administration
would be flexible and responsive to the particular needs
of individual companies, and tailor incentives whenever
such was possible.
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LOWTAX.NET
13/07 
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