Malaysia releases guidelines on tax incentives for a principal hub and other tax incentives

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1 20 May 2015 EY Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date Malaysia releases guidelines on tax incentives for a principal hub and other tax incentives On 6 April 2015, Malaysia s Ministry of International Trade and Industry issued detailed guidelines for the following new tax incentives that were introduced in the 2015 budget: 1 Incentives for establishment of a principal hub Incentives for less developed areas Incentives for industrial area management Capital allowance to increase automation in labor-intensive industries This Alert summarizes the key features of these incentives. Detailed Discussion Principal hub Definition A principal hub is defined as a Malaysian base used by a Malaysian company for conducting its regional and global operations to manage, control and support its key functions including management of risks, decision making, strategic business activities, trading, finance, management and human resource. Incentives An approved principal hub is eligible for a 0%, 5% or 10% corporate income tax rate 2 if it qualifies for one of the three tiers, depending on the level of value created, numbers of high-value jobs 3 created, key strategic and management positions, 4 annual business spending, numbers of countries served outside Malaysia and other qualifying services.

2 In addition to the tax incentives, the principal hub company will enjoy the following benefits: Customs duty suspensions for import of raw materials, components, or finished products into free industrial zones, licensed manufacturing warehouses, free commercial zones, and bonded warehouses for production or repackaging, cargo consolidation, and integration before distribution to end customers More flexibility for a qualifying Malaysian company to employ foreign nationals More flexible foreign exchange administration No local equity participation requirement Incentives are valid for five years and may be extended for a further five years, subject to the following two additional requirements: A 20% increment of the base commitment for jobs A 30% increment of the base commitment on business spending Eligibility Some of the key conditions to qualify for the principal hub incentive include, but are not limited to: Incorporation in Malaysia under the Companies Act 1965 Paid-up capital of more than RM2.5 million (US$700,000) Minimum annual business spending of RM3 million (US$850,000) Minimum annual sales of RM300 million (US$85 million) (an additional requirement for goods-based applicant companies) Serves and controls network companies 5 in at least three countries outside Malaysia Carry out at least three qualifying services, of which one of the qualifying services must be from the strategic services cluster 6 Significant use of Malaysia s banking and financial services and other ancillary services and facilities (e.g., trade and logistics services, legal and arbitration services, finance and treasury services) Applications can be submitted to the Malaysian Investment Development Authority (MIDA) from 1 May 2015 to 30 April With the principal hub incentive now effective, MIDA will no longer be accepting new applications for the Operational Headquarters, International Procurement Centre or Regional Distribution Centre incentives. Incentives for less developed areas To be eligible for this incentive, a company must undertake manufacturing or services activities in less developed areas that will lead to substantial creation of employment and rural development. This incentive package includes: A full income tax exemption for up to 15 years of assessment (5+5+5), commencing from the first Year of Assessment (YA) 7 that the company derives statutory income; or an investment tax allowance of 100% of the qualifying capital expenditure incurred by the company within a period of 10 years, which can be offset against 100% of statutory income for each YA Stamp duty exemption on the transfer or lease of land or building used for development in relation to manufacturing and services activities Withholding tax exemption on fees for technical advice, assistance or services or royalty in relation to manufacturing and services activities up to 31 December 2020 Import duty exemption on raw materials and components, machinery and equipment that are not produced locally and which are to be used directly in the manufacturing or services activities Applications can be submitted to MIDA from 1 January 2015 to 30 December Incentive for industrial area management The new incentive package is to ensure that industrial parks in Malaysia are better managed. The key incentive is a 100% income tax exemption for 5 years, commencing from the date the company commences its qualifying activities. Applications can be submitted to MIDA from 1 January 2015 to 31 December

3 Capital allowance to increase automation in labor-intensive industries The objective for this incentive, among others, is to encourage companies to engage in innovative and productive activities and the quick adoption of automation, especially for labor intensive industries. The following incentives are granted based on expenditures incurred for automation equipment used directly in the manufacturing activities. 200% of automation capital allowance will be provided on the first RM4 million (US$1.1 million) expenditure incurred within YA 2015 to 2017 (and including expenditures in 2014, if any) for high labor-intensive industries such as rubber products, plastics, wood, furniture and textiles. 200% of automation capital allowance will be provided on the first RM2 million US$550,000) expenditure incurred within YA 2015 to 2020 (including expenditures in 2014, if any) for other industries that do not fall under those in the first bullet point above. Endnotes 1. See EY, Malaysia enacts 2015 Budget Proposal, dated 5 January The current corporate income tax rate in Malaysia is 25% (reduced to 24% from the financial years ending in 2016). 3. High-value jobs are defined as those requiring a higher and more diverse set of managerial, technical, or professional skills, such as management, analytics, communication, problem-solving and proficiency in information technology. There is also a minimum monthly salary requirement of RM5,000 (US$1,400) per person. 4. Key strategic/management positions must have a minimum monthly salary of RM25,000 (US$7,000) per person. 5. Network companies are related companies or any entity within the group including subsidiaries, branches, joint ventures, franchises or any other company related to applicants supply chain and business with contractual agreements. 6. Qualifying services in the strategic services cluster include: (1) regional P&L/business unit management; (2) brand management; (3) corporate finance advisory services; (4) intellectual property management; (5) senior-level talent acquisition and management; and (6) strategic business planning and corporate development. 7. The term refers to an accounting/financial year which ends in that particular calendar year. 3

4 For additional information with respect to this Alert, please contact the following: Ernst & Young Tax Consultants Sdn Bhd, Kuala Lumpur Yeo Eng Ping Sockalingam Murugesan Anil Kumar Puri Ernst & Young LLP, Asia Pacific Business Group, New York Chris Finnerty Kaz Parsch Bee-Khun Yap Ernst & Young LLP, Asia Pacific Business Group, Houston Trang Scott

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