1. Main Incentives for Manufacturing Companies
The major tax incentives for companies investing in the manufacturing sector are the Pioneer Status or Investment Tax Allowance.
Eligibility for Pioneer Status or Investment Tax Allowance is based on certain priorities, including the levels of value-added, technology used and industrial linkages. Such eligible projects are termed as “promoted activities” or “promoted products”.
(Please refer to the List of Promoted Activities and Products – General)
(i) Pioneer Status
A company granted Pioneer Status enjoys a 5-year partial exemption from the payment of income tax. It pays tax on 30% of its statutory income*, with the exemption period commencing from its Production Day (defined as the day its production level reaches 30% of its capacity).
Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product.
To encourage investments in the promoted areas i.e. the States of Perlis**, Sabah and Sarawak and the designated “Eastern Corridor”+ of Peninsular Malaysia, applications received from companies located in these areas will enjoy a 100% tax exemption on their statutory income during their 5-year exemption period. All project applications received by 31 December 2010 will be eligible for this enhanced incentive.
Applications for Pioneer Status should be submitted to the Malaysian Industrial Development Authority (MIDA).
(ii) Investment Tax Allowance
As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance (ITA). A company granted ITA is entitled to an allowance of 60% on its 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.
The company can offset this allowance against 70% of its statutory income for each year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised. The remaining 30% of its statutory income will be taxed at the prevailing company tax rate.
For the promoted areas i.e. the States of Perlis** , 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 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. All project applications received by 31 December 2010 will be eligible for this enhanced incentive.
Applications should be submitted to MIDA.
* Statutory Income is derived after deducting revenue expenditure and capital allowances from the gross income.
+ The “Eastern Corridor” of Peninsular Malaysia covers the States of Kelantan, Terengganu and Pahang, and the district of Mersing in the State of Johor.
** The State of Perlis has been declared as one of the promoted areas effective from 2 September 2006 and companies undertaking promoted activities or manufacture products in this state will be eligible for incentives presently given to such areas.
2. Incentives for High Technology Companies
A high technology company is a company engaged in promoted activities or in the production of promoted products in areas of new and emerging technologies (Please refer to the List of Promoted Activities and Products – High Technology Companies). A high technology company qualifies for:
(i) PioneerStatus with tax exemption of 100% of statutory income for a period of 5years. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product; or
(ii) Investment Tax Allowance of 60% (100% for promoted areas) on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. The allowance can be utilised to offset against 100% of the statutory income for each yearof assessment. Any unutilised allowances can be carried forward tosubsequent years until the whole amount has been fully utilised.
Applications should be submitted to MIDA.
The high technology company must fulfill the following criteria:
(i) The percentage of local R & D expenditure to gross sales should be at least 1% on an annual basis. The company has three years from its date of operation or commencement of business to comply with this requirement.
(ii) Scientific and technical staff having degrees or diplomas with a minimum of 5years experience in related fields should comprise at least 7% of thecompany’s total workforce.
3. Incentives for Relocating Manufacturing Activities to Promoted Areas
In order to reduce the costs of doing business and to provide a competitive business environment, existing companies which relocate their manufacturing activities to the promoted areas, are eligible fora second round of the following incentives:
(i) Pioneer Status with tax exemption of 100% of statutory income for a period of 5years. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product; or
(ii) Investment Tax Allowance of 100% of the qualifying capital expenditure incurred within a period of 5 years. The allowance can be utilised to off set against 100% of the statutory income for each year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised.
Applications should be submitted to MIDA.
4. Incentives for Strategic Projects
Strategic projects involve products or activities of national importance. They generally involve heavy capital investments with long gestation periods, have high levels of technology, and are integrated, generate extensive linkages, and have significant impact on the economy. Such projects qualify for:
(i) Pioneer Status with a tax exemption of 100% of the statutory income for a period of 10 years; Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed tobe carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product; or
(ii) Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. This allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until the whole amount has been fully utilised.
Applications should be submitted to MIDA.
5. Incentives for Small and Medium-Scale Companies
Previously, small and medium-scale companies with a paid-up capital of RM2.5 million and below are eligible for a reduced corporate tax of 20% on the chargeable income of up to RM100,000. The tax rate on the remaining chargeable income is maintained at 28%. Dividends distributed will be given a tax credit of 20% in the hands of the shareholders.
However, effective from the year of assessment 2007, the corporate tax rate has been reduced to 27% and this reduction is also extended to SMEs.
Small-scale manufacturing companies incorporated in Malaysia with shareholders’ funds not exceeding RM500,000 and having at least 60% Malaysian equity are eligible for the following incentives:
(i) Pioneer Status with an income tax exemption of 100% of the statutory income for a period of five years. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product; or
(ii) Investment Tax Allowance of 60% (100% for promoted areas) on the qualifying capital expenditure incurred within five years. This allowance can be offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until the whole amount has been fully utilised.
A sole proprietorship or partnership is eligible to apply for this incentive provided a new private limited/limited company is formed to take over the existing production/activities.
To qualify for the incentive, a small-scale company has to comply with any one of the following criteria:
(i) The value-added must be at least 15%; or
(ii) The project contributes towards the socio-economic development of the rural population.
The company shall carry out the manufacture of products or participate in activities listed as promoted products and activities for small-scale companies (Please refer to the List of Promoted Activities and Products – Small Scale Companies ).
Applications should be submitted to MIDA.
6. Incentives to Strengthen Industrial Linkages
To encourage large companies to participate in an Industrial Linkage Programme (ILP), expenditure incurred in the training of employees,product development and testing, and factory auditing to ensure the quality of vendors’ products, will be allowed as a deduction in the computation of income tax.
Vendors,including small-and medium-scale companies that propose to manufacture promoted products or participate in promoted activities in an ILP(Please refer to the List of Promoted Activities and Products -Industrial Linkage Programme (ILP) ),are eligible for the following incentives:
(i) Pioneer Status with a tax exemption of 100% of the statutory income for a period of five years. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product ; or
(ii) Investment Tax Allowance of 60% (100% on promoted areas) on the qualifying capital expenditure incurred within five years which the company can offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until the whole amount has been fully utilised.
To encourage vendors to manufacture promoted products or participate in activities for the international market, vendors in an approved ILP who are capable of achieving world-class standards in terms of price,quality and capacity, will be eligible for the following incentives.
(i) Pioneer Status with a tax exemption of 100% of the statutory income for a period of 10 years. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product; or
(ii) (ii) Investment Tax Allowance of 100% for promoted areas on the qualifying capital expenditure incurred within a period of five years which the company can offset against 100% of the statutory income for each year of assessment. Any unutilised allowances can be carried forward tosubsequent years until the whole amount has been fully utilised.
Applications should be submitted to MIDA.
7. Additional Incentives for the Manufacturing Sector
(i) Reinvestment Allowance
A manufacturing company that has been in operation for at least 12 months and incurs qualifying capital expenditure to expand, modernise or automate its existing business or diversify its existing business into any related products within the same industry can apply for Reinvestment Allowance (RA).
The RA is given at the rate of 60% on the qualifying capital expenditure incurred by the company, and can be offset against 70% of its statutory income for the year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised.
A company can offset the RA against 100% of its statutory income for the year of assessment if:
The company undertakes reinvestment projects in the promoted areas i.e. the States of Perlis** , Sabah, Sarawak and the designated “Eastern Corridor” of Peninsular Malaysia; or The company attains a productivity level exceeding the level determined by the Ministry of Finance. For further details on the prescribed productivity level for each sub-sector, please contact the Inland Revenue Board (see Useful Addresses – Relevant Organisations)
The RA will be given for a period of 15 consecutive years beginning from the year the first reinvestment is made. Companies can only claim the RA upon the completion of the qualifying project, i.e. after the building is completed or when the plant/machinery is put to operational use. Assets acquired for the reinvestment cannot be disposed of within a period of two years from the time of the reinvestment.
Company that intends to reinvest before the expiry of its Pioneer Status can surrender its Pioneer Status for purpose of cancellation and be eligible for RA.
Applications for RA should be submitted to the Inland Revenue Board (IRB), while applications for the surrender of Pioneer Status for RA should be submitted to MIDA.
(ii) Accelerated Capital Allowance
After the 15-year period of eligibility for RA, companies that reinvest in the manufacture of promoted products are eligible to apply for Accelerated Capital Allowance (ACA). The ACA on capital expenditure is to be utilised within three years, i.e. an initial allowance of 40% and an annual allowance of 20%.
Applications should be submitted to the IRB accompanied by a letter from MIDA certifying that the companies are manufacturing promoted products.
(iii) Accelerated Capital Allowance on Equipment to Maintain Quality of Power Supply
In order to reduce the cost of doing business caused by interruptions in the power supply, companies which incur capital expenses on equipment to ensure the quality of power supply, are eligible for Accelerated Capital Allowance for a period of 2 years.
This incentive is effective from the year of assessment 2005.
Applications should be submitted to the IRB.
Only equipment determined by the Ministry of Finance is eligible for the Accelerated Capital Allowance.
(iv) Incentive for Industrialised Building System
Industrial Building System (IBS) will enhance the quality of construction, create a safer and cleaner working environment as well as reduce the dependence on foreign workers. Companies which incur expenses on the purchase of moulds used in the production of IBS components are eligible for Accelerated Capital Allowances (ACA) for a period of 3years.
This incentive is effective from the year of assessment 2006.
(v) Tax Exemption on the Value of Increased Exports
To promote exports, manufacturing companies in Malaysia qualify for:
A tax exemption on the statutory income equivalent to 10% of the value of increased exports, provided that the goods exported attain at least 30%value-added; or A tax exemption on the statutory income equivalent to 15% of the value of increased exports, provided that the goods exported attain at least 50%value-added.Claims should be submitted to the IRB To further encourage the export of Malaysian goods, a locally-owned manufacturing company with Malaysian equity of at least 60% is eligible for:A tax exemption on the statutory income equivalent to 30% of the value of increased exports, provided the company achieves a significant increase in exports;A tax exemption on the statutory income equivalent to 50% of the value of increased exports, provided the company succeeds in penetrating new markets; A full tax exemption on the value of increased exports, provided the company achieves the highest increase in export in its category.
(vi) Group Relief
To enhance private sector investment, group relief is provided under the Income Tax Act 1967 to all locally incorporated resident companies. The group relief is limited to 50% of the current year’s unabsorbed losses to be offset against the income of another company within the same group (including new companies undertaking activities in approved food production, forest plantation, biotechnology, nanotechnology, optics and photonics) subject to the following conditions:
- The claimant and the surrendering companies each has a paid-up capital of ordinary shares exceeding RM2.5 million;
- Both the claimant and the surrendering companies must have the same accounting period;
- The Shareholding, whether direct or indirect, of the claimant and the surrendering companies in the group must not be less than 70%;
- The 70% shareholding must be on a continuous basis during the preceding year and the relevant year;
- Losses resulting from the acquisition of proprietary rights or a foreign-owned company should be disregarded for the purpose of group relief; and
- Companies currently enjoying the following incentives are not eligible for group relief:
- Pioneer Status
- Investment Tax Allowance/Investment Allowance
- Reinvestment Allowance
- Exemption on shipping profit
- Exemption of income tax under section 127 of the Income Tax Act 1967; and
- Incentive Investment Company
With the introduction of the above incentive, the existing group relief incentive for approved food production, forest plantation,biotechnology, nanotechnology, optics and photonics will be discontinued. However, companies granted group relief incentive for the above activities shall continue to offset their income against 100% of the losses incurred by their subsidiaries.
This incentive is effective from the year of assessment 2006.
