Malaysia Enhances Incentives for Businesses Looking to Establish a Principal Hub

Malaysia has enhanced incentives for businesses looking to establish a principal/regional hub in the country. The amendments include allowing companies to undertake one qualifying service as opposed to three previously. Businesses that qualify for the principal hub incentive can enjoy a corporate income tax rate of between zero and 10 percent. However, this is dependent on several factors, including the number of Malaysians they hire, their salaries, and the company’s annual operating expenditure.

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On May 24, 2022, Malaysia announced increased incentives for businesses establishing a ‘principal hub’ in the country.

The new rules include easing the eligible conditions for businesses in addition to providing a corporate income tax (CIT) rate of between zero and 10 percent, depending on the qualifying business activity.

The principal hub incentive was first introduced in 2015, with the aim to make Malaysian cities more attractive to multinational companies (MNCs) looking to establish a regional hub in Southeast Asia, particularly since the country had established a manufacturing base for MNCs in the 1980s to 2000s. Further, the government hopes that by attracting more MNCs, Malaysia’s production hubs can move up the value chain.

To be determined as a principal hub, the company must be incorporated in Malaysia, and use the country as a base to manage, and support key functions of its regional or global business.

Applications for the incentives are open until December 31, 2022.

What are the qualifying activities for principal hubs in Malaysia?

The qualifying activities are as follows:

Qualifying Activities for Principal Hubs in Malaysia
Business type	Qualifying service
Business services	1.       Sales and marketing 2.       Logistic services 3.       Business development 4.       Bid and tender management 5.       Technical support consultancy 6.       Information management and processing 7.       Project management 8.       Research, development, and innovation 9.       Investment research analysis 10.   Strategic sourcing and distribution 11.   Treasure and fund management
Strategic services	1.       Intellectual property management 2.       Senior-level talent acquisition and management 3.       Strategic business planning and corporate development 4.       Corporate finance advisory services 5.       Regional profit and loss/business unit management
Share services	1.       Finance and accounting services 2.       Corporate training and human resource management services

Before the amendment, a qualifying company had to carry out at least three qualifying services to be eligible for the principal hub incentives. With the changes, businesses now only need to undertake one qualifying service.

How to qualify for the incentives

The incentives are structured in three tiers/categories, which are then based on various criteria ranging from annual business spending to annual sales to the number of employees.

A qualifying company can be a new company or an existing company. However, they have different conditions for eligibility.

New companies

Under the principal hub incentive, new companies are defined as:

1. Having paid-up capital of more than 2.5 million ringgit (US$568,000);
2. having been incorporated in Malaysia, under the Companies Act of 2016, and being a resident in the country;
3. A newly incorporated company in Malaysia, which does not have any existing entities or related entities in the country; and
4. A newly incorporated company in Malaysia, which has an existing entity or related entity in the country, but has not undertaken any principal hub qualifying services, prior to applying for the principal hub scheme.

Existing companies

Existing companies are defined as:

• Having paid-up capital of more than 2.5 million ringgit (US$568,000);
• having been incorporated in Malaysia, under the Companies Act of 2016, and be a resident in the country; and
• A company already operating in Malaysia and carrying out manufacturing or services activities other than the qualifying activity, prior to applying for the principal hub scheme.

What are the tax rates and their qualifying conditions?

There are three categories of tax rates, each with different qualifying conditions.

Category 1 (new companies under rule c)

Companies under category 1, are eligible for a zero percent CIT rate if they fulfill these additional conditions:

• Must employ at least 50 full-time employees with a minimum salary of 5,000 ringgit (US$1,137) per month. At least 50 percent of employees must be Malaysian citizens;
• Must employ at least five full-time employees with a minimum salary of 25,000 ringgit (US$5,687). 50 percent of such employees must be Malaysian citizens; and
• Have a minimum operating expenditure of 10 million ringgit (US$2.2 million).

Category 2 (new companies under rule d)

Companies under category 2, are eligible for a five percent CIT rate. The following conditions apply:

• Must employ at least 30 full-time employees with a minimum salary of 5,000 ringgit (US$1,137) per month. At least 50 percent of employees must be Malaysian citizens;
• Must employ at least four full-time employees with a minimum salary of 25,000 ringgit (US$5,687). 50 percent of such employees must be Malaysian citizens; and
• Have a minimum operating expenditure of 5 million ringgit (US$1.1 million).

The incentives for new companies are available for five years, and can be renewed for another five years if they adhere to the conditions below:

 

Category 1

• Must employ at least 60 full-time employees with a minimum salary of 5,000 ringgit (US$1,137) per month. At least 50 percent of employees must be Malaysian citizens;
• Must employ at least five full-time employees with a minimum salary of 25,000 ringgit (US$5,687). 50 percent of such employees must be Malaysian citizens; and
• Have a minimum operating expenditure of 13 million ringgit (US$2.9 million).

Category 2

• Must employ at least 36 full-time employees with a minimum salary of 5,000 ringgit (US$1,137) per month. At least 50 percent of employees must be Malaysian citizens;
• Must employ at least four full-time employees with a minimum salary of 25,000 ringgit (US$5,687). 50 percent of such employees must be Malaysian citizens; and
• Have a minimum operating expenditure of 7 million ringgit (US$1.5 million).

Category 3 (existing companies)

Existing companies can receive a 10 percent CIT rate if they adhere to the following additional conditions:

• Must employ at least 30 full-time employees with a minimum salary of 5,000 ringgit (US$1,137) per month. At least 50 percent of employees must be Malaysian citizens;
• Must employ at least five full-time employees with a minimum salary of 25,000 ringgit (US$5,687). 50 percent of such employees must be Malaysian citizens; and
• Have a minimum operating expenditure of 10 million ringgit (US$1.1 million).

Companies under Category 3 can enjoy incentives for a period of five years. There is no option to extend this.

Further Reading

• Incentives and Financing Schemes for Businesses Under Malaysia’s Budget 2022
• New Tax Measures Impacting Businesses and Individuals in Malaysia’s Budget 2022
• Malaysia Increases Minimum Wage from May 1, 2022: What are the Implications for Businesses?

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