Malaysia is rapidly becoming a top choice for multinational corporations (MNCs) looking to establish operational headquarters (OHQs) in Southeast Asia. This surge in interest is driven by a confluence of factors, including the country’s strategic location, business-friendly policies, and a skilled, multilingual workforce. Notably, Malaysia is moving up the value chain by focusing on high-technology, high-value-add, and knowledge-based activities, making it even more attractive for MNCs seeking to establish regional hubs. This report delves into the tax incentives and benefits that are making Malaysia a preferred destination for OHQs.
Tax Incentives for OHQs in Malaysia
The Malaysian government has implemented a robust framework of tax incentives to encourage businesses to set up OHQs in the country. These incentives are designed to reduce the tax burden on companies and enhance Malaysia’s competitiveness as an investment destination. Initially, Malaysia offered an Operational Headquarters (OHQ) incentive scheme, which was later replaced by the Principal Hub (PH) incentive in 2015.
Here’s a summary of the key tax incentives relevant to OHQs in Malaysia:
Income Tax Exemption (OHQ)
Approved OHQs are exempted from income tax for 10 years on income from qualifying services, interest on foreign currency loans, and royalties from R&D.
Eligibility Criteria
- Locally incorporated under the Companies Act 1965
- Minimum paid-up capital of RM0.5 million
- Minimum annual operating expenditure of RM1.5 million
- Provide at least three qualifying services (see below)
Concessionary Tax Rate (PH)
Existing companies engaged in core income-generating activities enjoy a 10% tax rate on statutory income (excluding IP income). New companies can qualify for a 0% or 5% tax rate on similar income, depending on their level of commitment. A 10% tax rate applies to IP income for new companies.
Eligibility Criteria
- Incorporated in Malaysia under the Companies Act 2016
- Paid-up capital of more than RM2.5 million
- Fulfill criteria for core income-generating activities and qualifying services (see below)
Investment Tax Allowance (ITA)
Companies involved in promoted activities or products can claim a tax deduction based on capital expenditure.
Eligibility Criteria
- Varies depending on the promoted activity or product
- Standard allowance rate is 60% of qualifying capital expenditure, but can increase to 100% for activities critical to national interests
Tax Exemption on Increased Exports
Resident companies in manufacturing or agriculture that increase exports are entitled to allowances.
Eligibility Criteria
- Achieve minimum annual sales of RM 10 million
- No more than 20% of annual sales from commodity trading
- Use local services and infrastructure
Double Deduction for Overseas Promotion
Companies can claim double deductions on expenses for export promotion, including overseas promotion and trade fairs.
Eligibility Criteria
- Expenses must be related to the promotion of exports
Qualifying Services for OHQ and PH Status:
To qualify as an OHQ or PH, companies must engage in a range of activities that demonstrate their commitment to managing regional or global operations from Malaysia. These activities include:
- Core Income Generating Activities: These encompass qualifying services or qualifying trading activities.
- Compulsory Services: For PH status, companies must provide Regional Profit & Loss/Business Unit Management and Strategic Business Planning and Corporate Development.
- Other Qualifying Services: Companies must also carry out a minimum number of other qualifying services, which can include activities such as general management and administration, business planning and coordination, procurement, technical support, marketing control, training and personnel management, treasury and fund management, and research and development.
Two-Tier Exemption System for Dividends
Malaysia’s tax incentives also extend to dividends. Under the two-tier exemption system, dividends received by shareholders from companies enjoying tax incentives (such as OHQs or PHs) are tax-exempt. This system encourages reinvestment and facilitates corporate structuring by allowing tax-exempt dividends to be distributed to shareholders up to two tiers away from the incentivized company.
Benefits of Establishing OHQs in Malaysia
Beyond the attractive tax incentives, Malaysia offers a multitude of benefits that make it a compelling location for OHQs:
Strategic Location and Market Access
Malaysia’s strategic location in Southeast Asia provides unparalleled access to the ASEAN market, a dynamic economic region with over 600 million consumers. The country’s well-developed infrastructure, including modern ports, airports, and road networks, ensures efficient connectivity within the region and with global markets. This accessibility is further enhanced by Malaysia’s extensive network of FTAs, which provide preferential trade tariffs and reduce barriers to entry for businesses. Moreover, Malaysia has benefited from ongoing trade tensions and supply chain recalibrations, as companies seek alternative manufacturing and operational bases.
Political and Economic Stability
Malaysia enjoys a stable political environment, with a history of peaceful transitions and a government committed to maintaining predictable policies. The country’s strong economic fundamentals, including a diversified economy and low inflation rates, contribute to a favourable investment climate.
Business-Friendly Environment
Malaysia has a pro-business environment that prioritises efficiency and ease of doing business. The country’s ranking of 12th on the World Bank’s Ease of Doing Business Index highlights the streamlined procedures for starting and operating a business.
Skilled and Multilingual Workforce
Malaysia boasts a young, educated, and productive workforce with a high literacy rate. The workforce is also multilingual, with English widely spoken alongside other languages. This multilingual capability is a significant asset for businesses operating in a globalised economy.
Government Support and Facilities
The Malaysian government actively encourages FDI and provides comprehensive support to foreign investors. This support includes tax incentives, investment allowances, and streamlined procedures for setting up businesses. The government has also established special economic zones and industrial parks with attractive incentives to encourage investment in specific sectors and regions.
Facilities for Principal Hub Companies:
In addition to the above, companies with PH status enjoy the following facilities:
- Foreign Equity Participation: 100% foreign equity participation is allowed.
- Expatriate Posts: Companies can hire expatriates based on their business plan requirements, subject to prevailing policies.
- Use of Foreign Professional Services: Companies can utilise foreign professional services if those services are not available locally.
Fostering Innovation and a Future-Ready Workforce
Malaysia is committed to fostering innovation and developing a future-ready workforce. The Principal Hub incentive encourages the transfer of high-value technology and knowledge-based activities to the country. Furthermore, Malaysia’s digital transformation initiatives, such as the MyDIGITAL initiative, are crucial for attracting foreign investment and equipping the workforce with digital skills. These initiatives ensure that Malaysia remains competitive in the evolving global economy.
Optimizing Resources and Decision-Making
The Principal Hub structure offers several operational advantages for MNCs. It enables companies to optimize resources, build capacity, and quicken decision-making processes. By centralizing regional or global functions in Malaysia, companies can streamline their operations, improve efficiency, and enhance their responsiveness to market demands.
Flexibility in Foreign Currency Transactions
OHQs in Malaysia enjoy flexibility in managing foreign currency transactions. They can open foreign currency accounts with onshore licensed banks, licensed offshore banks in Labuan, or overseas banks. They can also obtain foreign currency credit facilities from onshore licensed banks and licensed merchant banks in Malaysia, as well as from non-residents.
Case Studies of OHQs in Malaysia
Several MNCs have successfully established OHQs in Malaysia, demonstrating the country’s attractiveness as a regional hub. Here are a few examples:
- Honeywell International: Honeywell established its regional ASEAN headquarters in Greater Kuala Lumpur, citing the availability of talent, government support, and positive experiences with its existing facilities in Penang. The company expects to double the number of local managers employed over the next five years.
- Oracle Corporation: Oracle established its first digital hub in Southeast Asia in Greater Kuala Lumpur, taking advantage of Malaysia’s business-friendly ecosystem and digital infrastructure.
Conclusion
Malaysia presents a compelling case for MNCs seeking to establish OHQs in Southeast Asia. The country’s comprehensive tax incentives, strategic advantages, and supportive environment create a fertile ground for businesses to thrive. While Malaysia faces competition from other Southeast Asian countries offering its incentives, its unique blend of political stability, economic strength, and a future-ready workforce positions it as a leader in the region.
However, companies should be aware of potential challenges, such as navigating cultural nuances and ensuring compliance with evolving regulations. As the global economic landscape continues to shift, Malaysia must maintain its focus on innovation, infrastructure development, and talent upskilling to solidify its position as a premier destination for OHQs. By addressing these challenges and capitalising on its strengths, Malaysia can further enhance its attractiveness to foreign investors and solidify its role as a key player in the regional and global economy.