Q&A on Foreign Investment in Malaysia

1. Are there any foreign investment laws in Malaysia?

Malaysia does not have a general or overarching foreign investment legislation. Instead, there are specific restrictions that apply to foreign investments in several industry sectors. These in- dustry sectors include financial ser- vices, capital markets activities carried out by investment banks, petroleum, communications and multimedia, water and energy supply. Malaysia does have a framework in the form of the Promotion of Investment Act 1986 which exclusively deals with the application of incentives applicable to companies and/or individuals for investment tax allowance and the restrictions and conditions on foreign investment.

2. Is there a governing or regulatory body responsible for overseeing foreign investment in Malaysia?

The Malaysian government has tasked several governing or regulatory bodies with the responsibility of promoting and regulating foreign investment in different industry sectors. The following are some of the governmental agencies, bodies and authorities involved in foreign investment in different industries:

Central Bank of Malaysia (Bank Negara Malaysia) – financial services and foreign currency controls;
Malaysian Investment Development Authority (MIDA) – manufacturing and services sector;
Ministry of International Trade and Industry (MITI) – technology, electrical, electronics, machinery, medical devices, aerospace and energy;
Ministry of Trade, Co-operatives and Consumerism – wholesale, retail and trade;
Malaysian Economic Corridors – there are various Economic Corridors with statutory bodies assigned to encourage development in specific regions in Malaysia; and
Economic Planning Unit, Prime Minister’s Department (EPU) – acquisition of land and properties by foreign entities.

3. What restrictions exist in Malaysia on foreign investment?

Restrictions may apply in different sectors in Malaysia including logistics, industrial training, wholesale and distributive trade (such as hypermarkets and food and restaurant businesses), which limit foreign equity participation.

Other restrictions include equity ownership limits or requirements to reserve equity ownership for Bumiputera (Malays and indigenous people) which may be imposed as a condition to obtain certain licenses in certain sectors.

As for foreign investment in land and properties in Malaysia, there are certain restrictions imposed by each state in Malaysia in terms of the value of the property, location and sometimes the type of property.

4. Which industries do these restrictions apply to (if any)?

Generally, there are minimal restrictions imposed on foreign investments in Malaysia. However, there are certain restrictions imposed by the relevant authorities in the respective industry sectors, some of which are as follows:

Trade: Foreign investors seeking to engage in the trading sector in Malaysia must follow the Guidelines on Foreign Participation in the Distributive Trade Services under the Ministry of Domestic Trade, Co-operatives and Consumerism which require foreign involvement to be approved by the Ministry.
Manufacturing: Companies engaged in manufacturing activities (with an equity capital of more than RM2.5 million and more than 75 full-time employees) are required to submit an application for a licence to the Malaysian Investment Development Authority.
Oil and Gas: Foreign companies seeking to invest in oil & gas companies must be mindful of the licenses and approvals required from Petronas including the requirement of Bumiputera equity control. In addition to the restrictions imposed on certain industry sectors, there are policies that apply to some of these sectors which may require minimum equity ownership by Bumiputera Malaysians.

5. Can foreign investors acquire real estate/property/land in Malaysia?

Under the “Guideline on the Acquisition of Properties” issued by the Economic Planning Unit, foreign investors may purchase property in Malaysia in their individual name or in certain cases in their company’s name. However, consent to acquire property may be required from the Economic Planning Unit or respective state land offices.

The foreign investor may have to comply with the following restrictions, which vary from state to state so as to ensure:

The property is above the minimum purchase price threshold;
The residential property is not classified as low-cost housing;
The property is not located on designated Malay reserved land;
The property is not allocated as Bumiputera interest; and
Any further restrictions on the type of property.

6. Are there any sanctions or restrictions on foreign investors from certain countries?

There are presently no sanctions or restrictions on foreign investors from certain countries. However, investors from certain sanctioned countries or high-risk countries may find it difficult to set up bank accounts with banks in Malaysia. The Central Bank of Malaysia issues periodic circulars to advise reporting financial institutions under its purview on measures and steps to be taken in dealing with customers from higher-risk countries in line with anti-money laundering and counter financing terrorism regulations (AML/CFT).

7. Are any governmental approvals required for foreign investment in Malaysia?

Prior to commencing business in certain industry sectors that are subject to foreign ownership restrictions, companies are required to obtain governmental approvals in the form of a licence, permit or consent. These include manufacturing companies, trading companies with foreign equity which may be required to obtain a WRT Licence (Wholesale, Retail & Trade) and real estate which requires consent from the Economic Planning Unit (if necessary).

8. What are the common types of foreign investment in Malaysia?

Equity investment by foreign companies acquiring stakes in local companies and foreign direct investment in projects by way of mergers & acquisitions and joint ventures are common types of foreign investment in Malaysia.

The industry sector which commonly attracts the most foreign investment in Malaysia is the manufacturing sector, followed closely by financial technology and the services sector. Real estate investment in residential and commercial property by foreigners or foreign companies is also common.

9. What are the common business entities open to foreign investors?

Foreign investors wishing to set up businesses in Malaysia can choose from the business structures more particularly set out below, all of which must be registered with the Companies Commission of Malaysia. Private limited companies are the most common and popular structure for doing business in Malaysia. Foreigners are restricted from setting up sole proprietorships and partnerships as these structures are only open to Malaysian citizens and permanent residents.

Private limited companies – known in Malaysia as a “sendirian berhad” company (Sdn Bhd), can be incorporated with at least one director and one shareholder. However, at least one director must ordinarily reside in Malaysia.
Public limited companies – known in Malaysia as a “berhad” company (Bhd), must have at least two directors that ordinarily reside in Malaysia.
Branch office – a foreign company wishing to establish a place of business or carry on business in Malaysia may set up a branch office and at least one agent who is ordinarily resident in Malaysia must be appointed.
Regional office – a foreign company wishing to set up a regional office in Malaysia may set up a regional office or representative office which requires approval from the Government of Malaysia.
Labuan companies – off-shore companies may be incorporated in Labuan, which is a Federal Territory of Malaysia off the coast of Borneo in East Malaysia and is governed by the Labuan Companies Act. Labuan companies may benefit from a preferential tax treatment under the Labuan Business Activity Tax Act (LBATA).

10. Are there any tax advantages for foreign investment in Malaysia?

Companies in Malaysia whether held by local or foreign stakeholders are liable to pay tax on income accruing or derived from Malaysia. Corporate tax rates for companies differ and depend on the total paid-up capital of the company.

Subject to qualifying criteria and the Promotion of Investments Act 1986, the following types of tax incentives are available for foreign investment:

Pioneer status;
Investment tax allowance;
Special incentive scheme;
Green initiative schemes;
Agricultural project incentives;
Research & development incentives;
High technology and strategic projects incentives;
Double deduction of expenses incurred for promotion of exports;
Training incentives;
Labuan international offshore finance centre;
Operational headquarters incentives;
Special economic corridors.

11. Are there any incentives for foreign investors in Malaysia?

The main form of incentives for foreign investors in Malaysia are in the form of tax exemptions and/or incentives as set out above. Tax incentives are provided under the Promotion of Investment Act 1986 and the Income Tax Act 1967.

The Promotion of Investment Act 1986 establishes several different types of incentives. The two most important are pioneer status and the investment tax allowance. Pioneer status essentially entitles an investor to an income tax holiday for five years.

12. Are there any free trade zones in Malaysia which are attractive to Foreign Investors?

There are thirteen free industrial zones (FIZ) and twelve free commercial zones (FIC) in Malaysia. The port of Klang is both a FIZ and FIC.

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian Government, implemented through Malaysia Digital Economy Corporation (MDEC), launched in November 2017. DFTZ aims to facilitate seamless cross-border trading and eCommerce to enable Malaysian SMEs to export their goods internationally.

13. Can foreign investors obtain work visas in Malaysia?

In order to work in Malaysia, foreigners must hold a valid work pass and the application process is conducted through the hiring company. Whilst the list below is not exhaustive, below are types of applicable work visas:

Employment Pass – applications are made by the hiring company which meet minimum paid-up capital requirements;
Professional Visit Pass – is a temporary pass that allows foreigners with certain professional qualifications or specialist skills to enter Malaysia for business under an organization or company for not more than twelve months;
Resident Pass – is a ten year multiple entry visa that is independent of an employer and is applicable to foreigners who have been living and working in Malaysia for at least three years on a continuous basis in any of eleven key industries which form part of the National Key Economic Areas.

14. Are there any foreign currency or exchange controls regulations in Malaysia relating to foreign investment?

There are no foreign currency or exchange controls that restrict foreign investment in Malaysia. The Central Bank of Malaysia has issued notices under the Financial Services Act 2013 and Islamic Financial Services Act 2013 to clarify this.

15. Can foreign investors invest in government projects? If so, are there any restrictions or penalties imposed on the withdrawal of such investments?

Yes, foreign investors may invest in government projects in Malaysia subject to government approval. The Malaysian government is always on the lookout for foreign direct investment (FDI) in projects due to the country being FDI-dependent. Restrictions that may apply depend on the industry sector where certain equity conditions are applicable.

Penalties imposed on withdrawals of such investments will depend on the Investment Agreement entered into between each investor and the Malaysian government.

16. Are there any safeguards or investor protection frameworks in place in Malaysia for foreign investors?

Malaysia is a member of the Multilateral Investment Guarantee Agency (MIGA) and signatory to the MIGA Convention which protect and assist investors in dealing with risks and losses related to expropriation, currency convertibility and transfer restrictions, war, terrorism, breach of contract and non-honouring of financial obligations.

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes. Malaysia has signed the Convention on the Settlement of Investment Disputes in 1965 (ICSID) including adopting the Convention on the Settlement of Investment Disputes Act 1966.

17. Is Malaysia a signatory to any investment protection treaties with any countries?

Malaysia is a party to seven bilateral investment free trade agreements with Japan, Pakistan, New Zealand, India, Turkey, Australia and Chile and six regional free trade agreements through its membership in ASEAN.

Malaysia is also a signatory to several international investment agreements/treaties with investment provisions that protect investors.

18. Have there been any recent changes in law or developments for reform that may affect foreign investment in Malaysia?

As a result of COVID-19, there have been a number of one-off stimulus packages/ policies announced by the Malaysian government that are expected to have a positive impact on foreign investment activities.

The Malaysian Prime Minister on 5 June 2020 announced a series of 40 short-term economic recovery measures (collectively called PENJANA) with a total of RM35 billion (~US$8.2 billion) in value. Some of these initiatives are either aimed at FDI or will have an impact on FDI in Malaysia. Introduced to attract foreign companies to relocate their businesses into Malaysia, Initiative No. 34 of PENJANA includes an allocation of RM50 million (~US$12,136,000) in funds and includes advantageous tax rates and allowances, running from July 2020 to December 2021. Eligible companies can enjoy a 0-10% tax rate for up to 10 years

19. What tips are there for foreign investors to be aware of when dealing with foreign investment in Malaysia?

Malaysia depends heavily on foreign direct investment and current policies are generally conducive to foreign investment. Foreign investors should be apprised of the evolving policy changes and take advantage of current government incentives available to them.

Foreign investors should contact the various Malaysian governmental agencies and seek legal advice to understand the latest FDI landscape and incentives available to them in Malaysia before investing in any particular sector.

This article is reproduced from the Malaysian Chapter in the League of Lawyers’ Country Guide on Foreign Investment. If you’re interested in exploring chapters from other jurisdictions, click here.

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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.