Manufacturing company

Opening a manufacturing company in Malaysia

Malaysia’s manufacturing sector has continued to attract investment with foreign capital accounting for at least 60% of the total numbers approved by the Malaysian Investment Development Authority (MIDA). So, Healy Consultants will be pleased to assist our Clients setup businesses in Malaysia’s manufacturing sector. Our services include i) incorporation of a fully foreign owned subsidiary ii) obtaining the necessary government licenses and permits iii) securing an office space and industrial space iii) hiring of qualified foreign or local labour and iv) locating agents and suppliers for raw materials. For more information, refer to the information below.

Advantages of setting up manufacturing operations in Malaysia

  1. Malaysia is one of the leading manufacturing destinations in the ASEAN region because:
    • Malaysia’s manufacturing industry is a crucial driver of the country’s economy, constituting at least 25% of the country’s GDP. The sales value of the manufacturing sector grew by 2.6% in the second quarter of 2016 to reach approximately US$14 billion as compared to US$13 billion reported in the past year;
    • Malaysia has established itself as a major hub for solar equipment manufacturing, attracting leading global companies from over 40 jurisdictions including the United States and Europe. In 2014, Malaysia was among the leading manufacturers of photovoltaics equipment in the world, coming third only to global economic powerhouses, China and the EU;
    • One of the main advantages of establishing manufacturing operations in Malaysia is the significantly lower key business costs as compared to its regional neighbours. For instance, the wages in the manufacturing industry in Singapore average US$3,250 per month as compared to a monthly average of only US$500 in Malaysia, giving the country a competitive edge;
    • Malaysia also offers an educated, productive and young workforce which is convenient for manufacturing businesses. The country’s median age is 27 years, lower than most of the ASEAN countries. Also, the country has a high literacy rate of 94%.
    • As a result, Cushman & Wakefield, the global real estate services company, ranked Malaysia in their Manufacturing Index 2015 report as the world’s best manufacturing destination, evaluating jurisdictions in at least 30 sub-categories based on risks, conditions and costs;
  2. The Malaysian Government offers multiple incentives to manufacturing companies including:
    • Under the Promotion of Investment Act 1986, the Malaysian government offers two main tax incentives to companies established in the manufacturing industry namely i) the Investment Tax Allowance (ITA) and ii) the Pioneer Status (PS). Eligibility for the incentives is dependent on the type of product or activities a company is involved in. Qualifying products and activities are termed as promoted products or promoted activities;
      • Investment Tax Allowance:
        • A manufacturing company under the ITA status will be entitled to 60% allowance on the company’s qualifying capital expenditure incurred for over a period of 5 years. Qualifying capital expenditure may include expenditures on plant, factory, machinery and other equipment used on the approved project;
        • The allowance can be utilized for exempting 70% of the company’s statutory income from corporation tax. However, the 30% balance will still be taxed at the normal income tax rate of 25%.
      • Pioneer Status:
        • As an alternative to the ITA, a manufacturing company may apply for the Pioneer Status (PS). A company granted the Pioneer Status will enjoy exemption from corporate income tax on 70% of its statutory income for a period of at least 5 years starting from when the company’s production level reaches 30% of the company’s total capacity;
        • The company is however taxed at the normal prevailing corporate tax on the 30% balance of its statutory income. Companies seeking to enjoy these incentives must first submit an application through the Malaysian Investment Development Authority (MIDA);
    • Manufacturing companies categorized under ‘High Technology Companies’ engaged in the production of promoted goods or activities in the area of emerging or new technologies may qualify for i) a Pioneer Status with 100% tax exemption on statutory income over a 5-year period and ii) an Investment Tax Allowance of 60% on the qualifying capital expenditure over the same period;
    • Companies investing in the Malaysian automotive industry especially in the manufacture of assembly of electric and hybrid vehicles will enjoy certain benefits including i) 100% pioneer status or income tax allowance for a period of 10 years ii) exemption of up to 50% on excise duty iii) Research and Development (R&D) grants and customized training;
    • Companies (at least 3 years old) investing in modernization, expansion, automation or diversification of their operations will be entitled to i) a reinvestment allowance of 60% of qualifying capital expenditure and ii) the possibility of offsetting the reinvestment allowance against 100% of its statutory income. However, the latter will only be possible provided the company attains specific levels of productivity prescribed by the Malaysian Ministry of Finance;
    • Companies that use Malaysia as their headquarters or regional or global base of operations will enjoy i) reduced corporate income tax rate ranging between 0% and 10% over a period of 10 years depending on activity ii) exemption from customs duty on imported components, raw material and selected finished products and iii) flexibilities on foreign exchange administration.

Disadvantages of setting up manufacturing operations in Malaysia

  1. Challenges to operating a manufacturing enterprise in Malaysia include:
    • Lack of abundant local cheap labour: Malaysia has a shortage of local labour and more times than not, has relied on imported cheap labour from the neighbouring countries such as Bangladesh, Indonesia, Thailand and Vietnam among others. Manufacturing companies looking to maximize on cheap labour will have to endure the stress of applying for work permits for these migrant workers;
    • The process of starting a business in Malaysia and the subsequent application for approvals of licenses and permits can be a long and tedious activity. Although the Ease of Doing Business report by World Bank indicates the number of days to set up a business in Malaysia at 4 days, the reality on the ground is that the process can take up to 3 to 4 months, especially for foreign investors;
    • Approvals for incentives including exemptions from customs duty, approval for status of Research and Development (R&D) companies, expatriate posts and approval of manufacturing licenses may take up to 6 months from the date of submission of application;
    • Malaysia has what most employers could consider a lot of ‘paid’ public holidays. The country has at least 19 public holidays (or more depending on State) annually owing to the diversity in religious and cultural practices as well as national events. In addition, a new Malaysian worker is entitled to at least 8 days’ annual paid leave bringing the total to at least a minimum of 27 days annually. This may be considered disruptive to work in the professional world.

Malaysia Labour Considerations

  • The Malaysian employments laws are majorly contained in the i) Industrial Relations Act 1967 and ii) the Employment Act 1955 as well as iii) various subsidiary regulations and legislation including the Employment (Termination and Lay-off Benefits) Regulations 1980;
  • The maximum weekly working hours in Malaysia is set at 48 hours over a six day working week. The minimum wage for peninsular Malaysia increased by 11.1% to MYR1,000 (Approx. US$250) per month with effect from 1st July 2016 and MYR920 (Approx. US$230) for the rest of the country including Sarawak, Sabah and Labuan FT;
  • Respectively, the minimum hourly wage in Malaysia was set at US$1 for peninsular Malaysia and US$1.2 for Sabah, Sarawak and Labuan FT. Employees working overtime are entitled to additional 50% of hourly pay for overtime work;
  • All employers in Malaysia are required to contribute to Malaysia’s Employee Provident Fund (EPF) an amount equivalent to 11% of the employee’s monthly remuneration. The employer must withhold the employment income tax through the PAYE (pas as you earn) monthly and submit to the relevant tax authority;
  • Malaysia does not have in place a maximum length of probation period for workers. Also, summary dismissal of employees due to redundancy is permitted by law;
  • All applications for employment of expatriates for manufacturing companies must be submitted to the Malaysian Investment Development Authority (MIDA). Companies are required to meet specific requirements based on i) their type of business activity ii) nationality of the to-be employees and iii) applicable quotas and levy.
  • The minimum paid up capital required for foreign owned manufacturing companies looking to hire expatriates is set at MYR500,000 (approx. US$125,000). The total number of expatriate posts will be dependent on the requirements of the company and will be considered by MIDA based on the merits of the case.

Contact us

For additional information on our business registration services in Malaysia, please email us at email@healyconsultants.com. Alternatively please contact our in-house country expert, Ms. Chrissi Zamora, directly:
client relationship officer - Chrissi
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