3 Important Considerations Before Incorporating Your Company In Malaysia

Malaysia is rapidly establishing itself as a prime candidate for offshore businesses seeking a stepping stone into the highly promising Southeast Asian region. This is due to the recent modernisation of the nation’s taxation structure to a progressive tax system, as well as policy reforms that have encouraged economic growth and foreign investment by enhancing corporate governance and financial controls. Most crucially, reductions in the cost of doing business through the establishment of PEMUDAH, the Special Task Force to Facilitate Business have resulted in an ever-narrowing GDP gap between Malaysia and its more illustrious neighbour, Singapore. Incorporating your company in Malaysia is definitely a viable option and has become even easier with the relaxation of the Companies Act. In this article, let our consultants help you understand the three main considerations to keep in mind when you want to register company in Malaysia.

What to consider before incorporating your company in Malaysia:

First consideration: Is Malaysia right for you?

• As a founding member of the Association of Southeast Asian Nations (ASEAN), doing business in Malaysia offers both political stability and economic benefits. Being a member of ASEAN also makes the nation a beneficiary to the various trade agreements that ASEAN is a part of both within and out of the region. Some of these trade agreements include the ASEAN Free Trade Area and Free Trade Agreements with the organisation’s major trading partners, such as Australia, China and New Zealand.
• Domestically, Malaysia’s governmental policies are also promising, with their openness to trade and investment helping to lower unemployment and increase median income. Malaysia has also transitioned successfully from a commodities-based economy to a technology- and data-driven economy, with specific initiatives to encourage this such as the creation of the Digital Free Trade Zone in Kuala Lumpur and the International Business and Financial Centre in Labuan. These promising changes make a strong case for incorporating your company in Malaysia.
• However, despite these promising changes, Malaysia still ranks in the middle third of the World Bank’s Human Capital Index, at 55th out of a total of 157 countries. This makes Malaysia a less than ideal choice in heavily knowledge-driven businesses. Certain pro-Bumiputera policies also exist in Malaysia’s education system, civil service and even business ownership. Bumiputera-owned companies are likely to have cheaper business licenses, special bank agreements and preferential rental agreements. This inherently deters company formation in Malaysia for non-Bumiputera businesses.
• Malaysia once more ranks in the middle third of Transparency International’s 2020 Corruption Index, at 57th out of a total of 179 countries, with a score of 51 – a less than ideal placing. The recent high-profile case involving the embezzlement of $4.5bn from sovereign-owned wealth fund 1 Malaysia Development Berhad (1MDB) by ex-Prime Minister Najib Razak has also tarnished the reputation of the country, creating a loss of trust and credibility.
• Lastly, the corporate tax rate stands at 24%, higher than other legally tax-exempt regions such as Singapore and Hong Kong at 17% and 16.5%; and goes even higher for petroleum-related industries to 38%. However, these tax rates are mitigated by tax rebates on smaller companies which lead them to only be taxed at 17%. In addition, petroleum operations in marginal fields are taxed at 25% which is only marginally higher than the base corporate tax rate.
• Based on this, companies must determine how well they are able to capitalize on the opportunities whilst managing the threats in the region when deciding whether to set up company in Malaysia. This brings us to our next two main considerations when incorporating your company in Malaysia.

Second consideration: How can your company capitalize on the opportunities Malaysia offers?

• At the end of the day, the opportunities that Malaysia offers are only meaningful if the internal capabilities of the company are a good match and allow the opportunities to be capitalised on and made relevant. Expansion into Malaysia would thus make the most sense for a company that is not already based within the ASEAN region as this would grant them access to ASEAN trading blocs. Given Malaysia’s focus on manufacturing, data and financial industries, the nation would also offer location economies for firms based in these industries, creating an added benefit to set up company in Malaysia.

Third consideration: How can your company mitigate the threats posed?

• Likewise, positioning your company to effectively mitigate the threats in entering the Malaysian market can go a long way in establishing a competitive advantage over your business rivals. Competitive advantage is derived from scarcity, and being able to mitigate these threats gives companies the confidence to enter markets that competitors would not. Most offshore companies would not need to depend too heavily on human capital since the number of employees they have would be minimal, thereby mitigating the lack of human capital within Malaysia. If absolutely necessary, the gap in human capital can also be bridged by in-house learning and development programs.
• A 2002 study by McKinsey & Co has also shown that shareholders are more willing to pay a premium for a company with good corporate governance practices based in a country with weaker legal and regulatory protections. Thus, in the same vein, we can expect that these shareholders would be more inclined to deal with reputable companies, especially in countries they deem to be corrupt as they would feel more protected by the company’s good corporate governance practices. As such, the level of corruption in the country does not necessarily correlate to the level of corruption in the company.
• Lastly, companies that are smaller in revenue or based in non-petroleum industries will be able to better mitigate the relatively higher Malaysian corporate tax rates. Companies operating or trading within Labuan also face a significantly lower tax rate of 3% of audited income. Foreign-sourced income is also not taxed, making it viable to register business in Malaysia if business activity is expected to be foreign rather than domestic.

Looking to incorporate your business in Malaysia?

Malaysia has long been overshadowed by its more illustrious compatriots in the Asia-Pacific, but recent changes have made company formation in Malaysia a viable option, especially if you bear in mind these the three main considerations above when incorporating your company in Malaysia and can organize your business to capitalize on the available opportunities yet mitigate the threats.

Tetra Consultants provides our clients with a hassle-free way to set up businesses. Our team of dedicated professionals will guide you through the full set-up process, from selecting the best jurisdiction to fit your company’s unique goals and needs, to appointing a qualified resident director and incorporating your offshore business successfully.

Contact us now to find out if your company is a good fit for Malaysia and we will revert within 24 hours.