What Type of Entity Should We Use to Set Up Our Business?

One of the first issues faced by prospective investors in Malaysia is choosing the appropriate type of legal structure through which to operate their business. Generally, the following are the most common structures adopted by foreign investors doing business in Malaysia:

1. Private limited company
2. Branch office
3. Representative office
4. Regional office

Private Limited Company

A company must be owned by a minimum of one shareholder and managed by a minimum of one resident director. The liability of each shareholder is generally limited to the amount unpaid on the shares held (if any) and shareholder(s)’ direct participation in the company’s affairs is normally quite limited. It is the directors who are responsible for managing the company’s affairs and who owe various fiduciary duties to the shareholder(s) and the company (duty of care, duty to act honestly, etc.).

Branch, Representative Office, and Regional Office

Many times, however, foreign investors will not want to operate as a limited company. This is most likely to be true when a multinational company seeks to establish a presence in Malaysia, but does not wish to establish a separate legal entity. For accounting, tax, and other reasons, the multinational company may instead want the Malaysia office to function as a part of the head office overseas. If that is the case, the multinational will normally choose to establish a representative office, branch office, or regional office, not a limited company.

Branch

It is with issues concerning liability where the branch and limited company structures fundamentally differ. For a limited company, liability arising from the actions of the business or its employees is generally limited to the Malaysian company only. The same is not true for a branch. Malaysian law treats a branch as merely an extension of its head office overseas.

Representative Office and Regional Office

The representative office and regional office structures are very different from those of the branch office and limited company. Unlike a branch or limited company, representative offices and regional offices are not allowed to earn income. Just as with a branch, representative offices and regional offices merely serve as extensions of their head offices overseas. They are not stand-alone legal entities. They are also strictly regulated to performing specific functions, designated by the Malaysian Ministry of International Trade and Industry, on behalf of their head offices overseas.

Capital Required

A representative office and a regional office are not subject to any minimum capital requirement or any equity condition; however, they must both be completely funded for all staff salaries, rent, and other operating expenses to be paid from sources outside Malaysia.

Branch Registration and Official Fees

A Malaysian branch of a foreign company to be located in Kuala Lumpur is required to register with the Companies Commission of Malaysia (CCM) before commencing operations. If the branch is to be located outside of Kuala Lumpur, then the foreign company has the option of either registering with the CCM in Kuala Lumpur or with the local office of the CCM in the state in which the branch is to be established.

Representative Office and Regional Office Registration

An application with complete information for the establishment of a representative office and a regional office (excluding banking and financial services) should be submitted in three sets to the Chief Executive Officer of the Malaysian Industrial Development Authority (MIDA), MIDA Sentral, No. 5, Jalan Stesen Sentral 5, Kuala Lumpur Sentral, 50470 Kuala Lumpur, Malaysia, Tel: (603)2267-3633, 164 25 • TYPE OF BUSINESS TO ESTABLISH: MALAYSIA Fax: (603)2274-7970, Email: investmalaysia@mida.gov.my,  

What are the Legal Issues Associated with the Start-Up of a Company?

There are several legal and practical issues associated with the legal start-up of a private limited company (“company”). The start-up process involves registration with the Companies Commission of Malaysia (CCM), as well as obtaining other government licenses and approvals that may be required, depending upon the business activities the company seeks to engage in. Shelf companies are available in Malaysia and will be discussed in the last section of this chapter.

1. Promoters and Subscribers

The parties responsible for registering the company with the CCM are referred to as the company’s promoters. The promoters (minimum one) must be individuals (not business entities), and they must be available to sign documentation, as required, during the registration process and incur the initial company expenses for the incorporation process. The subscribers are the parties responsible for subscribing to the first shares of the company and may either be individuals or business entities.

1. Directors

The company is required to have a minimum of one director for a private company and two directors for a public company, each of whom must maintain their primary residence in Malaysia and it shall not include an alternate or substitute director.

1. Reservation of Company’s Name

The first step of the company registration process is the application for confirmation of availability of the company’s proposed name and reservation of the company’s proposed name. In order to confirm the availability and reserve the proposed name, the applicant is required to submit the relevant application forms to the CCM online at https://mycoid2016.ssm.com.my/. However, this application shall only be made by a person with a registered user name and password with the CCM. Accordingly, most of these applications are submitted via a registered company secretary or a lawyer already having such user name and password.

1. Constitution

Most companies in Malaysia maintain a Constitution which is referred to as the Memorandum and Articles of Association (“M&A”) under the previous law. The Constitution contains the basic rules, which the company is to follow with regard to calling and holding shareholders and directors’ meetings, the appointment of offices, timing of required meeting, etc.

1. Address

It is the normal situation in Malaysia for the company to maintain an official registered office and a separate business address. The registered office address is usually the address of the appointed company secretary. The business address of the company is the address where the actual place of business of the company is located.

1. Share Capital

Requirements Share capital refers to the total financial responsibility of the company’s shareholders with respect to the company. Each individual shareholder may make this investment in the company using either cash or non-cash assets. Under Malaysian law, there are no generally applicable minimum capital requirements for company registration, however, minimum capital requirements may apply in association with work permit / visa requirements (see Chapter 28) or see to specific capital requirements.

1. Official Fees

The registration fees for the incorporation of a company varies from RM 1,000 to RM 3,000, based on the following schedule.

• Type of Company Applicable Registration Fee
• Company limited by shares RM 1,000
• Company limited by guarantee RM 3,000
• Unlimited company RM1,000

1. Timing

Registration of the company can normally be accomplished within two to three weeks, depending on whether all the documents required for incorporation are complete and comply with applicable regulations.

1. Filings

After company registration is completed, other various statutory filings are required to be submitted to the CCM within one month from the date of incorporation. These filings are fairly routine. For instance, the company shall appoint a registered company secretary within thirty the days after incorporation and the company secretary shall be registered with CCM and possess a valid practising certificate issued by CCM.

1. Public Access to Company Details

After the company is successfully registered, many details regarding the company’s structure are easily available to the public at the CCM. These details include the company’s list of shareholders and directors, registered capital, details of company charges, balance sheet for the preceding year, etc.

1. Purchase of Shelf Companies

As an alternative to incorporating a new company (as outlined above), the applicant may wish to purchase a shelf company. A shelf company is a company which has already been registered by formation agents for the purpose of sale to third parties.

What are the Legal Issues Associated with Operating as a Foreign-Held Company?

1. Definition of Foreign

Under Malaysian law, the definition of foreign is quite broad and includes any company incorporated outside of Malaysia and any company whose head office or principal place of business is not in Malaysia. A foreign-held company can generally be defined as a company owned and/or controlled by a non-citizen or by a foreign company whose headquarters is located in a foreign country. Also meeting the definition of “foreign” is any Malaysian registered company which is legally classified as a foreign interest. The definition of foreign interest includes foreign nationals (including foreign nationals who have permanent residence in Malaysia) and local companies and local institutions in which foreigners hold more than 50% of the voting rights in that local company or local institution.

1. Bumiputera Requirements

In Malaysia, certain legal rights and privileges are reserved for those Malaysian nationals who qualify as ethnic Malay or aboriginal, also referred to as Bumiputera. These rights and privileges sometimes affect the requirements imposed on foreign investors in Malaysia. Historically, Malaysian law has imposed the following minimum shareholding quotas on Malaysian registered companies with foreign shareholders through the establishment of the Foreign Investment Committee (“FIC”): 30% minimum Bumiputera shareholding 40% Malaysian (non-Bumiputera) shareholding permissible 30% maximum foreign shareholding permissible Note that the above quotas have largely been repealed in the past 20 years, however, are still applicable to certain sectors.

1. Nominee Shareholders

Contractual arrangements between foreign investors and Malaysian parties in the form of nominee agreements, voting agreements, etc. are legally enforceable and common place in Malaysia. Investors should note, however, that these arrangements are enforceable only against the party to the contract and are not binding on the company itself.

1. Registration

Unlike many other countries, Malaysia does not have a central registration authority for foreign investment, but rather uses a system whereby specific governmental agencies are responsible for different areas of foreign business. Each of these agencies has its own procedures, requirements, and approval criteria. The chart below lists the government agencies responsible for specific sectors of foreign investment and the normal processing time for registration approval.

What Is the Process to Obtain a Work Permit?

1. Employment and Visit Pass

The standard authorization required for foreigners to work and live in Malaysia is either an Employment Pass or a Visit Pass, depending upon the situation. All applications for Employment Passes and Visit Passes shall be made online through the Expatriate Services Division (“ESD”) online system.

1. Application Process for Employment Pass and Visit Pass

The process for the foreign employee to be employed and be given either an Employment Pass or Visit Pass (collectively known as Authorization) involves the following two steps: i. obtaining initial approval from the designated government agency (depending on the area of employment); and ii. applying for the relevant passes from the Immigration Department.

What Incentives are Available to Foreign Investors by the Government?

Malaysian Industrial Development Authority (MIDA)

MIDA is an agency under the Ministry of International Trade & Industry (MITI) in charge of encouraging specific types of manufacturing projects and services activities in Malaysia.

In order for a project to qualify for the incentives offered by MIDA, the project must engage in promoted activities or produce promoted products. To see a complete list of the promoted activities and products, please refer to the Appendices in the guidebook published by MIDA – ‘Malaysia: Investment in the Manufacturing Sector – Policies, Incentives and Facilities’(“Guidebook”) – which can be accessed through the following link:

https://www.mida.gov.my/home/administrator/system_files/modules/photo/uploads/20200212162629_Malaysia%20Investment%20in%20the%20Manufacturing%20Sector%202019.pdf

Please note MIDA promotes specific types of products and activities in Malaysia only and not the company itself.

1. Pioneer Status

Companies investing in promoted activities or products may be granted Pioneer Status which entitles the companies to a tax exemption from 70% to 100% on the project’s annual statutory income for a period of five to ten years. The degree of tax exemption granted will depend on the type of promoted activity/product. For example:

1. Promoted activities/products for the manufacturing sector: tax exemption on 70% of statutory income for 5 years.
2. Promoted activities/products for high technology companies: tax exemption on 100% of the statutory income for 5 years.
3. Promoted activities/products of national and strategic importance: tax exemption on 100% of statutory income for 10 years.

For a complete list of tax exemptions applicable to specific categories of promoted activities and products, please refer to the Guidebook (link provided above).

1. Investment Tax Allowance

The Investment Tax Allowance (ITA) is offered by MIDA for long term projects with large capital investments. ITA is an allowance of 60% to 100% with respect of qualifying capital expenditure which has been incurred within five to ten years from the date the first qualifying expenditure is incurred. This allowance may be used to offset against 70% to 100% of the project’s annual statutory income.

1. BioNexus Status

MIDA grants certain special incentives for projects engaging in activities in the biotechnology industry and which have also been approved with BioNexus Status by the Malaysian Bioeconomy Development Corporation Sdn Bhd.

Free Zones

Free Zones are administrated by the Malaysian Ministry of Finance and are designated as either free commercial zones or free industrial zones. Generally, being located in a Free Zone entitles a company to certain benefits in the form of exemption from customs checks.

1. Free Commercial Zones Companies which operate within Free Commercial Zones (FCZ) are subject to greatly reduced customs formalities. The scope of activities permitted in a FCZ includes trading (except retail trading), breaking bulk, grading, repacking, relabeling, and transit.

2. Free Industrial Zones The activities permitted in Free Industrial Zones (FIZ) are limited to manufacturing-related activities. Companies located in a FIZ are granted reduced customs formalities, as well as the duty free import of raw materials, component parts, machinery, and equipment specifically required in the manufacturing process.

What are the Legal Issues Associated with Foreign Ownership of Land?

1. Definition of Non-Citizen, Foreign Company and Foreign Interest

Malaysian law defines a “non-resident” as a natural person who is not a citizen of Malaysia and a “foreign company” as:

1. company, corporation, society, association or other body incorporated outside Malaysia;
2. an unincorporated society, association or other body which under the law of its place of origin may sue or be sued, or hold property in the name of the secretary or other officer of the body or association duly appointed for that purpose and which does not have its head office or principal place of business in Malaysia;
3. a company incorporated with 50% or more of voting shares held by non-citizen/foreign company or by both; or
4. a company incorporated with 50% or more of voting shares held by company in (c)

“Foreign interest” means any interest, associated group of interests or parties acting in concert, comprising of:

1. individual who is not a Malaysian citizen; and/or
2. individual who is Permanent Resident; and/or
3. foreign company or institution; and/or
4. local company or local institution whereby the parties as stated in item a. and/or b. and/or c. above hold more than 50% of the voting rights in that local company or local institution.

Individuals or entities falling within the ambit of the definition of non-resident, foreign company or foreign interest seeking to acquire and other real property in Malaysia are required to adhere to specific conditions and restrictions stipulated under the National Land Code (“NLC”) and the EPU Guideline on the Acquisition of Properties (“EPU Guideline”) as further explained below.

1. Residential Property

Foreign individuals and foreign companies are allowed to own houses and the land upon which the houses sit, residential condominium units, and apartment units which have a minimum purchase price of RM 1 million without having to obtain approval from the Economic Plan Unit of the Prime Minister’s Department (“EPU”). However, they are still required to obtain the approval from the relevant state authority prior to purchasing any residential property in the respective state.

1. Financing Malaysian banks usually offer financing of up to 60% to 80% of the value of the property to foreigners. Some banks even require the non-citizen to be a permanent resident in Malaysia before providing financing.
2. Ownership Ratio Certain legal rights and privileges are reserved for the Bumiputeras who are Malaysian nationals who qualify as Malays or aborigines (“Malays”). These rights and privileges sometimes affect foreigners’ ability to purchase residential property in the country as a certain percentage of the development has to be allocated to Bumiputeras. This is referred to as the Bumiputera Lot.

 

1. Purchases Requiring EPU’s Approval

Non-residential Property The EPU Guideline provides that except for residential units, EPU’s approval is required for all property acquisition which results in the dilution of the interest of Bumiputera or government agency(ies) as follows:

a. Non-residential Property

1. direct acquisition of property valued at RM20 million and above, resulting in the dilution in the ownership of property held by Bumiputera interest and/or government agency; and
2. indirect acquisition of property by other than Bumiputera interest through acquisition of shares, resulting in a change of control of the company owned by Bumiputera interest and/or government agency, the property amounts to more than 50 percent of the total assets of the company and the said property is valued more than RM20 million.

1. Conditions to be Fulfilled Where EPU’s Approval is Required

Note that in the case of a purchase of non-residential property by a foreign individual the EPU may (or may not) require the foreign individual to make the purchase through either a new or existing Malaysian registered company, rather than allowing the foreign individual to make the purchase in his own name.

1. Purchases Exempt from EPU’s Approval

Foreign interests may acquire, among others, the following without approval from the EPU, (however certain other regulations may still be applicable and the transaction may still be subject to government discretion)

1. Restrictions on Foreign Interests

Foreign interests are not allowed to acquire the following types of properties:

1. residential and non-residential units valued less than RM1 million per unit;
2. residential units under the category of low and low-medium cost as determined by the State Authority;
3. properties built on Malay reserved land; and
4. properties allocated to Bumiputera in any property development project as determined by the State Authority.

1. Additional Considerations When Purchasing Land

1. Restriction in Interest
2. Malay Reserve Land

1. Leases

Foreign interests are generally allowed to lease land and/or immovable property in Malaysia, subject only to restrictions which may be imposed by the government on certain tracts of land. If the land is subject to such restrictions, it should be stated on the property title.