Principal Hub Tax Incentive Rules 2022
02 June 2022
The Minister of Finance of Malaysia, YB Tengku Dato’ Sri Zafrul Tengku Abdul Aziz, announced on 6 November 2020 that the tax incentive for principal hub, which was due to expire on 31 December 2020, will be extended until 31 December 2022 and that the tax incentive conditions will be relaxed.
1
The
Income Tax (The Principal Hub Incentive Scheme) Rules 20222 (‘
the 2022 Rules’), gazetted on 24 May 2022, set out the new conditions for tax incentives under the Principal Hub Incentive Scheme and have effect from year of assessment (‘
YA’) 2021.
What is a principal hub?
A ‘principal hub’ is a locally incorporated company that uses Malaysia as a base for conducting its regional or global businesses and operations to manage, control, and support its key functions including management of risks, decision making, strategic business activities, finance, management and human resource.
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The tax incentive
The income of a qualifying company derived from a qualifying activity under the Principal Hub Incentive Scheme (‘
the Scheme’) will be subject to tax at rate of 0% (Category 1), 5% (Category 2) or 10% (Category 3) as set out in Schedule 2 to the 2022 Rules for five consecutive YAs (‘
specified YAs’) commencing from a date determined by the Minister of Finance (‘
Minister’). In addition, a qualifying company must satisfy the relevant conditions set out in Schedule 2 and any other conditions imposed by the Minister as specified in his approval letter and the
Guidelines for Principal Hub Incentive 3.0 (‘
Principal Hub Guidelines 3.0’) issued or as revised by the Malaysian Investment Development Authority (‘
MIDA’) and as approved by the Minister.
Key requirements
Qualifying activity
A qualifying activity is a service activity set out in rule 4 of the 2022 Rules undertaken by a qualifying company as specified in Schedule 1 of the 2022 Rules and fulfils the eligibility condition prescribed by the Minister. The qualifying activities, as set out in Schedule 1, are as follows:
| No. |
Cluster |
Qualifying service |
| 1. |
Strategic services |
(a) Regional profit and loss or business unit management
(b) Strategic business planning corporate development
(c) Corporate financial advisory services
(d) Brand management
(e) Intellectual property management
(f) Senior-level talent acquisition and management |
| 2. |
Business services |
(a) Bid and tender management
(b) Treasury and fund management
(c) Research, development and innovation
(d) Project management
(e) Sales and marketing
(f) Business development
(g) Technical support and consultancy
(h) Information management and processing
(i) Economic or investment research analysis
(j) Strategic sourcing, procurement and distribution
(k) Logistics services |
| 3. |
Shared services |
(a) Corporate training and human resource management
(b) Finance and accounting (transactions, internal audit) |
Qualifying company
A qualifying company may be a new company or an existing company, each as defined in rule 3 of the 2022 Rules, which fulfils the eligibility conditions imposed by the Minister under the Income Tax Act 1967 (‘ITA’) and the 2022 Rules.
Rule 3 of the 2022 Rules provides that a new company must:
- be incorporated under the Companies Act 2016 (‘CA 2016’) and resident in Malaysia;
- have a paid-up capital of more than RM2,500,000.00; and
- be established for the purpose of carrying on a qualifying activity, which: (i) does not have an existing entity or related entity in Malaysia prior to the application referred to in rule 2 being made; or (ii) has an existing entity or related entity in Malaysia which has not carried on a qualifying activity in Malaysia prior to the qualifying company’s application for approval as a principal hub under the Scheme.
Rule 3 of the 2022 Rules provides that an existing company must:
- be incorporated under the CA 2016 and resident in Malaysia;
- already be operating in Malaysia and carrying on a manufacturing or services activity other than the qualifying activity prior to the qualifying company’s application for approval as a principal hub under the Scheme; and
- have a paid-up capital of more than RM2,500,000.00.
Rate of tax and conditions
The rate of tax and the conditions as set out in Schedule 2 of the 2022 Rules are as follows:
| Category of qualifying company |
Category 1
(new company under rule 3(c)(i)) |
Category 2
(new company under rule 3(c)(ii)) |
Category 3
(existing company) |
| Income tax rate |
0% |
5% |
10% |
| Conditions for a qualifying company under the Scheme |
| Minimum number of full-time new employees in Malaysia with a minimum basic salary of RM5,000.00 per month and at least 50% of the new employees are Malaysians |
50 persons |
30 persons |
30 persons |
| Minimum number of full-time new employees in Malaysia with a minimum basic salary of RM25,000.00 per month and at least 50% of the new employees are Malaysians |
5 persons |
4 persons |
5 persons |
| Minimum amount of annual operating expenditure in Malaysia |
RM10 million |
RM5 million |
RM10 million |
Time frame for submission of application
To be eligible for the tax incentive under the 2022 Rules, a qualifying company must submit a written application under the Scheme to the Minister through MIDA and such application must be received on or after 1 January 2021 but no later than 31 December 2022.
Extension of tax incentive period
The Minister may extend the specified YAs for a new company for a further period of five YAs subject to the new company fulfilling all conditions specified in Schedule 3 of the 2022 Rules and any other conditions imposed by the Minister in the approval letter. The application for extension by the new company must be in writing and be received by the Minister through MIDA within 30 days before the expiry of the specified YAs.
The conditions set out in Schedule 3 are as follows:
| Category of qualifying company |
Category 1
(new company under rule 3(c)(i)) |
Category 2
(new company under rule 3(c)(ii)) |
| Income tax rate |
0% |
5% |
| Conditions for the extension of the specified YAs for a new company under the Scheme |
Minimum number of full-time new employees in Malaysia with a minimum basic salary of RM5,000.00 per month and at least 50% of the new employees are Malaysians (to be complied with at the end of
the last year of the specified YAs) |
60 persons |
36 persons |
| Minimum number of full-time new employees in Malaysia with a minimum basic salary of RM25,000.00 per month (to be complied with at the end of the last year of the specified YAs) |
5 persons |
4 persons |
| Minimum amount of annual operating expenditure in Malaysia (to be complied with at the end of the last year of the specified YAs) |
RM13 million |
RM7 million |
Exclusion and non-application
Income derived from intellectual property from a qualifying activity shall not be included in ascertaining the statutory income of a qualifying company and the income derived from intellectual property shall be subject to tax under the ITA.
4 In addition, the 2022 Rules shall not apply to a qualifying company which has made a claim for relief, exemption, deduction, or incentive under certain provisions of the ITA or the Promotion of Investments Act 1986.
5
Comments
Certain conditions for tax incentive for a principal hub under the 2022 Rules are more liberal that those under the predecessor subsidiary legislation, namely the
Income Tax (Exemption) (No. 8) Order 20186 (‘
the 2018 Order’). In particular, a qualifying company was required,
inter alia, to carry on three qualifying services under the 2018 Order, but is only required carry on one qualifying service to be eligible for tax incentives as a principal hub.
Prospective applicants for this incentive should also take note of the additional requirements set out in the Principal Hub Guidelines 3.0.
Alert prepared by Sheba Gumis (Partner) of the Corporate Practice and Desmond Liew (Senior Associate) of the Tax Practice of Skrine.
1 Paragraph 149 of the 2021 Malaysian Budget Speech.
3 Paragraph 1.0, Principal Hub Guidelines 3.0.
4 See Rule 6 of the 2022 Rules for further details.
5 See Rule 11 of the 2022 Rules for further details.
6 P.U.(A) 387/2018. This Order applied to applications received by the Minister through MIDA on or after 1 January 2018 but no later than 31 December 2020.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.