Incentives for Principal Hubs and Less Developed Areas
30 September 2015
Toh Ying Lynn explains two new investment incentives in Malaysia
On 6 April 2015, Malaysia’s Ministry of International Trade and Industry issued detailed guidelines for four new tax incentives (“Guidelines”) following the announcement made by the Malaysian Government during the 2015 Budget:
1. Incentive for the Establishment of a Principal Hub;
2. Incentive for Less Developed Areas;
3. Incentive for Industrial Area Management; and
4. Capital Allowance to Increase Automation in Labour Intensive Industries.
This article will discuss the Incentive for the Establishment of a Principal Hub and the Incentive for Less Developed Areas.
INCENTIVE FOR PRINCIPAL HUB
The Guidelines define a “Principal Hub” as a “locally incorporated company that uses Malaysia as a base for conducting its regional and global businesses and operations to manage, control, and support its key functions including management of risks, decision making, strategic business activities, trading, finance, management and human resource.”
The introduction of the Principal Hub replaces the existing incentives given to Regional Distribution Centers (“RDC”), International Procurement Centers (“IPC”) and Operational Headquarters (“OHQ”) as of 1 May 2015. A company which has been granted RDC, IPC or OHQ status is still entitled to enjoy the respective incentives for the full approved period and upon expiration of the said period, the company may apply for the Principal Hub Incentive subject to fulfilling the eligibility criteria.
An approved Principal Hub company is eligible for a 3-tiered corporate tax rate as set out in Table 1
To be eligible for the Principal Hub Incentive, an application must be received by the Malaysian Investment Development Authority (“MIDA”) from 1 May 2015 to 30 April 2018. Tax incentives are to be approved through the National Committee on Investment (“NCI”).
The initial 5-year incentive period may be extended for a further period of five years subject to the fulfilment of the initial criteria and an increase in annual business spending and high value job-creation by 30% and 20% respectively from their initial base commitment.
In addition to the tax incentives, a Principal Hub company is also entitled to the following benefits:
- 100% foreign equity participation;
- Expatriate posts based on the requirements of the applicant company’s business plan, subject to current policy on expatriates;
- Higher flexibility for foreign exchange administration;
- A foreign-owned company may acquire fixed assets for the purpose of carrying out the operations of its business plan; and
- Suspension of customs duty for import of raw materials, components, or finished products into free industrial zones, licensed manufacturing warehouses, free commercial zones, and bonded warehouses for production or repackaging, cargo consolidation and integration before distribution to the end customer.
Amongst the key conditions that have to be fulfilled in order to qualify for the Principal Hub Incentive are the following:
- Incorporation under the Companies Act 1965;
- Paid-up capital of more than RM2.5 million;
- Minimum annual business spending of RM3 million, RM5 million and RM10 million for Tier 3, Tier 2 and Tier 1 respectively;
- Minimum annual sales turnover of RM300 million (applicable only for goods-based companies);
- Serves and controls “network companies” outside Malaysia as follows:
- Tier 3: minimum three countries;
- Tier 2: minimum four countries;
- Tier 1: minimum five countries;
A “network company
” is a related company or any entity within the Group, including subsidiaries, branches, joint ventures, franchises or any other company related to the applicant’s supply chain and business with contractual agreements;
- Carries out at least three qualifying services set out in Table 2, including at least one Strategic Service:
- Tier 3: Strategic Service + two other qualifying services;
- Tier 2: Regional P&L + two other services;
- Tier 1: Regional P&L + two other services;
- Employment requirements whereby at least 50% of the high value jobs are to be held by Malaysians by the end of Year 3:
- Tier 3: 15 high value jobs including 3 key strategic/management positions;
- Tier 2: 30 high value jobs including 4 key strategic/management positions;
- Tier 1: 50 high value jobs including 5 key strategic/management position.
The minimum monthly salary for key strategic/management positions is RM25,000;
- Income tax exemption threshold received from services or goods-based company inside and outside Malaysia is based on the ratio of 30:70 (inside:outside);
- Significant use of Malaysia’s banking and financial services and other ancillary services and facilities (e.g. trade and logistics services, legal and arbitration services, finance and treasury services); and
- The applicant must have a human resource training and development plan for Malaysians.
A Principal Hub company will be given three years from the commencement of the initial 5-year incentive period to comply with the relevant criteria. Failure to do so will result in a clawback of tax benefits obtained.
A Principal Hub company is required to submit a yearly report to MIDA for evaluation of its performance. Non-submission will result in the incentive being withdrawn.
INCENTIVE FOR LESS DEVELOPED AREAS
This incentive was introduced to promote balanced regional growth by channelling more investments to the less developed areas. The expression “Less Developed Areas
” is not defined and will be considered on a case by case basis in consultation with the relevant authorities.
Customized incentives will be given under the Less Developed Areas Incentive based on the merit of each case, subject to the company complying with the conditions and achieving the key performance index for each additional five years.
To be eligible for the Less Developed Areas Incentive, an application must be received by MIDA from 1 January 2015 to 31 December 2020. The NCI will forward its recommendations to the Ministry of Finance for consideration and approval.
The tax incentive will take the form of either:
- Income Tax Exemption of 100% for up to 15 years of assessment (5+5+5) commencing from the first year of assessment in which the company derives statutory income; or
- Income Tax Exemption equivalent to 100% of the qualifying capital expenditure (“Investment Tax Allowance”) incurred within a period of 10 years. The Investment Tax Allowance can be offset against 100% of statutory income for each year of assessment and unutilized allowances can be carried forward until fully absorbed.
Additional benefits that may be available under the Less Developed Areas Incentive include:
- Stamp duty exemption on transfer or lease of land or building used for the manufacturing and services activities;
- Withholding tax exemption on fees for technical advice, assistance or services or royalty in relation to manufacturing and services activities up to 31 December 2020;
- Import duty exemption on raw materials and components that are not produced locally and are used directly in the manufacture of finished products subject to the prevailing policy, guidelines and procedures; and
- Import duty exemption on machinery and equipment that are not produced locally and are used directly in the activity for selected services sectors, subject to the prevailing policy, guidelines and procedures.
To qualify for Less Developed Areas Incentive:
- The applicant must be a company incorporated under the Companies Act 1965 and may be an existing company which is expanding its operations into a Less Developed Area, or a newly established company;
- The manufacturing or services activities undertaken by the company in a Less Developed Area will lead to substantial creation of employment and rural development; and
- The company must comply with other conditions specified by the Ministry of Finance including value added, local employment and Managerial, Technical and Supervisory staff index (MTS Index) requirements.
Time will tell whether the benefits under the Principal Hub Incentive and Less Developed Areas Incentive will attract more foreign direct investments into Malaysia.