Incentives for companies adopting IR 4 0 and digitalization technology

Tax incentives for companies that adopt Industrial Revolution (IR) 4.0 and digitalization technology

In Budget 2021, to spur economic recovery through investment activities, the following incentives were proposed for companies in selected services sectors (see Take 5: Malaysia Budget 2021):

• 0% to 10% tax rate for 10 years for new companies
• 10% tax rate for 10 years for existing companies with new services segment

The selected services sectors include companies that adopt IR 4.0 and digitalization technology, with investments that contribute to significant multiplier effects in the following services:

• Provision of technology solutions
• Provision of infrastructure and technology for cloud computing
• R&D or design and development activities
• Medical devices testing laboratory and clinical trials
• Any other services, including manufacturing- related services, as determined by the Minister

To legislate the above proposal, the Income Tax (Relocation of Provision of Services Business Incentive Scheme) Rules 2022 [P.U.(A) 398] were gazetted on 28 December 2022. The Rules provide that a qualifying company which carries on a business in respect of a qualifying activity under the Relocation of Provision of Services Business Incentive Scheme, will be eligible for the following concessionary tax rates on the chargeable income for the specified YAs:

• New company: Not more than 10%
• Existing company: 10%

The specified YAs are for a period of up to 10 consecutive YAs, commencing from the YA as determined by the Minister.

Applications for the incentive must be received by the Minister through the MIDA, between 7 November 2020 and 31 December 2022.

The qualifying company which applies for the incentive must comply with the conditions imposed by the Minister as specified in the approval letter, and the Guidelines and Procedures for the Application of Special Tax Incentive for Selected Services Activities under the National Economic Recovery Plan (PENJANA) issued or as revised by MIDA and approved by the Minister. The conditions include that the qualifying company must:

• Hire at least 80% full-time Malaysian employees on or before the third year from the date the first invoice (in relation to the qualifying activity) is issued, until the end of the specified YAs; and
• Incur an approved adequate amount of annual operating expenditure or investment in fixed assets to carry on the qualifying activity

The following terms are defined in the Rules:

(a)  Relocation of Provision of Services Business Incentive Scheme

        Incentive scheme for the qualifying company which undertakes a qualifying              activity and which is approved by the Minister

(b)  New company

        A company:

(i)    Which is incorporated under the Companies Act 2016 and resident in                Malaysia,

(ii)   Which is established for the purpose of carrying on a qualifying activity              under the Rules and which:

a.     Does not have an existing entity or related entity in Malaysia prior to           the application of the incentive, or

b.     Has an existing entity or related entity in Malaysia which has not                 carried on a qualifying activity in Malaysia prior to the application               for the incentive,

              and

              (iii) Which:

a.     Relocates its facility for the qualifying activity from outside Malaysia          into Malaysia,

b.     Relocates a new qualifying activity into Malaysia which is different              from the existing qualifying activity outside Malaysia, or

c.     Establishes a new operation in Malaysia

(c)  Existing company

        A company which is:

        (a)   Incorporated or registered under the Companies Act 2016 and resident                    in  Malaysia, and

        (b)  Already operating in Malaysia and carrying on a qualifying activity for a                     new business segment separate from the operations of the existing                           qualifying activity

(d)  Qualifying company

        A new company or an existing company which fulfills the eligibility conditions          imposed by the Minister under the ITA and the Rules

(e)  Qualifying activity

        Any of the following service activities which adopt IR 4.0 and digitalization              technology undertaken by a qualifying company:

(i)         Provision of technology solutions or a technology company which                       develops technology and provides technology solutions based on                       substantial scientific or engineering challenges,

(ii)       Provision of infrastructure and technology for cloud computing,

(iii)      R&D or design and development activities,

(iv)      Medical devices testing laboratory and clinical trials, or

(v)       Any service activity or manufacturing related service activity as                         determined by the Minister

The Rules provide that the Minister may allow the qualifying company to surrender the incentive granted, by providing notice in writing to the Minister through MIDA, except in situations where the qualifying company fails to comply with any conditions imposed in relation to the incentive. The surrender of the incentive shall take effect from the first day in the basis period for the YA in which the application for the surrender of the incentive is received by the Minister through MIDA.

The non-application provisos stipulate that the Rules will not apply to a qualifying company which has in the specified YAs:

(a)   Made a claim for allowances under Schedules 7A or 7B of the ITA

(b)  Been granted any incentive under the Promotion of Investments Act 1986

(c)   Been granted an exemption under Sections 127(3)(b) or 127(3A) of the ITA

(d)  Been approved by the Minister for an incentive scheme under any rules made          under Section 154 of the ITA

(e)   Made a claim for deduction under any rules made under Section 154 of the             ITA except:

(i)         The rules in relation to allowance in Schedule 3 of the ITA,

(ii)       The Income Tax (Deduction for Audit Expenditure) Rules 2006, or

(iii)      The Income Tax (Deduction for Expenses in relation to Secretarial Fee                and Tax Filing Fee) Rules 2020

The Rules are effective from YA 2021.