Principal Hub (PH) incentive

Principal Hub (PH) incentive

In Budget 2021, the Government proposed that the application period for the PH incentive be extended for two years, until 31 December 2022. It was also proposed that the qualifying conditions relating to the number of high value jobs, annual operating expenditure and number of key posts be relaxed for the second five-year period of the incentive (see Take 5: Malaysia Budget 2021).

Following the above, the Malaysian Investment Development Authority (MIDA) published on its website the “Guidelines for Principal Hub Incentive 3.0” (Guidelines for PH 3.0), which were effective from 1 January 2021 (see Tax Alert No. 20/2021).

To legislate the above, the Income Tax (The Principal Hub Incentive Scheme) Rules 2022 [P.U.(A) 164] were gazetted on 24 May 2022.

The Rules provide that a qualifying company which carries on a qualifying activity under the PH Incentive Scheme will be eligible for a concessionary tax rate on the chargeable income for the specified years of assessment (YAs), as stipulated in Schedule 2 to the Rules (outlined in Appendix II to this Alert). The specified YAs are for a period of five consecutive YAs, commencing from the YA as determined by the Minister.

Applications for the incentive must be received by the Minister through MIDA between 1 January 2021 and 31 December 2022. The qualifying company which applies for the incentive must comply with the relevant conditions based on the category applicable to the said company (see Appendix II), any other conditions imposed by the Minister as specified in the approval letter, and the latest relevant Guidelines for PH 3.0.

The following terms are defined in the Rules:

(a)  Qualifying activity

        Service activity undertaken by a qualifying company as specified in Schedule 1 to the Rules (outlined in Appendix I to this Alert)

(b)  PH Incentive Scheme

        Incentive scheme for the qualifying company which carries on a qualifying activity and approved by the Minister

(c)   New company

        A company which:

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

(ii)      Has paid-up capital of more than RM2.5 million, and

(iii)     Is established for the purpose of carrying on a qualifying activity under the Rules, which:

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

(d)  Existing company

       A company which:

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

(ii)    Is already operating in Malaysia and carrying on a manufacturing or services activity other than the qualifying activity prior to the application for the incentive

(iii)    Has paid-up capital of more than RM2.5 million

(e)  Qualifying company

       New or existing company that fulfills the eligibility conditions imposed by the Minister under the Income Tax Act 1967 (ITA) and the Rules

The Rules provide that in ascertaining the statutory income of a qualifying company, intellectual property (IP) income derived from the qualifying activity of the qualifying company shall be excluded. The IP income will not qualify for the tax incentive and will be subject to tax at the prevailing rate.

The specified YAs for the incentive in respect of a new company may be extended for a further five YAs, subject to the fulfilment of conditions specified in Schedule 3 to the Rules (outlined in Appendix III to this Alert) and any other conditions imposed by the Minister as specified in the approval letter. Applications for the extension must be received by the Minister through MIDA within 30 days before the expiry of the specified YAs.

The Rules also 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 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.                                                  

APPENDIX I

Qualifying services under the PH Incentive Scheme

APPENDIX II

Applicable tax rate and conditions for a qualifying company under the PH Incentive Scheme

Conditions for a qualifying company under the PH Incentive Scheme

 APPENDIX III

Applicable tax rate and conditions for the extension of the specified YAs for a new company under the PH Incentive Scheme

Conditions for the extension of the specified YAs for a new company under the PH Incentive Scheme

*To be complied with at the end of the last year of the specified YAs