Principal Hub incentive 2 0

Principal Hub incentive 2.0

In Budget 2015, the Principal Hub (PH) incentive was proposed to encourage multinational companies to establish regional or global operational centres in Malaysia. The PH incentive was revised after receiving the evaluation from the Forum of Harmful Tax Practices (FHTP) of the Organisation for Economic Cooperation and Development (OECD). MIDA had issued the Guidelines for Principal Hub Incentive 2.0 (PH 2.0 Guidelines), which were effective for applications received from 1 January 2019 to 31 December 2020 (see Tax Alert No. 20/2019).

To legislate the above, the following Exemption Orders were gazetted on 23 August 2023:

a)    Income Tax (Exemption) (No. 2) Order 2023 [P.U.(A) 251] – for existing companies

b)    Income Tax (Exemption) (No. 3) Order 2023 [P.U.(A) 252] – for new companies

Commentary: As the PH 2.0 incentive is now legislated, taxpayers who had been granted the incentive may consider revising their income tax return form (ITRF) for the relevant YAs to claim the income tax exemption.

The PH incentive was extended until 31 December 2022. Please refer to the following for further details:

a)    MIDA Guidelines for Principal Hub Incentive 3.0 (see Tax Alert No. 20/2021)

b)    Income Tax (The Principal Hub Incentive Scheme) Rules 2022 [P.U.(A) 164] (see Tax Alert No. 11/2022)

Income Tax (Exemption) (No. 2) Order 2023

The Exemption Order provides that a PH which carries on core income generating activities under the PH 2.0 Incentive will be eligible for a concessionary tax rate of 10% on statutory income (excluding intellectual property income) derived from  core generating activities for a period of five consecutive YAs, commencing from the YA as determined by the Minister. 

A PH referred to under this Exemption Order is a company which:

• is a Malaysian-resident company which is incorporated under the Companies Act 2016
• has a paid-up capital of more than RM2.5 million
• is already operating in Malaysia which: 

a)    Does not have an operational headquarters (OHQs), international procurement centre (IPC) or regional distribution centre (RDC) status (“regional operations”)

b)    Has been approved as having regional operations 

•    With approved incentive

•    Without approved incentive

The PH must comply with the conditions stipulated in Appendix 1 of this Alert and other conditions imposed by the Minister in the approval letter.

Any unabsorbed losses or current year losses incurred of a PH from the qualifying services or trading activities are not allowed to be utilized for set-off against income from the same source or other businesses during the tax exemption period. Such losses also cannot be carried forward to the post-tax exempt period.

Income Tax (Exemption) (No. 3) Order 2023

The Exemption Order provides that a PH which carries on core income generating activities under the PH 2.0 Incentive will be eligible for a concessionary tax rate of either 0% or 5% on the statutory income (excluding the intellectual property income) derived from the core generating activities for a period of five consecutive YAs, commencing from the YA as determined by the Minister. The tax exemption on statutory income will be based on the level of commitment of the company.

The PH 2.0 incentive may be extended for another five YAs, subject to the PH fulfilling the specified conditions (see Appendix 2 of this Alert). The application of the extension of the incentive must be submitted to the Minister, through MIDA, not later than 60 days before the expiry of the exempt YAs.  

A PH referred to under this Exemption Order is a new company which:

• is a Malaysian-resident company which is incorporated under the Companies Act 2016
• has paid-up capital of more than RM2.5 million
• does not have an existing entity or related entity in Malaysia which carries on any qualifying services in Malaysia

The PH must comply with the conditions stipulated in Appendix 2 of this Alert and other conditions imposed by the Minister in the approval letter.

Any unabsorbed losses or current year losses incurred by a PH from the qualifying services or trading activities are not allowed to be utilized for set-off against income from the same source or other businesses during the tax exemption period. Such losses also cannot be carried forward to the post-tax exempt period.

The following terms are defined in both the Exemption Orders above:

a)    Core income generating activities

Activities taken by a PH in relation to the qualifying services or qualifying trading activities.

b)    Qualifying services

Services specified in Schedule 1 of the Exemption Order.

c)     Qualifying trading activities

Activities undertaken by a PH in respect of the procurement and sale of raw materials, components and finished products from the PH to a network company within or outside Malaysia.

d)    Network company

•       A related company;

•       An entity within the same group of companies as the PH including a subsidiary, branch, joint venture or franchise; or

•       A company which has a contractual agreement with the PH or the PH’s ultimate holding company which relates to the PH’s supply chain and business for at least three years