Relocation of manufacturing business incentive scheme

Relocation of manufacturing business incentive scheme

In the retabled Budget 2023, it was proposed that the special tax incentives for manufacturing companies that relocate their manufacturing operations to Malaysia be extended to 2024. This includes the special tax rate of 15% for non-Malaysian individuals holding key or C-suite positions in the companies relocating their operations to Malaysia.

The following have been published to legislate the proposals and provide guidance to interested investors:

a)    Income Tax (Exemption) Order 2023 [P.U.(A) 240][1] – for existing companies

b)    Income Tax (Relocation of Manufacturing Business Incentive Scheme) Rules 2023 [P.U.(A) 241]1 – for new companies

c)    Income Tax (For an Individual Resident Who is Not A Citizen and Holds C Suite Position in an Approved Company) Rules 2023 [P.U.(A) 2421

d)     Malaysian Investment Development Authority (MIDA) guidelines and procedures for the application of the special tax incentive (relocation) for the manufacturing sector, dated 14 August 2023 (Guideline) – available on this link

The Rules are effective from the year of assessment (YA) 2021.

Special tax incentive for companies

The following incentives will apply to companies that relocate their manufacturing operations to Malaysia:

Note:

A related company of an existing company which qualifies for the relocation tax incentive will not be entitled to the same incentive on the same qualifying activity

Some of the key incentive conditions are outlined below:

a)    The company must be a Malaysian-resident company which is incorporated under the Companies Act 2016, and fulfils the definition of a “new company” or “existing company”.

b)    The company undertakes manufacturing activities, other than the manufacturing activities listed in the Schedule of P.U.(A) 240/2023 and P.U.(A) 241/2023.

c)    The company must incur capital investment:

d)    The 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.

e)    Applications for the incentive must be received by the Minister through MIDA, from 1 July 2020 until 31 December 2024.

Other important notes that are provided in the Guideline are:

a)    The company is required to have paid-up capital of RM2.5 million or above.

b)    Determination of the effective date

• New company
  • Based on the YA the company commences operation of the approved products/activities. The commencement of operation is defined as when the first sales invoice is issued by the company.
  • Application for the determination of the effective date must be submitted within 36 months from the date of the approval letter.
• Existing company
  • Based on the first QCE incurred for the approved products/activities
  • Application for the determination of the effective date must be submitted within 24 months from the date of the approval letter.

c)    The company must provide the annual compliance report within six months from the end of the company’s YAs.

d)    The company must comply with the stipulated conditions throughout the incentive period.

Special tax incentive for individuals

A flat tax rate of 15% will apply for five consecutive YAs on the chargeable income of a non-citizen holding a C-Suite position in a company that has been approved for the special tax incentive for the relocation of its manufacturing operations to Malaysia (this includes the previous incentive provided under the Income Tax (Relocation of Provision of Services Business Incentive Scheme) Rules 2022 [P.U.(A) 398] – see Tax Alert No. 1/2023). The incentive is limited to five individuals per company.

The chargeable income of the qualifying individual for a YA is determined as follows:

A/B * C

A     Statutory income from employment with the approved company during the specified YAs (i.e., during five consecutive YAs)

B      Aggregate income during the specified YAs from all sources, including the income from wife or husband (where there is a combined assessment pursuant to Section 45(2) of the Income Tax Act 1967 (ITA))

C     Chargeable income during the specified YAs

The remaining balance of the chargeable income of the qualifying individual will be taxed at the prevailing tax rates under Part I of Schedule 1 of the ITA.

“C-Suite position” means the position of a top senior executive which relies on functional know-how and technical skills such as the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Chief Information Officer. The Guideline further provides that C-Suite executives are responsible for setting the business strategy and making decisions for the business operations.

To qualify for the incentive, the individual must:

a)    Be a Malaysian-tax resident for each YA throughout the five consecutive YAs; and

b)    Receive a basic monthly salary of at least RM25,000

Applications for the incentive must be received by the Minister through MIDA:

• From 7 November 2020 until 31 December 2024
  • For individuals employed by companies granted an incentive under P.U.(A) 240/2023 and P.U.(A) 241/2023
• From 7 November 2020 until 31 December 2022
  • For individuals employed by companies granted an incentive under P.U.(A) 398/2022