Guidelines on incentive for intellectual property IP development

Guidelines on incentive for intellectual property (IP) development

In Budget 2020, the Government proposed that qualifying intellectual property (IP)-generated income derived from the development of patents and copyright software be given 100% income tax exemption for a period of up to 10 years (see Special Tax Alert: Highlights of Budget 2020). The income which qualifies for the exemption will be calculated based on the Modified Nexus Approach (MNA). This is an Organisation for Economic Co-operation and Development (OECD)-compliant incentive, where the actual research and development (R&D) activities leading to the development, improvement, modification or creation of the qualifying IP asset would generally need to be undertaken in Malaysia in order to benefit from the incentive.

Following the above proposal, the Malaysian Investment Development Authority (MIDA) has recently issued the Guidelines on Incentive for Intellectual Property (IP) Development, dated 1 January 2020.

The Guidelines stipulate that 100% income tax exemption will be given on qualifying IP income for a period of up to 10 years. The exemption will only apply to income derived from IP developed in Malaysia, subject to the Gazette Order on MNANote.

Note:

The Gazette Order has yet to be released.

The Guidelines explain who would qualify for the incentive, the types of qualifying IP asset, the types of qualifying IP income, the criteria to qualify for the incentive, what constitutes qualifying R&D expenditure, the determination of the exemption period, situations where the incentive will be withdrawn and the application procedure.

Some of the key points are outlined below.

• The incentive will apply to new or existing companies that own the rights of the qualifying IPs and receive income from the qualifying IP activities related to the promoted activities prescribed under the Promotion of Investments Act 1986 (PIA) and Income Tax Act 1967 (ITA). Companies enjoying incentives under Sections 34A or 34B of the ITA will not be eligible for this incentive.
• The types of qualifying IP income are royalties and licensing fees.
• To qualify for the incentive:
  • The company must be a Malaysian-resident company incorporated under the Companies Act 2016.
  • The company must be conducting R&D activities in Malaysia which lead to the development, improvement, modification or creation of the qualifying IP asset (as defined).
  • The IP must be registered or filed with the Intellectual Property Corporation of Malaysia (MyIPO) or an equivalent body outside of Malaysia.
  • The company must have at least 30% science and technical staff having degree or diploma with a minimum 5 years experience from related fields
  • The company must incur an adequate amount of annual operating expenditure in Malaysia.
• The qualifying R&D expenditure is as follows:
  • The eligible R&D expenditure for the purpose of MNA calculation will be in line with the types of eligible expenditure under Section 34A of the ITA.
  • This includes expenditure under cost-sharing agreements, on condition that the R&D cost is clearly stated in the agreement.
  • Qualifying expenditure can backdated up to three years from the date the IP is filed with MyIPO or an equivalent body outside of Malaysia.
• The incentive will apply to applications received by MIDA between 1 January 2020 and 31 December 2022. Three sets of the application are to be submitted to:

Chief Executive Officer

Malaysian Investment Development Authority (MIDA)

MIDA Sentral

No. 5, Jalan Stesen Sentral 5

Kuala Lumpur Sentral

50470 Kuala Lumpur

(Attention: Advanced Technology and Research & Development Division (ATRD) Division)

The Guidelines are available on the MIDA website [Forms & Guidelines - MIDA | Malaysian Investment Development Authority > Services Sector > B) Research and Development (R&D) and Intellectual Property (IP)]