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Malaysia Investment

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Tips:InvestmentOpenness to Foreign Investment Malaysia has one of the worlds most trade-dependent economies with trade reachi
 Investment

Openness to Foreign Investment

Malaysia has one of the world’s most trade-dependent economies with trade reaching

200% of annual GDP. The Malaysian government values foreign investment as a

powerful force for the continued economic development of the country, but is hampered

by restrictions in some sectors and an overly burdensome regulatory regime.  However,

the government continues to liberalize and in some cases remove investment

restrictions. 

In 2009, Malaysia removed its former Foreign Investment Committee (FIC) investment

guidelines, enabling transactions for acquisitions of interests, mergers, and takeovers of

local companies by domestic or foreign parties without FIC approval. While the FIC itself

still exists, it now only reviews the purchase by foreigners of commercial properties

valued greater than at RM20 million (approximately $6.5 million) from Bumiputras (ethnic

Malays and other indigenous ethnicities in Malaysia).

The Ministerial Functions Act grants relevant ministries broad discretionary powers over

the approval of specific investment projects. Investors in industries targeted by the

Malaysian government often can negotiate favorable terms with ministries regulating the

specific industry or other regulatory bodies. This can include assistance in navigating a

complex web of regulations and policies, a few of which can be waived on a case-bycase basis. Foreign investors in non-targeted industries tend to receive less government

assistance in obtaining the necessary approvals from the various regulatory bodies and

therefore can face greater bureaucratic obstacles.Conversion and Transfer Policies Return to top

Regulatory Burden

In the World Bank’s global Doing Business 2012 report, Malaysia moved up from 21st to 18th

place overall among the 183 economies covered in the survey. Malaysia’s most

improved rankings were in the standardized indicators “enforcing contracts, resolving

insolvency and starting a business”. Malaysia was up from 111st to 50th place forstarting a business.” Malaysia’s worst rankings are in “dealing with construction permits”at 113th, “paying taxes” at 41st, down two places from 2011, and “trading across borders” at 29thplace, down one spot. Malaysia made tax compliance easier by improving

electronic systems and the availability of software, although it also reintroduced a capital gains tax on real estate. Starting a business was made easier by merging company, tax and social security and employment fund registration at the one-stop shop and providing same-day registration.

Measure Year Index/Ranking

TI Corruption Index 2011 60/178 (4.3 score)

Heritage Economic Freedom 2011 53

World Bank Doing Business 2011 18/183

To improve the business climate in Malaysia, the Malaysian government established the

PEMUDAH task force, consisting of 23 top-level government officials and private sector

representatives with a mandate to identify and evaluate bureaucratic impediments to

conducting business in Malaysia and to make recommendations to the Prime Minister on

how to address them. PEMUDAH’s focus is specifically on administrative reforms

designed to enhance the efficiency of the government bureaucracy’s interaction with the

private sector, not on deeper reform issues needed to address policy-level structural

inefficiencies in Malaysia’s economy. More information about the task force is available

at www.pemudah.gov.my.

Ethnic Preferences

According to many analysts, Malaysia’s complex network of preferences to promote the

acquisition of economic assets by ethnic Malays and other indigenous groups

(collectively known as “Bumiputra”) represents a key impediment to the country’s ability

to reach its goal of achieving high-income status by 2020.   Many of the preference

policies are opaque, with details of implementation largely left to the various ministries

and civil servants within those ministries. Policies and practices vary greatly. Some

practices are explicit and contained in law or regulation while others are informal, leaving

much ambiguity for potential investors. The civil service itself is subject to Bumiputra

hiring preferences.  The NEM proposes reforming ethnic preferences in business

ownership and social safety net programs. Some conservative Bumiputra groups have

voiced strong opposition to any significant changes to the extensive preferences.

In the early 1970s, the Malaysian government set a target of 30% of the nation’s wealth

to be held by ethnic-Malay Bumiputra. Several studies have concluded that the 30%

equity target has been reached or exceeded; however, the topic has proven to be

extremely sensitive politically and official government figures place Bumiputra equity at

18.9%. The government’s methodology has been criticized as not fully transparent, and

there has been considerable debate over how to account for the value of state-owned enterprises and other government-linked companies or how to measure equity (par

value versus market value).  The government states that the NEM is returning the focus

of preference policies to poverty reduction goals, as originally intended when

preferences were established in the early 1970s.

Prior to 2009, a company seeking a public listing on the Bursa Malaysia (formerly Kuala

Lumpur Stock Exchange) was required to reserve at least 30% of its initial public offering

(IPO) for purchase by Bumiputra. In 2009, the government reduced Bumiputra

ownership requirements for new listings of foreign owned corporations from 30% to

12.5%, removed foreign ownership limits for 27 non-controversial services subsectors,

repealed FIC guidelines on mergers and acquisitions, and reduced FIC approval

requirements for foreign ownership of real properties to only those above RM 20 million

($7 million). Domestic companies must still reserve 30% of shares for Bumiputra

investors.  However, Bumiputra equity remains a consideration when companies apply

for an array of required permits and licenses, many of which must be renewed either

annually or biennially.

Corporate Taxes

For tax purposes, local and foreign enterprises are treated essentially the same.

Resident petroleum companies pay 38% income tax; all other resident companies

currently pay an income tax of 25%. Dividends are taxed at the corporate rate. A

company is resident in Malaysia for tax purposes if its management and control is

exercised in Malaysia, that is, if directors’ meetings are held in Malaysia. Payments

made to non-residents for technical or management services and rental of movable

properties are subject to withholding tax at the rate of 10%. Multinational corporations

that establish their treasury management services in Malaysia are given 70% exemption

of income taxes for 5 years, withholding taxes on interest payment on borrowings, and

stamp duties on loan and services agreements. The income tax rate for non-resident

individuals is 26%. The U.S. and Malaysia do not have a bilateral tax agreement and no

negotiations are anticipated at this time. The government has postponed since 2010 a

plan to implement a Goods and Services Tax (GST, similar to a value-added tax), with

an initial rate of 4%, to broaden the overall tax base.

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Individual companies in the petrochemical industry are required to file an annual import

plan. The government controls the retail price and profit margins of gasoline and diesel.

Government documents articulating the restrictions and explaining the policy are difficult

to obtain. 

Agriculture production and most manufacturing production are private. State-owned

enterprises (SOEs) currently account for only one percent of total employment. Over

90% of manufacturers have fewer than 10 employees. Foreign companies interested in

acquiring ownership in SOEs apply through the DIP. Equity in medium and large-sized

SOEs can be obtained through a joint venture with the Lao government.

The GOL is supposed to respond to proposed new business investment within 15–45

working days. Foreign enterprises must begin business activities within 90 days from the

date of receipt of an investment license, or the license is subject to termination.

Lao law provides for sanctity of contracts, but in practice contracts are subject to political

interference and patronage. A contract can be voided if it is disadvantageous to one

party, or if it conflicts with state or public interests. Foreign businessmen have described contracts in Laos as being considered “a framework for negotiation” rather than a

binding agreement. Although a commercial court system exists, in practice most judges

adjudicating commercial disputes have little training in commercial law. Those

considering doing business in Laos are strongly urged to contact a reputable law firm for

additional advice on contracts.
 


Keyword: Malaysia Investment

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