Doing Business in Malaysia

Malaysia is one of the most populous countries in southeast Asia, and one of its most successful economies. Malaysia is separated by the South China Sea into two landmasses, which are neighboured by Singapore, Indonesia, Thailand and the Philippines. As an important gateway to regional business interests, Malaysia has developed a thriving economy which has grown over the past half century at an annual rate of around 6.5%. Malaysia industrialised rapidly over the 20th century as it transitioned from traditional mining and agricultural sectors, and improved its business infrastructure. With a wealth of natural resources, such as crude oil, gas, timber and palm oil, Malaysia’s major industries include electronics, automotive manufacturing and construction - with a growing trend towards high technology products. Malaysia is a constitutional elective monarchy, with a robust parliamentary system - it was a founding member of the Association of Southeast Asian Nations and the Organisation of Islamic Cooperation. Malaysia was ranked 24 on the World Bank’s Ease of Doing Business Survey 2018.

Why invest in Malaysia?

Investment in Malaysia has been increasing for over 50 years, with the government pushing to transform the country into a major financial hub. Some of the main reasons to invest in Malaysia include:

  • Financial initiatives: The Malaysian government is engaged in a number of initiatives to bring foreign direct investment into the country, including the Malaysian Investment Development Authority (MIDA), and the Malaysia External Trade Development corporation MATRADE, which work to help both companies set up and find markets.
  • Business opportunities: Currently ranking 23rd on the World Bank’s Ease of Doing Business survey, Malaysia offers businesses opportunities in a range of sectors. In 2015 it ranked 4th on the World Bank’s Doing Business investor protection index, and 3rd on the 2016 A.T Kearney Global Services Location Index.
  • Market diversity: Malaysia’s thriving industries include many innovative, high technology sectors. Popular investment targets include electronics manufacturing, biotech, research and development and photovoltaics.
  • Location advantage: Malaysia’s location at the heart of southeast Asia, offers its businesses access to a range of valuable markets, and a consumer base of over 600 million people. Around 5000 companies from over 40 countries have established premises in Malaysia - and benefit from excellent communication and transport links (air and sea) to neighbouring regions.
  • Skilled workforce: 20,000 graduates enter the Malaysian labour pool each year, offering businesses a wide range of highly-skilled potential employees. The Malaysian workforce tends to be young and productive - ideal for roles in research and manufacturing sectors. Workers also tend to have strong grasp of English.

Foreign Investment in Malaysia

The Malaysia Investment Development Authority (MIDA) is a subsidiary of the Government. It is focused on attracting inward investment in Malaysia from foreign multinational companies. Incentives to invest are focused on the High Technology; Machinery & Equipment; Automotive and the Oil Palm Biomass industries however there are additional opportunities.

Registering a Company and Establishing an Entity in Malaysia

Companies are required to register as an employer for tax, Employees’ Provident Funds (EPF), Social Security Funds and HRDF (Human Resources Development Fund), if applicable.

Employers must register with the Social Security Organization (SOCSO) when the first employee begins at the company. The principal and immediate employer who employs one or more employees is required to register and contribute monthly to SOCSO. Employers must register at the SOCSO office within 30 days from the date the new employee was employed.

There are currently no specific legal data protection requirements with regards to payroll data in Malaysia. For the time being, companies with a payroll function in Malaysia - either in-house or outsourced - will have to rely on internal or external company policies to ensure data protection principles are upheld.

A typical implementation timeline will be two months including a one month payroll parallel run. However, implementation duration will vary depending on the complexity of payroll requirements and the headcount to be implemented.

Business Banking in Malaysia

It is mandatory to make payments to both employees and the authorities from an in-country bank account. Generally, banks are open to the public from 09:00AM to 4:30PM, and closed on Saturdays.

Working Days and Working Hours in Malaysia

The working week in Malaysia is Monday to Friday. The normal number of hours worked per day in a commercial office is eight hours.

Basic Facts about Malaysia

General Information

Bordered by Thailand to the north, and Singapore to the south, and separated into two territories by the South China Sea, Malaysia is one of southeast Asia’s most diverse and populous countries. Established in 1946 as the Malay Union, the country went through a series of territorial restructurings to become Malaysia in 1963. Malaysia’s population spans many ethnicities and cultures, including Malays, Chinese, Indians and indigenous peoples. Although it is an elective monarchy, with the current king chosen from a hereditary line, Malaysia operates under a parliamentary government, based on the UK’s Westminster system. The diversity of Malaysia is reflected in its geography and climate: hot tropical regions see cooler periods and monsoon rainfall at periods throughout the year, while the South China Sea brings humidity and changeable weather to both territories.

Full name: Federation of Malaysia
Population: 27.9 million (UN, 2010)
Capital: Kuala Lumpur
Major languages: Malay (official), English, Chinese dialects, Tamil, Telugu, Malayalam
Monetary unit: 1 ringgit = 100 sen
Main exports: Electronic equipment, petroleum and liquefied natural gas, chemicals, palm oil, wood and wood products, rubber, textiles
GNI per capita: US $7,760 (World Bank, 2010)
Internet domain: .my
International dialling code: +60

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Tax & Social Security In Malaysia

The tax year in Malaysia runs from 1st January to 31st December.

Further information can be obtained via the following governmental departments:

Income Tax: Unit Pungutan, Kompleks Bangunan Kerajaan, Jalan Duta, 50600 Kuala Lumpur

Employees’ Provident Fund (EPF): Bangunan KWSP, Jalan Raja Laut, 50350 Kuala Lumpur

Social Security Organisation (SOCSO): Menara PERKESO, 281 Jalan Ampang, 50350 Kuala Lumpur

Income Tax

Employers in Malaysia have monthly withholding obligations for employee salaries, and must submit a tax return - with Monthly Tax Deduction (MTD) payments - to the Inland Revenue Board of Malaysia (IRBM). MTD can be calculated using computerised payroll software, or using the Schedule of Monthly Tax Deductions issued by the IRBM. Those calculations rely on information submitted by employees, including any personal tax relief or child relief, and zakat payments.

Tax returns are due by the 15th of the following month - failure or non-compliance could result in a fine of RM200 to RM20,000, and even 6 months imprisonment.

Malaysia’s income tax rate is progressive and ranges from 0-28% of an employee’s monthly remuneration. Taxation is dependent on ‘residential’ or ‘non-residential’ status:

  • ‘Resident’ taxpayers are those who spend 182 days or more in Malaysia in an assessment year. Residents pay tax at a progressive rate.
  • Non-resident’ taxpayers are those who spend less than 182 days in Malaysia. Non-residents are taxed at a maximum 28% rate (as of assessment year 2016).

Tax rates are also dependent on marital status (Single, Married Spouse Working, and Married Spouse Not Working). All individuals in Malaysia must complete an annual tax filing (BE Form) - and submit their report before the 30th of April in the subsequent year.

Form TP1: From January 2016 all Malaysian employers must allow their employees to claim allowable deductions and rebates via form TP1 at least twice a year. Form TP1 is designed to result in lower tax deductions for claimants. It is the employee’s responsibility to ensure the accuracy of these claims and keep records and receipts for up to 7 years. The employer is obliged to process the amount submitted by the employee and is not responsible for the veracity or accuracy of figures submitted by the employee.

More information may be found here: www.hasil.gov.my

Further income tax contributions:

Tabung Haji: Optional contribution by employees as saving for them to perform Hajj (only applicable for Muslim employees)

ASB: A Unit Trust Scheme by Permodalan Nasional Berhad. Open to Malaysian Bumiputra. Minimum Deduction of RM10. Maximum investment is RM200, 000.00

Social Security

Malaysia’s social security system is designed to deliver financial support to employees and their families should the employee suffer an injury, or an illness or occupational disease which results in death or disability. Social security also provides other benefits, such as sickness and maternity leave, and retirement schemes. Social security schemes in Malaysia fall into two categories: SOCSO and the EPF - both schemes involve contributions from employers and employees.

SOCSO: Deadline for submitting form is 30th of the following month

The Social Security Organisation (SOCSO) is an organisation set up to administer, enforce and implement the Employees’ Social Security Act 1969, and the Employee’ Social Security Regulation 1971.

From January 2016, an Income Tax Relief of RM 250.00 per annum for SOCSO contribution was introduced to encourage voluntary contributions.

The Social Security Organisation provides social security protection by social insurance, including medical and cash benefit, provision of artificial aids, and rehabilitation - to reduce suffering and to provide financial guarantees and protection for families.

SOCSO administer two types of social protection schemes:

• Employment Injury Insurance Scheme
• Invalidity Pension Scheme

The Employment Injury Insurance schemes provide protection to employees who are involved in accidents arising out of, and in the course of, their employment-related occupational disease.

EPF

The EPF (Employees Provident Fund) is a social security institution formed according to the Laws of Malaysia, and the Employees Provident Fund Act 1991 (Act 452). It provides retirement benefits for members through management of their savings in an efficient and reliable manner, and ensures such contributions are payable to the employees in full on reaching the age of 55 years.

The EPF also provides a convenient framework for employers to meet their statutory and moral obligations to their employees. Expatriates; domestic servants who are from the private account of the employers, self-employed persons and employees under age of 16 are excluded from the above.

A pension fund is available for civil servants and for some private voluntary schemes for employees.

Employment Insurance Scheme

Malaysia’s Employment Insurance Scheme (EIS) came into effect on 1 January 2018. Administered by the Social Security Organisation, the EIS is designed to provide certain benefits for members who lose their jobs. The scheme also provides a re-employment placement programme for its unemployed members: the programme promotes active labour market policies and other connected issues.

The benefits the EIS provides to members facing retrenchment include:

  • Job hunting assistance
  • Re-employment allowance
  • Reduced income allowance
  • Training allowance
  • Career counseling

Contributions to the EIS are set at 0.4% monthly salary - with employers and employees contributing 0.2% respectively. The minimum contribution amount is RM0.10, from a minimum eligible salary of RM30 monthly. The maximum eligible contribution per month is RM15.80, corresponding to a capped salary amount of RM4,000.

Reporting Tax in Malaysia

Employers in Malaysia have monthly withholding obligations to their employees. Deductions from salaries may be calculated using a schedule or computerised software, and tax returns should be filed with the IRBM by the 15th of the month. Beyond monthly-reports of business income, annual tax returns are also necessary in Malaysia - from all Malaysian employees, resident and non-resident.

Monthly

Income Tax – Deadline 15th of the following month

  • CP39 – Statement of Monthly Tax Contribution
  • CP 22 – Notification of New Employee (applicable for new joiner of the month)

Retrenchment/Retirement/Leaving Country

  • CP21 – Notification of Departure from Country
  • CP22A – Notification of termination / retrenchment / lay-off being paid a substantial termination amounts

EPF – Deadline 15th of the following month

  • KWSP 6 – Monthly Contribution Form (Form A) 
  • (No longer to be used if new employer registered after 1 April 2014 or existing employer with number of employees more than 50 people)
  • I-account is mandatory if the above mentioned met –

I-account registration requirements:

  • New employer: Register for I-account with filing of KWSP1 (i) when registration of employer
  • Existing employer: register for i-account with filing of KWSP1 (i)

SOCSO – Deadline 15th of the following month

  • Perkeso Assist Portal: Designed to assist businesses with the submission of monthly contribution information. To access the portal, users must fill in a Portal ID Registration form and submit it to their nearest SOCSO branch. Perkeso removes the need to file a physical Form 8A.
  • Form 2 – Notification of New Employee (need to enclose a copy of Identity Card of new hire)

EIS – Deadline 15th of the following month

  • SIP Perkeso portal: https://sip.perkeso.gov.my/eisc/rcc
  • SIP2A Form: Notification of Employee (Applicable for the new joiner of the month)

Yearly

Income Tax

Employer – Deadline 31st March of the following year

Form E – Employer Year End Tax (Year-end)

  • Used to report annual returns to the government for all employees. Must be submitted to the Inland Revenue Department by the 31st March. The hardcopy form will need to be signed by the appointed company representative before submission.

Employee – Deadline 30th April of the following year

Form 8A (EA) – Employee Year End Tax Filing

  • Used to facilitate employee tax filing and provided to each individual by the 28th Feb of each year. Electronic copies are provided and do not require employer signatures.

The documents can be submitted by a partner but the must be signed by customer.

New Employees in Malaysia

To set up a new employee the employer must complete and file IR56E forms so that the new employee can be registered with the Inland Revenue Department (IRD). This must be done within three months of the start date.

The following information is required when setting up a new start in Malaysia.

  • Personal details form
  • A copy of Identity Card
  • TP3 if employed in Malaysia within commencing year

Leavers in Malaysia

Employees in Malaysia must be given notice by employers in cases of termination - or if they are dismissed for any disciplinary or performance-related reasons. The length of that notice should be set out in their employment contract. Other necessary procedures will depend on the circumstances and type of dismissal.

In cases of retirement, resignation, termination, or if an employee has their employment terminated, or leaves Malaysia for more than 3 months, tax clearance is required. An employee’s final payment should be withheld by the employer for tax clearance purpose - the employer should release the money upon receiving a tax clearance letter from IRD.

  • Employers are required to complete tax clearance prior to an employee leaving the country by submitting Form CP21. 
  • Form CP22A is required for employees in the private sector who are retiring, resigning or being terminated.
  • Form CP22B is required for employees in the public sector who are retiring, resigning, or being terminated.

Upon receiving clearance from the Tax Authority, employers will be given approval to release all the monies (final payment) to the employee. Tax clearance letters are normally processed within 10 working days - delay in submitting the tax clearance application could result in a fine, or even imprisonment.

Payroll in Malaysia

Payroll processing in Malaysia normally takes place on a monthly basis. Payroll administration should take the following into account:

  • Mandatory Benefits: In Malaysia, mandatory payroll benefits include paid annual leave, statutory holidays, maternity or medical leave, and benefits for termination or unemployment.
  • Optional Benefits: Optional payroll benefits in Malaysia may include payment for Long Service, allowances for housing and transport, medical insurance schemes, commission and bonuses, and any retirement or pension schemes.
  • Statutory Contributions: Both employer and employee make statutory social security contributions to the EPF retirement and SOCSO scheme. Employees may also have to make PTPTN repayments (Malaysia’s student funding scheme), or Zakat donations (Muslim employees only).
  • Schedular Tax Deduction: Monthly tax deductions in Malaysia are governed by the STD mechanism - which reduces the need for employees to pay tax in one lump sum. 
  • Payslip: All employees in Malaysia should be issued with a payslip when they are paid, including information such as wages earned and deductions made.
  • Employee Records: Employers must maintain an employee register, with relevant payroll information for each staff member.

Employers in Malaysia must withhold employees monthly tax contributions - at rates ranging from 0%-28% depending on salary amount. The complexity of Malaysia’s tax regulations means it may be advisable for foreign businesses to outsource their payroll administration to a global payroll provider to benefit from compliance expertise and that ensure pay is delivered efficiently to their international employee populations. The standard payroll process in Malaysia includes the following steps:

  • Pay-day: Payments must be made by the 7th of each month.
  • Payment method: Cash, cheque, or credit to bank account.
  • Calculation of salary: incorporating overtime, sick pay etc.
  • Issue of payslips: Manual or automated/computerised distribution
  • Statutory contributions/deductions: EPF, SOCSO, etc.
  • Remittance of payment to authorities: Necessary to know deadlines and methods of payment

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