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Manufacturing Sector Incentive

Main Incentives for Manufacturing Companies

  • The major tax incentives for companies that invest in the manufacturing sector are the Pioneer Status or Investment Tax Allowance.Eligibility for Pioneer Status or Investment Tax Allowance is based on certain priorities, including the levels of value-added, technology used and industrial linkages. Such projects are termed as "promoted activities" or "promoted products".

Pioneer Status

A company granted Pioneer Status gain a benefit of a partial exemption from payment of income tax. It pays tax on 30% of its statutory income *, with the exemption period commencing from its Production Day (defined as the day its production level reaches 30% of capacity).

To encourage investment in the promoted areas , Sabah and Sarawak and areas known as "Eastern Corridor" + of Peninsular Malaysia, applications received from 13 September 2003 from companies located in these areas will benefit from a 100% tax exemption on statutory income during their 5-year exemption period. Companies that have been granted approval for this incentive a year before 13 September 2003 but has not commenced commercial production, or applications under consideration, are also eligible for this incentive. All project applications received before 31 December 2005 will be eligible for this enhanced incentive.

Applications for Pioneer Status should be submitted to the Malaysian Industrial Development Authority (MIDA).

Investment Tax Allowance (ITA)

As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance (ITA). A company granted ITA gets an allowance of 60% on qualifying capital expenditure (factory, plant, machinery and other equipment used for the approved project) incurred within five years from the date the first qualifying capital expenditure is made.

Companies can offset this allowance against 70% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized. The remaining 30% of the statutory income will be taxed at the prevailing company tax.

To encourage investment in the promoted areas , Sabah and Sarawak and areas known as "Eastern Corridor" + of Peninsular Malaysia, applications received from 13 September 2003 from companies located in these areas will benefit from a 100% tax exemption on statutory income during their 5-year exemption period. Companies that have been granted approval for this incentive a year before 13 September 2003 but has not commenced commercial production, or applications under consideration, are also eligible for this incentive. All project applications received before 31 December 2005 will be eligible for this enhanced incentive.

Applications should be submitted to MIDA.

* Statutory Income is derived after deducting revenue expenditure and capital allowances from the gross income.

+ "Eastern Corridor" of Peninsular Malaysia covers the states of Kelantan, Terengganu and Pahang, and the district of Mersing in Johor.

Incentives for Relocating Manufacturing Activities to Promoted Areas

Relocation of Manufacturing Activities to Promoted Areas

To reduce the cost of doing business and to provide a competitive business environment, existing companies which relocate their manufacturing activities to the promoted areas, are eligible for these incentives to the second round:

i. Pioneer Status with income tax exemption of 100% of statutory income for a period of 5 years; or
ii. Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within a period of 5 years. The allowance can be offset against 100% of statutory income for each year of assessment.

All applications received from 11 September 2004 to be eligible for this incentive.

Applications should be submitted to MIDA.

Incentives for High Technology Companies

 
Incentives for High Technology Companies

A high technology company is a company engaged in promoted activities or in the production of promoted products in areas of new and emerging technologies, (see: List of Activities and Products - High Technology Companies). A high technology company qualifies for:

i. Pioneer Status with income tax exemption of 100% of statutory income for a period of five years; or
ii. Investment Tax Allowance of 60% (100% for promoted areas) on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is made allowance can be utilized to offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

Applications should be submitted to MIDA.

The high technology company must fulfill the following criteria:

i. The percentage of local R & D expenditure to gross sales should be at least 1% per year. States have three years from the date of operation or commencement of business to meet these requirements.
ii. Scientific and technical staff having degrees or Diploma with work experience of at least 5 years should be at least 7% of the total workforce of the company.

Incentives for Strategic Projects

Incentives for Strategic Projects

Strategic projects involve products or activities of national importance. Typically, it involves a huge investment with a long term profit, flawless in high technology and integrated, generate extensive linkages, and have significant impact on the economy. Such projects qualify for:

i. Pioneer Status with income tax exemption of 100% of statutory income for a period of 10 years; or

ii. Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is made. The allowance can be offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

Applications should be submitted to MIDA.

Incentives for Small and Medium Enterprises

Incentives for Small and Medium Enterprises

With effect from year of assessment 2004, companies small and medium enterprises with a paid up capital of RM2.5 million and below are eligible for a 20% reduction of corporation tax on chargeable income up to RM500,000. The tax rate on the remaining chargeable income is maintained at 28%. Dividends distributed will be given a tax credit of 20% in the hands of shareholders.

Manufacturing companies of small size incorporated in Malaysia with shareholders' funds not exceeding RM500,000 and having at least 60% Malaysian equity are eligible for the following incentives:

i. Pioneer Status with income tax exemption of 100% of statutory income for a period of five years; or
ii. Investment Tax Allowance of 60% (100% for promoted areas) on the qualifying capital expenditure incurred within five years. The allowance can be offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

A sole proprietorship or partnership is eligible to apply for this incentive provided a new private limited / limited company is formed to take over production / existing activities. To qualify for the incentive, a small company must meet one of the following criteria:

i. Value-added must be at least 15%; or
ii. The project contributes to socio-economic development of the rural population.

The Company shall carry out the manufacture of products or participate in activities listed as promoted products and activities for small companies (see: List of Activities and Products - Small Scale Companies).

Applications should be submitted to MIDA.

Incentives to Strengthen Industrial Linkages

Incentives to Strengthen Industrial Linkages

To encourage large companies to participate in the Industrial Linkage Programme (ILP - Industrial Linkage Programme), expenditure incurred for the training of employees, product development and testing, and factory auditing to ensure the quality of vendors' products, will be allowed as a deduction for tax income.

Vendors, including small companies and medium that propose to manufacture promoted products or participate in promoted activities in an ILP (see: List of Activities and Products - Industrial Linkage Programme) are eligible for the following incentives:

i. Pioneer Status with income tax exemption of 100% of statutory income for a period of five years; or
ii. Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is made. The allowance can be offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

To encourage vendors to manufacture products or participate in activities for the international market, vendors in an approved ILP who are capable of achieving world-class standards in terms of price, quality and capacity, will be eligible for the following incentives:

i. Pioneer Status with income tax exemption of 100% of statutory income for a period of 10 years; or
ii. Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years, which the company can offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

Applications should be submitted to MIDA.

Incentives for Industrial Machinery and Equipment

 
• Incentives for the Production of Specialised Machinery and Equipment

Companies that carry out activities in the production of machinery and specialized equipment, it's machine tools, plastic injection machines, plastic extrusion machinery, material handling equipment, packaging machinery, robotics and factory automation equipment, machinery or specialized equipment / processes for specific industries and parts and components of machinery and equipment, are eligible for:

i. Pioneer Status with income tax exemption of 100% of statutory income for a period of 10 years; or
ii. Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is made. This allowance can be offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

Applications should be submitted to MIDA.

 
• Additional Incentives for the Production of Heavy Machinery

Applications are accepted from 13 September 2003 of the companies belonging to the existing local reinvest in the production of heavy machinery such as cranes, quarry machinery, batching plant and port material handling equipment, are eligible for the following incentives:

i. Pioneer Status with income tax exemption of 70% (100% for promoted areas) on the increased statutory income arising from the reinvestment for a period of five years; or
ii. Investment Tax Allowance of 60% (100% for promoted areas) on the additional qualifying capital expenditure incurred within five years. The allowance can be offset against 70% (100% for promoted areas) of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

Applications should be submitted to MIDA.

 
• Additional Incentives for the Production of Machinery and Equipment

Applications received from 13 September 2003 from locally owned companies that reinvest existing in the production of machinery and equipment, including specialized machinery and equipment and machine tools, are eligible for the following incentives:

i. Pioneer Status with income tax exemption of 70% (100% for promoted areas) on the increased statutory income arising from the reinvestment for a period of five years; or
ii. Investment Tax Allowance of 60% (100% for promoted areas) on the additional qualifying capital expenditure incurred within five years. The allowance can be offset against 70% (100% for promoted areas) of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

Applications should be submitted to MIDA.

Incentives for Automotive Component Modules

 
Incentives for Automotive Component Modules

The new companies and existing undertake design, R & D and production of modules or systems of automotive components that qualify are eligible for:

i. Pioneer Status with income tax exemption of 100% of statutory income for a period of five years; or
ii. Investment Tax Allowance of 60% (100% for promoted areas) on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is made. The allowance can be offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

Modules or systems that are eligible are modules over the next module corner of the rear module of the instrument panel, Strut and absorbers and assembly module like module bumpers, modular member cross, door modules function integrated, modular fuel tank, the module seating module pedal module fireplace doors, modular console floor, module tires and wheels, brake systems, wiper systems, airbags, exhaust system, audio system, air conditioning system heating, ventilation system power and signal distribution systems, alarm systems, seat belt systems, outdoor lighting, body in white modules, engine management systems, safety systems, telematics, navigation systems, engine fuel injection systems, and vehicle intelligence systems.

This incentive is for applications received by MIDA from 21 September 2002.

Enhanced Incentives for the Use of Oil Palm Biomass

Incentives for the Use of Oil Palm Biomass

Applications received from 13 September 2003 from companies that utilize oil palm biomass to produce value-added products such as particleboard, medium density fibreboard, plywood, pulp and paper are eligible for the following incentives:

(i) New Companies

(A) Pioneer Status with income tax exemption of 100% of statutory income for a period of 10 years; or
(B) Investment Tax Allowance of 100% on the qualifying capital expenditure incurred within five years. The allowance can be offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

However, companies that have been granted approval for this incentive a year before 13 September 2003 but have not commenced commercial production, or applications under consideration, are eligible for this incentive.


(ii) Existing Companies that Reinvest

(A) Pioneer Status with income tax exemption of 100% on statutory income arising from the reinvestment for a period of 10 years; or
(B) Investment Tax Allowance of 100% on the additional qualifying capital expenditure incurred within five years. The allowance can be offset against 100% of statutory income for each year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

Additional Incentives for the Manufacturing Sector

Additional Incentives for the Manufacturing Sector

(i) Reinvestment Allowance

A manufacturing company that has been operating for at least 12 months and incurs qualifying capital expenditure to expand, modernize or automate its existing business or diversify into any related products within the same industry can apply for Reinvestment Allowance (RA - Reinvestment Allowance) ,

RA is given at the rate of 60% on qualifying capital expenditure incurred by the company, and can be offset against 70% of statutory income for the year of assessment. Any unutilized allowances can be carried forward to subsequent years until fully utilized.

A company can offset the RA against 100% of statutory income for the year of assessment if:

• The company undertakes reinvestment projects in the promoted areas ie the States of Sabah, Sarawak and the designated "Eastern Corridor" of Peninsular Malaysia; or
• The company achieved the level of productivity than that set by the Ministry of Finance. For further details on the prescribed productivity level for each sub-sector, please contact the Inland Revenue Board. (See Useful Addresses - Relevant Organisations)

RA will be given for a period of 15 consecutive years starting from the first year the reinvestment. Companies can only claim the RA upon the completion of a qualifying project; ie after the building is completed or when the plant / machinery is in operation. Assets acquired for the reinvestment can not be disposed of within two years from the time of the reinvestment.

With effect from 21 September 2002, a company that intends to reinvest before the expiry of its Pioneer Status can surrender its Pioneer Status for cancellation and be eligible for RA.

Applications for RA should be submitted to the Inland Revenue Board (LHDN), while applications for the surrender of Pioneer Status for RA should be submitted to MIDA.

 
(ii) Accelerated Capital Allowance

After a 15-year period of eligibility for RA, companies that reinvest in the manufacture of promoted products are eligible to apply for Accelerated Capital Allowance (ACA - Accelerated Capital Allowance). ACA on capital expenditure is to be utilized within three years, ie an initial allowance of 40% and an annual allowance of 20%.

Applications should be submitted to the LHDN accompanied by a letter from MIDA certifying that the companies are manufacturing promoted products.


(iii) Accelerated Capital Allowance on Equipment to Maintain Quality of Power Supply

To reduce the cost of doing business due to power outages, companies that incur capital expenses on equipment to ensure quality power supply are eligible for Accelerated Capital Allowance for a period of 2 years.

Only equipment determined by the Ministry of Finance are eligible for Accelerated Capital Allowance.

This incentive is effective from year of assessment 2005.

Applications should be submitted to the LHDN.


(iv) Tax Exemption on the Value of Increased Exports

To promote exports, manufacturing companies in Malaysia qualify for:

• A tax exemption on statutory income equivalent to 10% of the value of increased exports, provided the products are exported to the value added of at least 30%; or
• A tax exemption on statutory income equivalent to 15% of the value of increased exports, provided that the goods exported attain at least 50% of value added.
Claims should be submitted to the LHDN.
To further encourage the export of Malaysian goods, a locally-owned manufacturing company with equity of at least 60% is eligible for:
• A tax exemption on statutory income equivalent to 30% of the value of increased exports, provided the company achieves a significant increase in exports;
• A tax exemption on statutory income equivalent to 50% of the value of increased exports, provided the company succeeds in penetrating new markets;
• A full tax exemption on the value of increased exports, provided the company achieves the highest increase in export in its category.

These incentives are effective from year of assessment 2003.


(v) Double Deduction for Expenses to Obtain Certification "Halal" Certification and Quality Systems and Standards
To enhance the competitiveness of Malaysian companies in the global market for "halal" product (product suitable for consumption by Muslims) including "halal" food, double deduction will be given for the purpose of income tax computation to companies which incur expenses for:

a. certificates and quality system standards and the certificate "halal" from the Department of Islamic Development Malaysia (JAKIM)
b. certified quality system and international standards

This incentive is effective from year of assessment 2005.

Claims should be submitted to the LHDN

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