The Complete Foreigner’s Guide to Starting a Business in Malaysia

Malaysia, with its strategic geographical position and rapidly growing economy, has emerged as a prime destination for international entrepreneurs and investors. Its business-friendly policies, combined with a diverse cultural landscape and a wealth of natural resources, make it a compelling choice for business ventures. This guide aims to offer a comprehensive understanding of the various aspects of establishing a company in Malaysia, from legal prerequisites to operational considerations.

Note: While this guide strives to give a detailed overview of starting a company in Malaysia, it’s important to understand that every entrepreneurial journey is different. While you will indeed gain insight from this article, to truly have the foresight for an optimum company launch in Malaysia, you will need a trusted partner on the ground.

InCorp is here to provide bespoke assistance for every phase of your business venture in Malaysia. With our in-depth knowledge and expertise, we ensure that you navigate the complexities of the Malaysian business environment with assurance and accuracy. We highly recommend reaching out to our team at InCorp for personalised advice tailored to your specific business requirements.

Why Start a Business in Malaysia?

Malaysia’s position in Southeast Asia offers excellent access to the ASEAN markets, without the higher costs involved with its more developed ASEAN partners. In essence, Malaysia is still a “ground floor opportunity”, but with GDP predicted to rise from around US$400 billion in 2022 to US$780 billion by 2032, it won’t stay that way for long.

Its vibrant economy, rich in natural resources like palm oil, rubber, and timber, combined with a skilled workforce and technological advancements, creates a conducive environment for businesses. Government initiatives for investors, such as those under the Malaysia Digital Economy Corporation (MDEC) and various funding and grant programs, further enhance the allure of initiating a business in this up-and-coming nation.

Requirements for Foreigners to Start a Business in Malaysia

Legal Entity Options for Businesses

Sole Proprietorship

The most straightforward business entity, a Sole Proprietorship, is exclusively available to foreigners with permanent residency in Malaysia. Subsequently, foreigners can only start a sole proprietorship in Malaysia if they gain permanent residency.

Partnership

A Partnership operates similarly to a Sole Proprietorship. To register a Partnership, all partners must either be Malaysian citizens or hold permanent residency in Malaysia.

Private Limited Company (Sdn. Bhd.)

A popular choice among foreign investors, a Private Limited Company allows foreigners to own the entire company. However, specific sectors, such as agriculture, banking, education, and oil and gas, mandate 50% Malaysian ownership.

Limited Liability Partnership (LLP)

An LLP blends the characteristics of both a partnership and a company, standing as a distinct legal entity separate from its partners. Foreigners can establish an LLP in Malaysia without being residents. However, the compliance officer for the LLP must either be a Malaysian citizen, a permanent resident, or someone who ordinarily resides in Malaysia.

Public Limited Company (Berhad)

Known as “Berhad”, this entity allows public share trading in Malaysia. Governed by the Company Act 2016, it’s favoured by large-scale businesses. While offering increased capital opportunities, it mandates strict regulatory compliance and transparency.

Branch Office

A Branch Office operates as an extension of its foreign parent company. While it mirrors the activities of the parent company, the parent company remains accountable for any debts the Branch Office accumulates in Malaysia. It should also be noted, that in most cases, this entity is most relevant for businesses seeking a temporary foothold in the Malaysian market. To establish a Branch Office, it’s mandatory to appoint at least one resident agent in Malaysia.

Representative Office

For foreign companies eager to explore the Malaysian market and understand its business landscape, a Representative Office is a suitable choice. However, it’s essential to note that a Representative Office lacks legal status in Malaysia — in essence, the parent company bears the responsibility for any debts or liabilities.

Unlike a Branch Office, a Representative Office is limited to promotional, liaison, market research, and coordination activities on behalf of the parent company. It cannot engage in profit-generating activities or enter into contracts.

You can read more in our article Choosing the Right Business Structure for Startups in Malaysia.

Foreign Investment Restrictions in Malaysia

• General Stance: Malaysia is largely open to foreign investment, allowing up to 100% foreign equity in new projects and expansions of existing businesses.
• Government Regulations: Different industries have specific rules set by relevant government departments. Some sectors may limit foreign ownership or require prior approvals before starting operations.
• Foreign Ownership Limits: Certain sectors, like oil and gas, banking, and education, have restrictions on foreign ownership. For instance, upstream oil and gas activities might limit foreign equity between 30% and 100%.

Process for Foreigners to Start a Business in Malaysia

Starting a business in Malaysia as a foreigner involves several key steps. Here’s a breakdown to guide you through the process:

1. Choosing and Securing a Business Name

Before anything else, you’ll want to pick a unique business name. Ensure it’s not too similar to existing businesses and aligns with the guidelines set by the Companies Commission of Malaysia (SSM). Your company name will be held for 30 days after SSM approves it. You can read more about choosing a company name on the SSM website.

2. Official Business Registration

Once you’ve settled on a name, gather all required documents and submit them to SSM. This includes items like your business plan, passport, visa, and if you’re setting up a Private Limited Company (Sdn Bhd), the Memorandum and Articles of Association. The time and cost for registration can vary based on your chosen business structure and whether you’re registering online or in person.

3. Acquiring Necessary Licenses

Your business might need specific licenses or permits, depending on its nature. These could come from various governmental bodies, such as the Ministry of Trade and Industry or the local council. It’s essential to research and secure these before you commence operations. If in doubt, talk to a trusted partner like InCorp.

4. Tax Matters

Register your enterprise with the Inland Revenue Board (LHDN) to get your tax identification number. Staying compliant with Malaysia’s tax obligations, like submitting yearly tax returns and handling corporate taxes and SST is crucial.

You can read more in our article What Should You Know Before Starting a Company in Malaysia?

Costs Associated with Starting a Business in Malaysia

Starting a business in Malaysia involves various financial outlays. Here’s a concise overview:

Paid-up Capital

The minimum paid-up capital needed to establish a company in Malaysia is RM1. It is important to understand that different government agencies, banks, and entities may impose their own minimum capital requirements for specific purposes such as loan applications, licensing, or business transactions. It is crucial to ensure that the stated paid-up capital accurately reflects the funds available, as it is illegal to declare a higher amount than what the company possesses.

Note: You can change the paid-up capital declared during company registration. It is advised that you consult your company secretary to determine this amount.

Here’s a rough guideline on the specific commitments necessary for issuing work permits to foreign employees. For instance:

• Advisory businesses: RM1 million (US$210,000)
• Import/export businesses: RM1 million (US$210,000)
• Joint ventures with a Malaysian partner: RM350,000-500,000 (US$73,500-US$105,000)

Tax Implications for Foreigners Starting a Business in Malaysia

Navigating the tax landscape is crucial for foreigners initiating a business venture in Malaysia. Here’s a concise overview of the tax implications:

Corporate Tax

• Standard Rate: Businesses in Malaysia are subject to a corporate tax rate of 24%.
• SMEs Benefit: Small and medium enterprises (SMEs) with a paid-up capital of RM2.5 million (US$533,000) or less enjoy a reduced tax rate of 17% on their initial RM600,000 (US$127,000) earnings.

Sales and Service Tax (SST):

• Introduction: In 2018, the Malaysian Government transitioned from GST to SST.
• Sales Tax: Taxable goods, whether manufactured in Malaysia or imported, are subject to a sales tax rate of either 5% or 10%.
• Service Tax: A service tax rate of 6% is applicable. For the latest amendments and updates on SST, one can refer to announcements by Malaysian Customs.

Individual Tax:

• Taxation Basis: Only income sourced from Malaysia is taxable for individuals. Income from foreign sources remains non-taxable.
• Tax Residency: An individual gains tax resident status if they reside in Malaysia for 182 days or more during a year.

Tax Rates: Personal tax rates are tiered based on income levels: