A Q&A guide to doing business in Malaysia.
This Q&A gives an overview of the legal system; foreign investment, including restrictions, currency regulations and incentives; and business vehicles and their relevant restrictions and liabilities. The article also summarises the laws regulating employment relationships, including redundancies and mass layoffs, and provides short overviews on competition law; data protection; and product liability and safety. In addition, there are comprehensive summaries on taxation and tax residency; and intellectual property rights over patents, trade marks, registered and unregistered designs.
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This article is part of the PLC multi-jurisdictional guide to doing business worldwide. For a full list of contents, please visit www.practicallaw.com/about/doingbusinessin-mjg.
Malaysia has a common law adversarial legal system based on precedents.
There are generally minimal restrictions on foreign investment in Malaysia. Foreign investors can hold 100% equity in all investments in new projects as well as investments in expansion and/or diversification projects in existing companies.
However, there are specific government guidelines, policies and licensing requirements for certain regulated sectors, such as:
Other sectors of strategic importance to the country.
Exchange transactions are regulated by the Central Bank of Malaysia (Bank Negara Malaysia). The foreign exchange administration rules of Malaysia have been progressively liberalised to create a competitive business environment and, currently, the rules allow (Exchange Control Act 1953):
The extension of a domestic credit facility by residents to non-resident controlled companies.
Payments to non-residents for the import of goods and services.
The repatriation of a foreign direct investor's investments, including:
Direct and indirect tax incentives are available for investment in some industries, for example:
Research and development.
Islamic financial services.
Direct tax incentives grant partial or total relief from income tax for a specified period. Indirect tax incentives provide exemptions from, or refunds of, import duty, sales tax and excise duty.
In addition, incentives are available to foreign enterprises for setting up any of the following in Malaysia:
Regional distribution centres.
International procurement centres.
Pioneer status industries.
Various tax allowance and tax exemption incentives are also available to investors in promoted areas, and regional multimedia and development corridors located across the country.
The most common forms of business vehicles used by foreign companies to conduct business in Malaysia are:
Joint ventures with local investors.
A company must:
Obtain approval of the company name from the Companies Commission.
Submit the memorandum and articles of association to the Companies Commission with a registration fee of between MYR1,000 (as at 1 November 2011, US$1 was about MYR3) and MYR70,000, depending on the company's nominal share capital.
A private company cannot have more than 50 shareholders. The registration process takes about six weeks to complete.
All Malaysian companies must have at least two issued equity shares.
A company can also apply to list on the Malaysian Stock Exchange (Bursa Malaysia), in either the Main Market or the ACE Market. Whilst there are no specific minimum eligibility requirements for admittance to the ACE Market, companies seeking to list on the Main Market have to satisfy one of the:
Market capitalisation test.
Infrastructure project corporation test.
Under the profit test, a company must report uninterrupted profit after tax of three to five full financial years, with aggregate of at least MYR20 million; and profit after tax of at least MYR6 million for the most recent full financial year.
Under the market capitalisation test, a company must meet the minimum total market capitalisation of MYR500 million on listing.
Under the infrastructure project corporation test, a company must have secured the right to build and operate an infrastructure project in or outside Malaysia, with project costs of not less than MYR500 million and the concession or licence for the project has been awarded by a government or a state agency, in or outside Malaysia, with a remaining concession or licence period of at least 15 years.
Shares can be issued for non-cash consideration provided the company files with the Companies Commission:
A copy of the transaction document containing details of the consideration.
Restrictions on rights attaching to shares. An ordinary share must carry one vote in general meetings. A private company must restrict the rights of its members to transfer shares.
Apart from this statutory restriction on the transfer of shares, the Companies Act does not specify any other form of restrictions or prescribe the extent of scope of the restrictions. Subject to the doctrine of illegality, and the bona fide exercise of such powers, the articles of a company may be altered or added to at any time.
Automatic rights attaching to shares. Ordinary shares give holders rights of ownership in the company, such as:
The right to share in the profits.
The right to vote in general meetings.
The right to elect and dismiss directors.
In the event of liquidation, ordinary shares rank after all other liabilities of the company.
Foreign companies must not hold more than 30% of a company's equity, unless the company is in the manufacturing or multimedia technology sector.
A company is managed by a board of directors, which is assisted by a management team.
Foreign managers can only be appointed if either:
There is a shortage of suitably trained Malaysian managers.
They fill key posts that are necessary to protect their own interests as investors.
Directors are liable if they breach either their:
Common law fiduciary duties.
Statutory duties to act honestly and with reasonable diligence.
A parent company and its subsidiary are separate legal entities with separate liabilities. However, a court can lift the corporate veil and find a parent company liable for its subsidiary if there is evidence of unity of ownership or control between the two companies, for example if the parent company is the directing mind who has effective control over the subsidiary company.
Directors of private companies must disclose, to the Registrar of Companies, company details (including changes) relating to:
A public company has a continuing obligation to disclose to both the Malaysian Stock Exchange and the public all information material to the market, such as:
Joint venture agreements.
Changes in management.
There is no cost for complying with these reporting requirements except that the company must pay the annual listing fees prescribed by the Malaysian Stock Exchange.
Employment relationships are regulated by the following legislation:
Employment Act 1955 (EA). The EA applies to Malaysian employees and foreign nationals employed in West Malaysia:
with income up to and including MYR1,500 a month; or
in certain categories of employment, such as:
manual labourers or their supervisors;
persons who maintain or operate mechanically propelled vehicles;
domestic servants; and
persons in certain positions in sea-faring vessels.
Equivalent legislation exists for employees in East Malaysia, although the provisions may differ.
Industrial Relations Act 1967 (IRA). The IRA applies to Malaysian and foreign nationals employed in Malaysia and governs:
relations between employers and employees (including trade unions); and
the prevention and settlement of disputes.
Trade Unions Act 1959. This Act applies to both foreign and Malaysian employees. It regulates the registration and constitution of trade unions and their rights and liabilities.
Employees Provident Fund Act 1991 (EPF). The EPF applies to employers and to Malaysian and foreign nationals employed in Malaysia. Employers and most employees must contribute to a provident fund (see Question 13). However, contributions by foreign employees and domestic servants are voluntary. Money can be withdrawn from the fund towards certain stipulated expenses or when the employee reaches the age of 55.
Employees' Social Security Act 1969 (SOCSO). The SOSCO provides social security for all employees whose gross monthly income is below MYR3,000. Once an employee is a registered contributor, his entitlement to SOCSO contributions does not cease simply because his salary exceeds MYR3,000 a month.
These laws do not apply to Malaysian employees working abroad.
An employer cannot contract out of the obligations imposed by the EA, EPF and SOCSO. Regardless of any choice of law clause, in adjudicating an unjust dismissal case, the Industrial Court is likely to refuse to be guided by the laws of another jurisdiction that are less favourable to the employee than the IRA.
Employment contracts lasting for more than one month must be in writing (EA). However, failure to provide a written contract does not invalidate the employment relationship or the contract terms. The EA provides that employment contracts must include a provision for termination, and any condition of service under the EA more favourable to the employee prevails over that in the employment contract. Certain terms can be implied by law or by custom.
Foreign nationals must obtain a valid work permit from the Immigration Department to take up employment in Malaysia, the type of permit required varies depending on the employee and the work they intend to do:
Expatriates or skilled foreign workers who take up paid employment must obtain an employment pass. A processing fee of MYR50 applies for each employment pass application, and fees for the employment pass range up to a maximum of MYR300 per annum, depending on the type of expatriate post approved.
Foreign nationals who enter Malaysia to take professional work for short-term periods not exceeding 12 months must obtain professional visit passes which cost MYR90 for every three months or less.
Unskilled or semi-skilled foreign workers from specified source countries are only allowed to work in specified sectors of the economy (for example, construction, manufacturing and agriculture). They must obtain a visit pass (temporary employment) and an annual levy for the visit pass (temporary employment) which varies up to a maximum of MYR1,800 depending on the sector.
If required, foreign nationals must also obtain visas to enter Malaysia and visa fees vary depending on their country of origin.
Employees are only entitled to management representation or consultation if it is a term of their contract or a collective agreement.
The IRA provides for, among other things, the security of employment contracts. An employee can only be dismissed for a just cause or excuse, such as:
Redundancy (see Question 11).
The burden is on the employer to prove that the dismissal was with just cause or excuse. Except for redundancy there is no minimum statutory notice period or severance payment.
If an employee is dismissed without just cause or excuse, he can seek either:
Reinstatement and back pay (the wages he would have earned had he not been dismissed).
Back pay plus compensation of one month's salary for each year of service, in lieu of reinstatement.
Back pay is limited to 24 months' wages.
Redundancies are regulated by the Code of Conduct for Industrial Harmony 1975. Selection for redundancy must be in accordance with the "last in-first out" principle and every effort must be made to offer the employees alternative employment. Employees who are dismissed on redundancy grounds are entitled to termination notice (as prescribed in their contracts) and fair severance benefit which, for employees who fall within the EA, must be no less than the minimum termination notice period and termination benefit prescribed by the EA.
Individuals are tax resident if they reside in Malaysia for more than 182 days in a year.
Tax resident employees must pay:
Income tax. This is payable at rates between 0% and 26% (with effect from year of assessment 2010) of gross worldwide income (after deducting tax reliefs).
Contributions to the employees' provident fund. This is payable at 11% of gross worldwide income.
Social security contributions. The contributions are between MYR0.7 and MYR57.25 per month, depending on the employee's monthly salary.
Non-residents do not qualify for tax relief and must pay tax at 26% on their Malaysia-source income, unless a double tax treaty applies (see Question 22).
Employers must make:
Contributions to the employees' provident fund, at 12% of their employees' gross monthly wages.
Social security contributions of between MYR0.7 and MYR57.25 per month, depending on the employee's monthly salary.
A company is resident if its business is controlled and managed in Malaysia (section 8(1)(b), Income Tax Act 1967 (ITA)).
All companies in Malaysia are subject to income tax at 25% on their Malaysia-source income.
Sales tax must be paid on certain imported and locally manufactured goods (Sales Tax Act 1972). The general rate is 10% but it can vary depending on the category of products.
Excise duty must be paid on imported and locally manufactured goods (Excise Act 1976 and Excise Duties (Amendment) (No.3) Order 2006). The rates range from 10% to 100%, depending on the category of products.
Capital gains tax is only paid on gains from real property. Currently the tax chargeable for real property gains is a fixed rate of 5%, for a disposal within five years of acquisition.
Non-tax resident companies are taxed on their Malaysia-source income only.
Dividends paid to foreign corporate shareholders?
Dividends received from foreign companies?
Interest paid to foreign corporate shareholders?
Intellectual property (IP) royalties paid to foreign corporate shareholders?
Dividends are taxed as the Malaysian paying company's income before being passed on to foreign corporate shareholders. There is no withholding tax on dividends paid by Malaysian companies.
Dividends received from foreign companies are taxed as the Malaysian recipient company's income unless a relevant double tax treaty applies (see Question 22).
Interest paid to a foreign corporate shareholder is subject to a withholding tax of 15%, unless:
It is varied by the Director General.
A relevant double tax treaty applies.
An exemption applies within Malaysia.
Royalties paid to foreign corporate shareholders are subject to a withholding tax of 10%.
There are no restrictions on loans from foreign affiliates. However, foreign exchange rules must be complied with.
The Malaysian tax authorities can impute the profits of a foreign subsidiary to a parent company that is tax resident in Malaysia. This right is protected in all double tax treaties that Malaysia has entered into.
Malaysia has transfer pricing rules under the ITA. The Malaysian tax authorities can disregard or vary any transaction that has the direct or indirect effect of altering the amount of tax payable.
Customs duties must be paid on imports and exports (Customs Act 1967). The rates, and any applicable exemptions, are set by subsidiary legislation made under the Act and depend on the type of goods imported or exported.
Most goods are subjected to import duties ranging from zero to 30%. Higher rates apply to luxury goods, automobiles, tobacco, alcoholic beverages and processed and high-value food products.
Malaysia has entered into almost 70 double tax treaties, of which 66 are in force, including with China, Japan, many EU countries (including the UK) and the US (although the US double tax treaty has limited provisions). A full list of the countries which have entered into double taxation agreements with Malaysia, together with the effective applicable rates can be found at www.hasil.gov.my/pdf/pdfam/DoubleTaxationAgreementRates.pdf.
Malaysia enacted the Competition Act 2010 on 10 June 2010. The Act prohibits horizontal or vertical agreements between enterprises which have the object or effect of significantly preventing, restricting or distorting competition or that encourage abuse of a dominant position in any market for goods or services. The Act will come into operation on 1 January 2012 and applies to any commercial activity within Malaysia, and outside Malaysia if it has an effect on competition in any market in Malaysia.
The Competition Act 2010 regulates unilateral conduct by enterprises which are in a dominant position in any market for goods or services. Whether an enterprise is dominant in any market depends on whether it possesses, "such significant power in a market to adjust prices or outputs or trading terms, without effective constraint from competitors or potential competitors". However, the Act states that the market share of the enterprise is not conclusive as to whether that enterprise occupies a dominant position in that particular market. Conduct which may amount to abuse includes (section 10(2) Competition Act):
Imposing unfair purchase or selling price or other unfair trading conditions on any supplier or customer.
Limiting or controlling production, market outlets or market access, technical or technological development, or investment.
Tying and bundling.
Predatory behaviour towards competitors.
Buying up scarce resources or intermediate goods required by a competitor.
Mergers and acquisitions are not subject to merger control as there are currently no merger control provisions under the Competition Act 2010.
Nature of right. To qualify for a patent, an invention must:
Involve an inventive step.
Be capable of industrial application.
Not fall under an excluded category.
The owner of a patent has the exclusive right to exploit the patented invention and transfer, assign or license the patent.
Protection. A patent must be registered with the Registrar of Patents (Patents Act 1983).
Malaysia has acceded to the Patent Cooperation Treaty (PCT), which provides a unified procedure for filing patent applications to protect inventions globally.
Enforcement. A patent owner can institute court proceedings, and be awarded the following civil remedies:
Any other applicable remedy.
Specific offences under the Patents Act can lead to criminal prosecution. Officers of corporations can also be subject to one or both of:
A fine of not more than MYR15,000.
Imprisonment for a term of not more than two years.
Length of protection. Patents granted after 1 August 2001 are protected for 20 years from the date of filing an application for registration. Patents granted before 1 August 2001 are protected for the longer of:
20 years from the date of filing an application.
15 years from the date the patent is granted.
Nature of right. To qualify for registration, a trade mark must:
Ideally, comprise invented words.
Not have any direct reference to the character or quality of the goods or services.
The owner of a registered trade mark has the exclusive right to:
Use the trade mark in relation to the goods or services for which it is registered.
Prevent others from using an identical or similar mark in a way that is likely to deceive or confuse potential customers.
Protection. A trade mark can be protected by registration with the Registrar of Trade Marks (Trade Marks Act 1976).
Registered and unregistered trade marks can also be protected using the common law right of passing off, which protects the goodwill and get-up connected to a trade mark.
Enforcement. The civil liabilities and remedies are the same as for patents (see above, Patents).
Falsely representing a trade mark as being registered is a criminal offence and can result in one or both of a:
Fine of not more than MYR500.
Term of imprisonment of not more than two months.
Falsely representing oneself as the owner of a trade mark is also a criminal offence under the Trade Descriptions Act 1972 and can result in one or both of a:
Fine of not more than MYR500.
Term of imprisonment for not more than two months.
Length of protection. Protection lasts for ten years from the date of registration. This can be extended indefinitely for additional ten-year periods by paying the renewal fees.
Nature of right. To qualify for registration, an industrial design must:
Have features of a shape, configuration, pattern or ornamentation.
Be applied to an article by an industrial process.
Be, in its finished form, capable of being aesthetically judged by the eye.
A design cannot be registered if it is either:
Dictated solely by the function that the finished article must perform.
Dependent on the appearance of another article of which the finished article is intended to form an integral part.
The owner of a registered design has the exclusive right to:
Produce, sell, hire or import any article that incorporates the design.
Prevent third parties from, among other things, applying or imitating the design in relation to any article without permission.
Protection. A design must be registered with the Registrar of Industrial Designs (Industrial Designs Act 1996).
Enforcement. The design holder can institute civil proceedings and remedies can include:
An account of profits.
Any other applicable remedies.
Criminal prosecution can be instituted for specific offences under the Act, which are the same as for patents (see above, Patents).
Length of protection. Protection lasts for five years from the date of filing an application for registration. This period of protection can be extended for two further periods of five years each.
Nature of right. The following original works qualify for copyright protection:
Art (including architecture).
The copyright owner can bring an action to cease infringement or prohibit the importation of infringing copies of a work (Copyright Act 1987).
Protection. Copyright protection arises automatically on creation of the work. Malaysia is party to the Berne Convention for the Protection of Literary and Artistic Works 1971, which gives citizens of participating countries the same rights in all relevant countries.
Enforcement. The civil liabilities and remedies are the same as for registered designs (see above, Registered designs). In addition, the court, after taking into account various considerations, can award additional damages as it considers appropriate.
The Copyright Act provides for various criminal offences, for example:
Distributing, possessing or importing infringing copies.
Making infringing copies available for sale or hire.
The penalties for the above offences include one or both of a:
Fine of up to MYR40,000 for each infringing copy or contrivance.
Term of imprisonment of not more than 20 years.
For other offences involving tampering of technological measures or electronic rights management information, the wrongdoer can be subject to one or both of (for first time offences only):
A fine of up to MYR250,000.
Imprisonment for up to five years.
Any other offence under the Act or the regulations under the Act can be penalised by one or both of:
A fine of up to MYR25,000.
Imprisonment for a term of not more than three years.
Length of protection. Protection for literary, musical or artistic works lasts for the life of the author plus 50 years. Protection for films, sound recordings, broadcasts and performances lasts for 50 years from the beginning of the calendar year after which the work was first published or performed.
The Copyright (Amendment) Bill 2010 has been passed by the House of Representatives and is awaiting reading in the Senate. The proposed amendments include provisions to fulfil the requirements for accession to the WIPO Copyright Treaty (WCT) and WIPO Phonograms and Performances Treaty (WPPT). Other proposed amendments relate to the voluntary notification mechanism of copyright works, introduction of camcording as an offence in certain venues and the limitation of liability for internet service providers.
Nature of right. Any information is confidential if it is disclosed under an obligation of confidence. The right holder can use the information in any way he wants and he can impose obligations of confidentiality on whoever he decides to disclose the information to.
Protection. Confidentiality is breached by disclosure, or threatened disclosure, of the confidential information. An action for breach of confidence can be made under contract, tort and equity law.
Enforcement. The owner of confidential information can bring a court action for any of the following:
An account of profits.
An order for the delivery up and destruction of offending material.
Length of protection. Confidential information can, in theory, be protected indefinitely. However, the length of protection can be restricted to a reasonable period by the courts or a defined period by contract.
There is no specific legislation regulating agency agreements.
Distribution agreements are only regulated if they relate to certain products, including:
Regulations are applied by laws relating specifically to the goods concerned.
The Franchise Act 1998 regulates:
The establishment of a franchise.
The conduct of franchising parties.
Government supervision of franchises throughout the duration of a franchise agreement.
There is no comprehensive legislation governing e-commerce in general. Specific areas of e-commerce are governed by:
The Digital Signatures Act 1997.
The Payment Systems Act 2003.
Guidelines issued by the Central Bank of Malaysia.
The Malaysian Personal Data Protection Act (PDPA) has yet to come into effect.
The purpose of the PDPA is to regulate the processing of personal data (including sensitive personal data) by providing safeguards to protect the interest of data subjects. Data users would be required to register themselves with the Commissioner under the PDPA.
In addition, information relating to customers of banking and financial institutions is protected (Banking and Financial Institutions Act 1986).
Product liability is governed by the Consumer Protection Act 1999, which provides that the producer or importer of a product is liable for any damage caused wholly or partly by a defect in the product. This is the same as the common law position on manufacturer's liability.
Qualified. Malaysia, 1995
Areas of practice. Dispute resolution; anti-dumping disputes; international law; competition; arbitration and alternative dispute resolution; banking and finance; corporate and commercial disputes; directors' and officers' liability; partnerships; securities; insolvency.
Qualified. Malaysia, 1994; United Kingdom, 1990
Areas of practice. Competition law; oil and gas; energy; shipping; mergers and acquisitions.
Qualified. Malaysia, 1994
Areas of practice. Industrial relations; employment; medical negligence; professional indemnity insurance.
Qualified. Malaysia, 2000; Australia, 1999
Areas of practice. Patents advisory and disputes; trade marks advisory and disputes; industrial designs advisory and disputes; copyright advisory and disputes; franchising and licensing; IP due diligence; trade secrets and confidential information; technology transfer.