Malaysia is an attractive destination for businesses looking to establish operations, offering a strategic location in Southeast Asia, solid infrastructure and a skilled workforce. However, setting up and running a business in Malaysia involves more than simply incorporating a company. Businesses must navigate a range of regulatory, licensing, immigration and property requirements, which vary depending on the nature of their activities. Identifying the relevant approvals at an early stage can help ensure a smoother business establishment process.
Business Activities and Sector Licensing
One of the first considerations for businesses establishing operations in Malaysia is identifying the nature of their intended business activities. Different industries are regulated by different authorities and may require specific licences or approvals before operations can begin.
- Business Premise and Signboard Licences
Before commencing operations, businesses operating from a physical office, shop, warehouse or other commercial premises are generally required to obtain a business premise licence and, where applicable, a signboard licence from the relevant local authority.
As licensing requirements vary between local authorities, businesses should verify the applicable requirements based on the location of their premises. Failure to obtain or renew the necessary licences may result in enforcement action, including fines or the closure of business premises.
- Manufacturing Licence
Under the Industrial Co-ordination Act 1975, a manufacturing licence is mandatory for companies with shareholders’ funds of RM2.5 million or more, or those employing 75 or more full-time employees. Applications are submitted to the Malaysian Investment Development Authority (“MIDA”) for approval by the Ministry of Investment, Trade and Industry (“MITI”).
Manufacturing companies should also consider whether they are eligible for investment incentives administered by MIDA, such as Pioneer Status, Investment Tax Allowance, and exemptions from import duty or sales tax for qualifying projects.
Businesses should note that whether an activity constitutes “manufacturing” is not always straightforward. For example, a central kitchen preparing and packaging ready-to-eat food may require further assessment to determine whether the activity falls within the scope of “manufacturing” under the applicable regulatory framework.
- Wholesale and Retail Trade (“WRT”) and Unregulated Services Sector (“USS”) Approvals
Foreign participation in Malaysia’s distributive trade and certain service sectors is subject to the WRT and USS approval regimes administered by the Ministry of Domestic Trade and Cost of Living (“KPDN”).
Generally, businesses engaged in the distribution, wholesale or retail sale of goods may require WRT Approval. This includes businesses such as supermarkets, retail outlets, wholesale distributors and trading companies.
Foreign-owned companies providing services that are not regulated by another sector-specific authority may require USS Approval, which applies to a broad range of service-based businesses. Examples include transportation, management consulting, cleaning, laundry and beauty service businesses.
Although WRT and USS Approvals are administrative approvals rather than statutory licences, they are treated by KPDN as an important prerequisite for foreign-owned businesses carrying on the relevant activities. In practice, the absence of the relevant approval may affect applications for Employment Passes and certain business licences. KPDN may also reject applications to establish additional branches or revoke previously granted WRT or USS approvals in cases of non-compliance.
- Examples of Other Sector-Specific Approvals
Apart from the approvals discussed above, foreign-owned businesses should also consider whether their intended business activities are subject to sector-specific foreign equity restrictions. While many sectors permit 100% foreign ownership, certain regulated industries remain subject to foreign equity limits or ownership conditions. For example, construction contractors are required to register with the Construction Industry Development Board (“CIDB”), banking and insurance businesses are regulated by Bank Negara Malaysia (“BNM”), upstream oil and gas activities are subject to PETRONAS licensing requirements under the Petroleum Development Act 1974, and certain telecommunications licences regulated by the Malaysian Communications and Multimedia Commission (“MCMC”) are subject to foreign equity restrictions. Businesses should therefore assess the applicable ownership requirements at an early stage before establishing operations.
Employment and Immigration Requirements
Businesses intending to relocate expatriate personnel to Malaysia should also consider the applicable immigration requirements.
- Employment Pass (“EP”)
Employment Passes are categorised based primarily on the expatriate’s monthly salary, as summarised below:
|
EP Category |
Minimum Monthly Salary |
Maximum Duration |
|
Category I |
RM20,000 and above |
Up to 10 years |
|
Category II |
RM10,000 to RM19,999 |
Up to 10 years |
|
Category III |
RM5,000 to RM9,999* |
Up to 5 years |
* For certain manufacturing and manufacturing-related services sectors, the minimum monthly salary for Category III is RM7,000.
Eligible Employment Pass holders may also apply for Dependant Passes for their spouse and eligible children, allowing them to reside in Malaysia for the duration of the principal Employment Pass.
- Professional Visit Pass (“PVP”)
A Professional Visit Pass (“PVP”) is generally appropriate for foreign personnel who are temporarily assigned to Malaysia by an overseas employer to provide services to, or undergo practical training with, a Malaysian company. The maximum validity period of a PVP is 12 months.
Unlike EP holders, PVP holders are not eligible to apply for Dependant Passes. Businesses should therefore assess the nature, purpose and duration of the proposed assignment to determine the appropriate immigration pass.
Businesses should also note that applications for Employment Passes and Professional Visit Passes may be subject to additional requirements, including minimum paid-up capital requirements, depending on the intended business activities and the requirements of the relevant approving authority.
Importation of Assets or Products
Businesses intending to import machinery, equipment, raw materials, components or finished products into Malaysia should note that all imports must be declared to the Royal Malaysian Customs Department (“RMCD”), with the applicable customs duties and Sales and Service Tax (“SST”) assessed and paid unless an exemption applies. In addition, certain categories of controlled goods require an Approved Permit (“AP”) or other specific regulatory permits or certifications from the relevant government authority and comply with a host of specific procedures, before importation or distribution in Malaysia. Examples include motor vehicles, strategic goods, medical devices, telecommunications equipment, food products and cosmetics, which may require approvals from the relevant government authorities before importation.
Businesses should also consider whether they are eligible for any import duty and/or SST exemptions on imported machinery, equipment, raw materials or components. Such relief is available for qualifying businesses across various sectors, including manufacturing, agriculture and selected service industries. Businesses may also be eligible from customs facilitation arrangements, such as Free Industrial Zones (“FIZ”) and Licensed Manufacturing Warehouses (“LMW”), subject to the applicable eligibility criteria and approval requirements.
Incorporating a company to do business in Malaysia is relatively quick and easy, however, getting the business ready for operations in a legally compliant way requires much more significant planning and preparation.
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This article was written by Shawn Ho (Partner) with the assistance of Sonia Lim (Intern) from Donovan & Ho’s corporate practice.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
