Overview:
Small and Medium Enterprises (SMEs) in Malaysia are integral to the country’s economy, benefiting from a variety of financial and non-financial incentives designed to support their growth and sustainability. Among the most significant forms of financial assistance available to these businesses are grants, conventional loans, venture capital funding, and tax incentives. These incentives are largely provided and coordinated through various government agencies, including the Malaysia Investment Development Authority (MIDA), which plays a crucial role in promoting investment in the manufacturing sector. SMEs in Malaysia can take advantage of these opportunities, which are tailored to foster expansion and innovation, especially in sectors with substantial growth potential.
For manufacturing companies, two major tax incentives are particularly important: the Pioneer Status and the Investment Tax Allowance (ITA). These incentives are designed to encourage companies to undertake qualifying activities and investments that contribute to economic growth. The Pioneer Status (PS) is a tax incentive where companies can enjoy income tax exemptions ranging from 70% to 100% of their statutory income for a period of 5 to 10 years. The exemption period begins from the Production Day, defined as the date when a company’s production level reaches 30% of its capacity. During the pioneer period, companies can carry forward unabsorbed capital allowances and accumulated losses, which can be offset against future income post-pioneer status, typically for up to seven consecutive years. This provides SMEs with significant tax relief, allowing them to reinvest and expand their operations.
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Alternatively, companies can apply for the Investment Tax Allowance (ITA), which grants an allowance of 60% to 100% on qualifying capital expenditure (QCE) incurred within 5 to 10 years from the date of the first qualifying capital expenditure. ITA can be utilized to offset up to 70% of the company's statutory income in each year of assessment, while the remaining 30% is subject to the prevailing corporate tax rate as specified under the Income Tax Act 1967. The allowance can be carried forward until it is fully utilised, offering companies greater flexibility in managing their tax liabilities over time. The ITA is particularly advantageous for companies with high capital expenditure and long gestation periods, where the benefits from tax exemptions may not be fully realized within the shorter Pioneer Status period.
These tax incentives also cater to a range of industries, including higher educational institutions, intellectual property (IP) income, and other sectors where innovation is key. The tax exemptions and allowances help alleviate financial pressures, enabling companies to invest in qualifying capital expenditure such as factory facilities, plant machinery, and equipment essential for their operations. It is important to note that these incentives are conditional on meeting specific qualifying activities and investment criteria set by MIDA, and companies must submit their applications for Pioneer Status or ITA before commencing operations.
In addition to tax incentives, SMEs in Malaysia can benefit from various deductions, such as tax deductions for interest paid on loans, or other tax deductions provided by the government to ease their financial burden. For companies facing challenges such as ill health of key stakeholders or a decline in business performance, these incentives provide much-needed support, allowing them to recover or expand despite challenging circumstances. Ultimately, the availability of such comprehensive incentives, combined with strategic tax planning, enables Malaysian SMEs to thrive in a competitive business environment, enhancing their productivity, fostering innovation, and contributing to the country’s economic development.
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SMI FUNDING ROLE:
Well-experienced consultants from SMI FUNDING offer invaluable assistance to SMEs in Malaysia by helping them fully leverage tax incentives, including the Pioneer Status and tax exemptions. These consultants are experts in navigating the complex regulatory landscape and can guide businesses through the entire process—from identifying eligibility for various incentives to maximizing the benefits. They ensure that companies take full advantage of tax relief opportunities, which can significantly reduce their tax liabilities, enhance cash flow, and provide the financial freedom to reinvest in growth initiatives. SMI FUNDING consultants also help businesses understand the nuances of tax exemptions, such as those related to qualifying capital expenditure, and how to structure their operations to meet the required criteria.
In addition to offering strategic advice, SMI FUNDING consultants handle all the necessary documentation, application procedures, and status updates for companies applying for Pioneer Status or other tax incentives. The process of applying for these incentives can be time-consuming and requires precision, as companies must submit comprehensive documentation to prove eligibility. SMI FUNDING streamlines this process by preparing the required paperwork, ensuring compliance with regulations, and submitting applications on behalf of the company. Their ongoing support also includes status updates, keeping businesses informed at every stage of the application process, and providing timely advice on any additional steps needed to secure tax exemptions and other incentives. With their expertise, SMEs can focus on growing their business while leaving the complexities of tax incentive applications to the professionals.
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Pioneer Status (PS)
A five- to ten-year period during which 70% to 100% of statutory income is exempt from income taxes. The company's post-pioneer status might be reduced by carrying forward and deducting cumulative losses and unabsorbed capital allowances from the pioneer phase. Pioneer Status (PS) allows a corporation to partially avoid paying income tax for five years. The company's tax liability is 30% of its statutory income*. However, there is a grace period that begins on output Day, which is the day when output achieves 30% of its capacity. You can deduct any unabsorbed capital allowances from your post-pioneer income that you incurred during the pioneer period. After the pioneer phase ends, the company can deduct its accumulated losses from its post-pioneer income for seven years in a row.
A vast array of incentives are available in Malaysia, spanning all of the main industries. Allowances and income exemptions are two forms of tax benefits. Any unused allowances can be used against future statutory income in cases where incentives are provided in the form of them. However, there is a seven-year limit for certain incentives, like the reinvestment allowance and the investment allowance for approved service projects.
The following are the major types of incentives available in Malaysia.
The PS and ITA incentives are enhanced for the following types of projects:
Qualifying industry | Pioneer status | Investment tax allowance | ||
Incentive | TRP (1) | Incentive | TRP (1) | |
Projects of national and strategic importance involving heavy capital investment and high technology. | 100% of SI (2) | 5 + 5 | 100% QCE (3) against 100% SI | 5 |
High-technology companies engaged in areas of new and emerging technologies. | 100% of SI | 5 | 60% QCE against 100% SI | 5 |
Companies manufacturing specialised machinery and equipment. | 100% of SI | 10 | 100% QCE against 100% SI | 5 |
Companies providing technical and vocational training, and private higher education institutions providing qualifying vocational / science courses. | - | - | 100% QCE against 70% SI | 10 |
New companies investing and existing companies reinvesting in utilising oil palm biomass to produce value-added products. | 100% of SI | 10 | 100% QCE against 100% SI | 5 |
Small scale companies (defined) that meet with specified conditions. | 100% of SI | 5 | 60% QCE against 100% SI | 5 |
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Special incentive schemes
Reinvestment allowance
When a resident company that has been in operation for at least 36 months makes capital expenditures to grow, update, automate, or diversify its current manufacturing business or an authorized agricultural project, they are eligible for reinvestment allowance. Here's how it works:
· The allowance is provided for a period of fifteen years beginning with the year of claim.
· The allowance can be used against 70% of statutory income and is calculated at 60% of QCE incurred. Projects that have met the productivity level set by the Minister of Finance are exempt from the 70% restriction.
· If the asset that is eligible for the allowance is sold or otherwise transferred within five years, the allowance will be revoked.
Note:
A company approved with a Pioneer Status certificate can enjoy income tax exemption between 70% - 100% of statutory income for 5 to 10 years, whereas for Investment Tax Allowance, a company can get allowances between 60% - 100% on qualifying capital expenditure incurred within a period of 5 to 10 years.
For projects with longer gestation period and high capital expenditure, it would be more beneficial to opt for Investment Tax Allowance. Companies should study the options before applying either for Pioneer Status or Investment Tax Allowance.
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Promotional export policies Companies based in the country that produce goods or provide services can claim allowances ranging from 10% to 100% of the value of increased exports (as long as they meet certain requirements). These allowances can be deducted up to 70% of their statutory income.
Regional operations
International trading company
For the first five years, international trading enterprises can deduct 20% of the increasing export value from their statutory income, up to a maximum of 70%. This incentive is contingent upon the following three things being true for the business:
· Founded in Malaysia and controlled by Malaysians to the tune of 60%.
· Sell at least MYR 10 million every year, with no more than 20% coming from commodity trading.
· Take advantage of the banking, financing, and insurance options as well as the local ports and airports that are available to you.
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