Malaysia continues to focus on economic recovery following its deepest recession in 20 years, brought on by the COVID-19 pandemic and restrictions on domestic travel and business operations intended to curb the spread of the virus. Under Prime Minister Muhyiddin Yassin, the government has spent an estimated USD 82 billion in stimulus measures since the start of the pandemic. Despite these setbacks, Malaysia’s economy is expected to rebound in 2021, buoyed by manufacturing export sector growth and public initiatives to increase digital investments and construction activity. Malaysia’s finance ministry and central bank have noted the pace of the recovery will also be impacted by the government’s vaccine rollout, which has experienced delays.
On April 21, the government announced the National Investment Aspirations, a framework intended to reform Malaysia’s investment policies. Among the goals of the new investment framework are to expand and integrate Malaysia’s linkages with regional and global supply chains and further develop economic clusters tied to key sectors, including advanced manufacturing and technology (broadly referred to in Malaysia as the electrical and electronics, or E&E, sector). On February 19, the government announced the MyDigital initiative, intended to add 500,000 jobs and grow Malaysia’s digital economy to nearly one-quarter of GDP by 2030.
On January 12, Prime Minister Muhyiddin announced a six-month state of emergency intended to strengthen the government’s ability to respond to the pandemic. However, the resulting suspension of parliament has also contributed to political uncertainty in Malaysia since a change in government in March 2020, the second in a two-year period.
The Malaysian government has traditionally encouraged foreign direct investment (FDI), and the Prime Minister and other cabinet ministers have signaled their openness to foreign investment since taking office. In its 2021 budget, the government proposed tax incentives which include extensions of existing relocation incentives for the manufacturing sector (including a zero-percent tax rate for new companies or a 100-percent investment tax allowance for five years) and extensions of existing tax incentives for certain industrial sectors.
The business climate in Malaysia is generally conducive to U.S. investment. Increased transparency and structural reforms that will prevent future corrupt practices could make Malaysia a more attractive destination for FDI in the long run. The largest U.S. investments are in the oil and gas sector, manufacturing, technology, and financial services. Firms with significant investment in Malaysia’s oil and gas and petrochemical sectors include ExxonMobil, Caltex, ConocoPhillips, Hess Oil, Halliburton, Dow Chemical, and Eastman Chemicals. Major semiconductor manufacturers, including ON Semiconductor, Texas Instruments, Intel, and others have substantial operations in Malaysia, as do electronics manufacturers Western Digital, Honeywell, and Motorola.
|TI Corruption Perceptions Index||2020||57 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||12 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||33 of 130||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country (historical stock positions)||2019||USD 10.8 billion||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2019||USD 11,230||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Historically, the Malaysian government has welcomed FDI as an integral component of its economic development. Over the last decade, the gradual liberalization of the economy and influx of FDI has led to the creation of new jobs and businesses and fueled Malaysia’s export-oriented growth strategy. The Malaysian economy is highly dependent on trade. According to World Bank data, the value of Malaysia’s imports and exports of goods and services as a share of GDP held steady at roughly 130 percent in 2018, more than double the global average.
In October 2019, the government introduced measures in its 2020 budget designed to streamline and further incentivize foreign investment, with special emphasis on investments being redirected from China as a result of shifting global supply chains. The Malaysian government established the China Special Channel for the purpose of attracting these investments, an initiative being managed by InvestKL, an investment promotion agency under the Ministry of International Trade and Industry. The government also established the National Committee on Investment, an investment approval body jointly chaired by the Minister of Finance and the Minister of International Trade and Industry, to expedite the regulatory process with respect to approving new investments.
In its 2021 budget, the government proposed a slew of tax incentives which include extensions of existing relocation incentives for the manufacturing sector (including a 0 percent tax rate for new companies or a 100 percent investment tax allowance for five years) and extensions of existing tax incentives for certain industrial sectors. In light of the pandemic, manufacturers of pharmaceutical products, particularly those involved with COVID-19 vaccine supply chains, investing in Malaysia will be given income tax rates of zero percent to 10 percent for the first 10 years; with 10 percent rates for the subsequent 10 years.
Malaysia has various national, regional, and municipal investment promotion agencies, including the Malaysian Investment Development Authority (MIDA) and InvestKL. These agencies can assist with business strategy consultations, area familiarization, talent management programs, networking, and other post-investment services.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity, with some exceptions. Although Malaysia has taken steps to liberalize policies concerning foreign investment, there continue to exist requirements for local equity participation within specific sectors. In 2009, Malaysia repealed Foreign Investment Committee (FIC) guidelines that limited transactions for acquisitions of interests, mergers, and takeovers of local companies by foreign parties. However, certain business sectors, including logistics, industrial training, and distributive trade, are required to limit foreign equity participation when applying for operating licenses, permits and approvals. Due to residual economic policies, this limitation most commonly manifests as a 70-30 equity split between foreign investors (maximum 70 percent) and Bumiputera (i.e., ethnic Malays and indigenous peoples) entities (minimum 30 percent).
Foreign investment in services, whether in sectors with no foreign equity caps or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors. A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals. The Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of investment projects. Investors in industries targeted by the Malaysian government can often negotiate favorable terms with the ministries or agencies responsible for regulating that industry. This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis. Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from various regulatory bodies and therefore can face greater bureaucratic obstacles.
Malaysia’s 2011-2020 Financial Sector Blueprint has produced partial liberalization within the financial services sector; however, it does not contain specific market-opening commitments or timelines. For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent. However, Bank Negara Malaysia (BNM), Malaysia’s central bank, would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry. The latest Blueprint helped to codify this case-by-case approach. Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country. In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities. BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified.
While there has been no policy change in terms of the 70 percent foreign ownership cap for insurance companies, the government did agree to let one foreign owned insurer maintain a 100 percent equity stake after that firm made a contribution to a health insurance scheme aimed at providing health coverage to lower-income Malaysians.
BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas). The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank. BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back-office activities in Malaysia.
Information & Communication
In 2012, Malaysia authorized up to 100 percent foreign equity participation among application service providers, network service providers, and network facilities providers. An exception to this is national telecommunications firm Telekom Malaysia, which has an aggregate foreign share cap of 30 percent, or five percent for individual investors.
Malaysia permits up to 100 percent foreign equity participation for new manufacturing investments by licensed manufacturers. However, foreign companies can face difficulties obtaining a manufacturing license and often resort to incorporating a local subsidiary for this purpose.
Oil and Gas
Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign participation tends to take the form of production sharing contracts (PSCs). PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders. Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder. PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.
Other Investment Policy Reviews
Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013. Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.
Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies. The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors. Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations. Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has revived the Sales and Services Tax, which was implemented on September 1, 2018.
The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965. Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2019, Malaysia streamlined the process of obtaining a building permit and made it faster to obtain construction permits; eliminated the site visit requirement for new commercial electricity connections, making getting electricity easier for businesses; implemented an online single window platform to carry out property searches and simplified the property transfer process; and introduced electronic forms and enhanced risk-based inspection system for cross-border trade and improved the infrastructure and port operation system at Port Klang, the largest port in Malaysia, thereby facilitating international trade; and made resolving insolvency easier by introducing the reorganization procedure. These changes led to a significant improvement of Malaysia’s ranking per the Doing Business Report, from 24 to 15 in one year.
In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (i.e., company charter); 2) a Declaration of Compliance (i.e., compliance with provisions of the Companies Act); and 3) a Statutory Declaration (i.e., no bankruptcies, no convictions). The registration and business establishment process takes two weeks to complete, on average. GST was repealed in May of 2018 and a new sales and services tax (SST) took effect on September 1, 2018.
Beyond these requirements, foreign investors must obtain licenses. Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM2.5 million (approximately USD 641,000) or employs at least 75 full-time staff. The Malaysian government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify. Manufacturing investors seeking to expand or diversify their operations need to apply through MIDA.
Manufacturing investors whose companies have annual revenue below RM50 million (approximately USD 12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives. Companies in the services or other sectors that have revenue below RM20 million (approximately USD 5.1 million) or fewer than 75 full-time employees also meet the SME definition.
While the Malaysian government does not promote or incentivize outward investment, a number of government-linked companies, pension funds, and investment companies do have investments overseas. These companies include the sovereign wealth fund of the Government of Malaysia, Khazanah Nasional Berhad; KWAP, Malaysia’s largest public services pension fund; and the Employees’ Provident Fund of Malaysia. Government-owned oil and gas firm Petronas also has investments in several regions outside Asia.
3. Legal Regime
Transparency of the Regulatory System
In July 2013, the Malaysian government accelerated its efforts to modernize the regulatory processes in the country by releasing the National Policy on Development and Implementation of Regulations (NPDIR), a roadmap to achieving Good Regulatory Practice (GRP). Under the NPDIR, the federal government formalized a comprehensive approach to improve the efficiency and transparency of the country’s regulatory framework. The benefits to the private sector thus far have included a streamlining of project approval requirements and fees (to the point that Malaysia ranked 2nd in the World Bank’s 2020 Doing Business report on ease of “dealing with construction permits”), a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings. The main components of the policy are: 1) the requirement of a Regulatory Impact Assessment (RIA) (a cost-benefit analysis of all newly proposed regulations) with each new piece of regulation; and 2) the formalization of a public consultation process to take the views of stakeholders into account while formulating new legislation. Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine which ones need to be adjusted or eliminated.
In furtherance of the NPDIR, the Malaysian government published four circulars in 2013 and 2014 to explain the methodology and implementation of their new strategy. These four documents laid out a clear framework toward increasing accountability, standardization, and transparency, as well as explaining enforcement and compliance mechanisms to be established. Throughout its various agencies, the government of Malaysia has taken steps to actualize these circulars. Ministries and agencies use their respective websites to publish the text and or summaries of proposed regulations prior to enactment, albeit with varying levels of consistency. Further, Malaysia’s procurement principles include adherence to open and fair competition, public accountability, transparency, and value for money.
Despite these efforts to foster inclusion, fairness, and transparency, considerable room for improvement exists. The Malaysian government’s 2018 Report on Modernization (sic) of Regulations emphasized the need to “Establish an accountability mechanism for the implementation of regulatory reviews by the government.” Many foreign investors echo this lack of accountability and criticize the opacity in the government decision-making process. One major area of concern for foreign investors remains government procurement policy, as non-Malaysian companies claim to have lost bids against Bumiputera-owned (ethnic Malay) companies despite offering better products at lower costs. Such results are due to the government’s preference policy to facilitate greater Bumiputera participation in the private sector. This preference policy is manifested through set-aside contracts for Bumiputera suppliers and contractors, and through the use of preferential price margins to increase the competitiveness of Bumiputera bidders.
Malaysia has a three-tiered system of legislation: federal-level (parliament), state-level, and local-level. Federal and state-level legislation derive their authority from the Malaysian Constitution, specifically Articles 73-79. Parliament has the exclusive power to make laws over matters including trade, commerce and industry, and financial matters. Parliament can delegate its authority to administrative agencies, states, and local bodies through Acts. States have the power to make laws concerning land, local government, and Islamic courts. Local legislative bodies derive their authority from Acts promulgated by parliament, most notably the Local Government Act of 1976. Local authorities can issue by-laws concerning local taxation and land use. For foreign investors, parliament is the most relevant legislating body, as it governs issues related to trade, and in instances of conflict, Article 75 of the Constitution states that federal laws will supersede state laws.
It is also important to note the role of the administrative state in the promulgation of new laws and regulations in Malaysia. Pursuant to the Interpretation Act of 1948 and 1967, “Any proclamation, rule, regulation, order, notification, bye-law, or other instrument made under any Act, Enactment, Ordinance or other lawful authority and having legislative effect.” Thus, the various ministries and agencies can be delegated lawmaking authority by an Act of a legislature with the legal right to make laws.
The Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework, which came into effect on January 1, 2012. The MFRS framework is fully compliant with the International Financial Reporting Standards (IFRS) framework; this compliance serves to enhance the credibility and transparency of financial reporting in Malaysia.
The Malaysian Institute of Accountants’ (MIA) Auditing and Assurance Standards Board (AASB) reviews standards and technical pronouncements issued by the International Auditing and Assurance Standards Board (IAASB), which sets International Standards on Auditing (ISAs) that have been adopted in more than 110 jurisdictions.
In theory, pieces of legislation are to be made available for public comment through a multi-stage system of rulemaking. The Malaysia Productivity Corporation (MPC) published the Guideline on Public Consultation Procedures in 2014 (the “Guideline”), which clarifies the roles of government and stakeholders in the consultation process and provides the guiding principles for Malaysia’s public consultation approach. As in the case of foreign investment, the consultation procedures usually fall under the purview of the Malaysian Securities Commission (SC), the Bursa Malaysia (Malaysia’s stock exchange), or BNM. The SC, for example, keeps public consultation papers on its website, easily accessible by stakeholders. These papers generally contain the rationale for the proposed regulations, as well as potential impacts, and provide a list of questions for stakeholders to explain their views to regulators.
The public is also engaged in the public consultation process through the increased role of PEMUDAH (the Special Task Force to Facilitate Business), which was founded in 2007 to serve as a bridge between government, businesses, and civil society organizations. PEMUDAH promotes the understanding of regulatory requirements that impact economic activities, by addressing unfair treatment resulting from inconsistencies in enforcement and implementation. It also plays an advocacy role in various points in the regulatory implementation process; provides recommendations from the private sector to regulators before new regulations are implemented, and monitors enactment of existing pieces of regulation.
Despite the Guideline, and significant steps taken to reduce the regulatory burden on industry, obstacles remain. There are frequent inconsistencies between different ministries in their implementation of the public consultation procedures, as well as in their respective interpretations of how regulations are to be applied. Adding to the difficulty is the complicated relationship between state-level and federal-level legislation, which can overlap on a range of issues and lead to inefficiencies for investors.
The CLJ Law website publishes the full text of Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2020 . In 2019 Malaysia in association with the World Bank, created a website that contains all ongoing pieces of legislation and allows public comment thereon. The website, called the Uniform Public Consultation Portal (http://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?home=1 ), does not contain legislation that was completed or implemented before 2019, but is a positive move toward standardizing and emphasizing the public consultation process. The website is user-friendly and allows searching by due date, implementing agency, and phase of consultation.
Malaysia has a multi-faceted approach to ensuring governmental compliance with regulatory requirements. The most important enforcement mechanism is access to judicial review. The WEF 2019 Report lists Malaysia as the 12th ranked country in efficiency of the legal framework in challenging regulations. Through ease in accessing administrative and judicial courts, aggrieved parties in Malaysia are able to compel action by the regulator.
Besides the legal route, aggrieved parties can also seek recourse through the various agency-led enforcement mechanisms. The central bank has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions. The Bank lists enforcement options as “a public or private reprimand; an order to comply; an administrative and civic penalty; restitution to customer; or prosecution. By contrast, the Inland Revenue Board of Malaysia (tax agency) has the Special Commissioners of Income Tax, to which taxpayers may file appeals concerning judgments and new regulations. The Malaysian Companies Commission (which regulates laws relating to companies registered in Malaysia) is also engaged in enforcement proceedings, as is the Malaysian Securities Commission. On matters of procurement, aggrieved bidders may complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, the Malaysian Competition Commission, or the National Audit Department.
International Regulatory Considerations
Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN). On December 31, 2015, the ASEAN Economic Community formally came into existence. ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the 10-country bloc. Although already robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital. No regional regulatory system is in place. As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.
Legal System and Judicial Independence
Malaysia’s legal system consists of written laws, such as the federal and state constitutions and laws passed by parliament and state legislatures, and unwritten laws derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes. States generally control property laws for residences but through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.
Malaysia has taken measures to increase the efficacy of the courts to improve its reputation as an international business hub. Other than the usual criminal and civil branches of the legal system, there are dedicated courts for issues such as intellectual property (IP) and labor.
Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA). However, before a foreign judgment can be enforceable, it must be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei. If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt.
To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.
Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.
Laws and Regulations on Foreign Direct Investment
The e Malaysia Investment Development Authority (MIDA). Under the purview of the Ministry of International Trade and Industry (MITI) has the task to attract foreign investment and serve as a focal point for legal and regulatory questions. Other regional bodies providing support to investors include: Invest Kuala Lumpur, Invest Penang, Invest Selangor, the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation, among others.
Competition and Antitrust Laws
On April 21, 2010, the Parliament of Malaysia passed the Competition Commission Act 2010 and the Competition Act 2010 which took effect on January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position but does not create any pre-transaction review of mergers or acquisitions. Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition. As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.
In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions. In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market. The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.
Expropriation and Compensation
The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.
ICSID Convention and New York Convention
Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966. In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.
Malaysia adopted the following measures to make the two conventions effective in its territory:
The Convention on the Settlement of Investment Disputes Act, 1966 (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966 (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980 (Act A 478 of 1980).
Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts. Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.
Investor-State Dispute Settlement
Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes. Malaysia does not have a Bilateral Investment Treaty with the United States.
Post has little data concerning the Malaysian government’s general handling of investment disputes. In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders. The case involves allegations by the U.S. investor of embezzlement by the other directors, and its resolution is unknown.
The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005. The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor. The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development. Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law. Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.
Many firms choose to include mandatory arbitration clauses in their contracts. The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration ( http://www.rcakl.org.my ), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes. The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.
Malaysia’s Department of Insolvency (MDI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967. On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM30,000 to RM50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.
The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016. After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders. Bankruptcy is not criminalized in Malaysia. The country ranks 40th on the World Bank Group’s Doing Business 2020 Rankings for Ease of Resolving Insolvency.
4. Industrial Policies
The Malaysian government has codified the incentives available for investments in qualifying projects in target sectors and regions. Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.
The lists of application procedures and incentives available to investors in these sectors and regions can be found at: http://www.mida.gov.my/home/invest-in-malaysia .
Foreign Trade Zones/Free Ports/Trade Facilitation
The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ), generally for warehousing commercial stock. The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain and operate any free trade zone. Currently there are 13 FIZs and 12 FCZs in Malaysia. In June 2006, the Port Klang Free Zone opened as the nation’s first fully integrated FIZ and FCZ, although the project has been dogged by corruption allegations related to the land acquisition for the site. The government launched a prosecution in 2009 of the former Transport Minister involved in the land purchase process, though he was later acquitted in October 2013.
The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian government, implemented through MDEC, launched in November 2017 with the participation of China’s Alibaba. DFTZ aims to facilitate seamless cross-border trading and eCommerce and enable Malaysian SMEs to export their goods internationally. According to the Malaysian government, the DFTZ consists of an eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers; and an eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade.
For more information, please visit https://mdec.my/digital-economy-initiatives/for-the-industry/entrepreneurs/dftz/ .
Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent of their output and depend on imported goods, raw materials, and components may be located in these Free Zones. Ports, shipping, and maritime-related services play an important role in Malaysia, as 90 percent of the country’s international trade by volume is seaborne. Malaysia is also a major transshipment center.
Goods sold into the Malaysian economy by companies within the FZs must pay import duties. If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40 percent of a product’s content must be ASEAN-sourced. In addition to the FZs, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from two to eight weeks.
Performance and Data Localization Requirements
Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer requirements. Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.
The Malaysian government extends a full tax exemption incentive of fifteen years for firms with “Pioneer Status” (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and ten years for companies with “Investment Tax Allowance” status (those on which the government places a priority, but not as high as Pioneer Status). However, the government appears to have some flexibility with respect to the expiry of these periods, and some firms reportedly have had their pioneer status renewed. Government priorities generally include the levels of value-added, technology used, and industrial linkages. If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded. Potentially, a firm could lose its manufacturing license. The New Economic Model stated that in the long term, the government intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors. More information on specific incentives for various sectors can be found at www.mida.gov.my .
Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia. However, since July 1, 2018, the Government decided to put on hold the granting of MSC Malaysia Status and its incentives, including extension of income tax exemption period, or adding new MSC Malaysia Qualifying Activities to review and amend Malaysia’s tax incentives. While the MSC Malaysia Status Services Incentive was published on December 31, 2018, the MSC Malaysia Status IP Incentive policy is still under review. For further details on incentives, see www.mdec.my. The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status. For more information please visit: https://www.mdec.my/msc-malaysia .
In the services sector, the government’s stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarter research and development, university and graduate education, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management. To date, Malaysia has had some success in attracting regional distribution centers, global shared services offices, and local campuses of foreign universities. For example, GE and Honeywell maintain regional offices for ASEAN in Malaysia. In 2016, McDermott moved its regional headquarters to Malaysia and Boston Scientific broke ground on a medical device manufacturing facility.
Malaysia seeks to attract foreign investment in biotechnology but sends a mixed message on agricultural and food biotechnology. On July 8, 2010, the Malaysian Ministry of Health posted amendments to the Food Regulations 1985 [P.U. (A) 437/1985] that require strict mandatory labeling of food and food ingredients obtained through modern biotechnology. The amendments also included a requirement that no person shall import, prepare, or advertise for sale, or sell any food or food ingredients obtained through modern biotechnology without the prior written approval of the Director. There is no ‘threshold’ level on the labeling requirement. Labeling of “GMO Free” or “Non-GMO” is not permitted. The labeling requirements only apply to foods and food ingredients obtained through modern biotechnology but not to food produced with GMO feed. The labeling regulation has yet to go into force although was slated to do so in 2014.
Malaysia has not implemented measures amounting to “forced localization” for data storage. Bank Negara Malaysia has amended its recent Outsourcing Guidelines to remove the original data localization requirement and shared that it will similarly remove the data localization elements in its upcoming Risk Management in Technology framework. The government has provided inducements to attract foreign and domestic investors to the Multimedia Super Corridor but does not mandate use of onshore providers. Companies in the information and communications technology sector are not required to hand over source code.
11. Labor Policies and Practices
Malaysia’s two million documented and estimated 1.5 to four million undocumented foreign workers make up over 30 percent of the country’s workforce. However, to curb the rise of COVID-19, the Malaysian government banned in 2020 additional or replacement migrant workers from entering the country, resulting in a dearth of migrant labor available for domestic companies.
Malaysia’s shortage of skilled labor is the most frequently mentioned impediment to economic growth cited in numerous studies. Malaysia has an acute shortage of highly qualified professionals, scientists, and academics. U.S. firms operating in Malaysia have echoed this sentiment, noting that the shortage of skilled labor has resulted in more on-the-job training for new hires.
The Malaysian labor market, traditionally accustomed to operating at or near full employment, has been heavily impacted by the prolonged shutdown as part of the government’s response to the global pandemic. The unemployment rate reached five percent in April 2020, Malaysia’s highest in over 30 years, with economic observers predicting it will climb higher during the year.
Malaysia is a member of the International Labor Organization (ILO). Labor relations in Malaysia are generally non-confrontational. While a system of government controls strongly discourages strikes and restricts the formation of unions, the new government has created a National Labor Advisory Council – comprised of the Malaysian Trade Unions Congress and Malaysian Employer’s Federation – to increase labor participation in unions. The government amended its Trade Unions Act and Industrial Relations Act in July 2019 to increase freedom of association in Malaysia. Some labor disputes are settled through negotiation or arbitration by an industrial court. Malaysian authorities have pledged to move forward with amendments to the country’s labor laws as a means of boosting the economy’s overall competitiveness and combatting forced labor conditions. The previous government prohibited outsourcing companies, improved oversight of employment agencies, and brought the Employment Act, Children and Young Persons Act, and Occupational Safety and Health Act in line with ILO principles.
Although national unions are currently proscribed in Malaysia, there are a number of territorial federations of unions (the three territories being Peninsular Malaysia, Sabah, and Sarawak). The government has prevented some trade unions, such as those in the electronics and textile sectors, from forming territorial federations of unions. Instead of allowing a federation of unions for all of Peninsular Malaysia, the electronics sector is limited to forming four regional federations of unions, while the textile sector is limited to state-based federations of unions, for those states which have a textile industry. Proposed changes to the Trade Unions Act address this issue and would allow unions to form.
Employers and employees share the costs of the Social Security Organization (SOSCO), which covers an estimated 12.9 million workers and has been expanded to cover foreign workers. No systematic welfare programs or government unemployment benefits exist; however, the Employee Provident Fund, which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector. Civil servants receive pensions upon retirement.
The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers, remains a notable impediment to employing workers in Malaysia. The high cost of terminating employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers. The former prime minister formed an Independent Committee on Foreign Workers to study foreign worker policies. The Committee submitted 40 recommendations for streamlining the hiring of foreign workers and protecting employees from debt bondage and forced labor conditions. It is unclear whether or how the new government will act on these recommendations.
Executives at U.S. companies operating in Malaysia have reported that the government monitors the ethnic balance among employees and enforces an ethnic quota system for hiring in certain areas. Race-based preferences in hiring and promotion are widespread in government, government-owned universities, and government-linked corporations.
The former government increased and standardized the minimum wage across the country to RM 1100 (USD 275), a raise from RM 1,000 (USD 250) in Peninsular Malaysia and RM 920 (USD 230) in East Malaysia.
In 2018, the Department of Labor’s Trafficking Victims Protection Reauthorization Act (TVPRA) listing of goods produced with child labor and forced labor included Malaysian palm oil (forced and child labor), electronics (forced labor), garments (forced labor), and rubber gloves (forced labor). Senior officials within a number of Malaysian government agencies have been working with the private sector and civil society to address concerns relating to the recruitment, hiring, and management of foreign workers in all sectors of the Malaysian economy yet progress remains slow as the government’s priorities are focused on issues of public health and the economy.