2023 Investment Climate Statements: Malaysia

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 partial liberalization of the economy and influx of FDI have led to the creation of new jobs and businesses and fueled Malaysia’s export-oriented growth strategy. U.S. FDI into Malaysia was $12.5 billion in 2021, a 3.3 percent increase from 2020.

Malaysia does not have a central authority or legislation that regulates FDI into the country. In April 2021, Malaysia’s government launched the National Investment Aspirations (NIA), a framework intended to spur investment and reform existing policies. The NIA prioritizes FDI that enhances local research and development (R&D) and production capabilities, generates high-income and knowledge-intensive jobs, integrates Malaysia with global supply chains, develops new and existing economic clusters, and promotes workforce inclusivity. The NIA also places emphasis on FDI that catalyzes Malaysia’s adoption of environmental, social, and governance (ESG) standards and helps it to achieve climate and emissions-reduction targets.

There are some laws and practices that differentiate how foreign versus domestic investors are treated in Malaysia. Depending on the sector, foreign investments are sometimes required to meet local participation requirements in terms of equity ownership or board representation. The restriction on foreign equity ownership most commonly takes the form of mandated minimum or majority equity stakes to be held by either local Malaysians or bumiputera (i.e., ethnic Malay) entities. For board representation, this can include a requirement for a local Malaysian or bumiputera individual to be appointed to a board of directors.

Malaysia’s 2022 budget proposed the creation of a $450 million Special Strategic Investment Fund to attract strategic foreign investments from multinational companies that align with NIA goals, including the development of industry value chains, growth of knowledge-based jobs, and creation of development opportunities for local small- and medium-sized enterprises (SMEs).

Malaysia has various national, regional, and municipal investment promotion agencies, including the Malaysian Investment Development Authority (MIDA) and InvestKL under the Ministry of International Trade and Industry (MITI). These agencies 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

The Malaysian government actively encourages joint ventures between foreign investors and domestic partners as a development strategy. 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 the 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 are required to limit foreign equity participation when seeking specific approvals, operating licenses, permits, or registrations. Due to residual economic policies, this limitation most commonly manifests as a 70-30 equity split between foreign investors (maximum 70 percent) and bumiputera 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 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.

Banking

Foreign shareholdings of up to 70 percent are allowed in domestic Islamic banks and investment banks, and up to 30 percent for commercial banks. Bank Negara Malaysia (BNM), or Malaysia’s central bank and banking regulator, 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., market centers, semi-urban areas, and non-urban areas). These policies do not allow foreign banks to set up new branches within 1.5 kilometers 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.

Insurance

Foreign ownership in insurance companies cannot exceed 70 percent. BNM, the insurance regulator, considers higher foreign equity limits on a case-by-case basis.

Information & Communications Technologies

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 a foreign share cap of 30 percent, or five percent for individual investors.

Manufacturing

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 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 tenders. Non-Malaysian firms are allowed to participate in oil services in partnership with local firms but are limited 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 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 actions to institute incentives to encourage investment. Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity.

WTO Trade Policy Review (February 2018): https://www.wto.org/english/tratop_e/tpr_e/tp466_e.htm 

There have not been substantive reviews of Malaysian investment policy-related concerns by civil society organizations in the past five years.

Business Facilitation

The principal law governing foreign investors’ entry and operation in the Malaysian economy is the Companies Act of 2016.

In addition to registering with the Companies Commission of Malaysia ( https://mycoid2016.ssm.com.my/ ), business entities must file: (1) a 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.

Beyond these requirements, foreign investors must obtain licenses. Under the Industrial Coordination Act of 1975, an investor engaging in manufacturing needs a license if the business claims capital of RM 2.5 million (approximately $565,000) 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 RM 55,000 (approximately $12,400) 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 RM 50 million (approximately $11.3 million) or with fewer than 200 full-time employees meet the definition of an SME and will generally be eligible for incentives. Companies in the services or other sectors that have revenue below RM 20 million (approximately $4.5 million) or fewer than 75 full-time employees also meet the SME definition.

Outward Investment

Although the Malaysian government does not actively promote or incentivize outward investment, a number of government-linked companies, pension funds, and investment companies do have investments overseas. These companies include sovereign wealth fund 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.

Transparency of the Regulatory System

In July 2013, the Malaysian government released 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 have included a streamlining of project approval requirements and fees, a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings.

In July 2021, the Malaysian government released the National Policy on Good Regulatory Practice (NPGRP) to replace the NPDIR. The NPGRP expands the NPDIR’s regulatory scope to include economic, social, and environmental policies. Additionally, the NPGRP codifies best practices from the NPDIR regime, including mandatory five-year reviews of existing regulations and post-implementation reviews of new regulations.

An area of concern is the Malaysian government’s procurement policy, as non-Malaysian companies claim to have lost bids against bumiputera-owned 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.

The Malaysian government is exploring ways to promote companies’ environmental, social, and governance (ESG) disclosure as part of its efforts to improve transparency and achieve national targets. Such efforts include the Green Technology Application for the Development of Low Carbon Cities (GTALCC); the Joint Committee on Climate Change; the National Energy Efficiency Action Plan (NEEAP); the Green Technology Master Plan (GTMP) 2017-2030; and the Securities Commission’s Sustainable and Responsible Investment (SRI) Roadmap.

Malaysia has a three-tiered system of legislation: federal (parliament), state, and local. 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.

The Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework in 2012, which 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 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 other steps 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 this 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 has published the full text of Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2023. In 2019, Malaysia, in association with the World Bank, created a website that contains ongoing pieces of legislation and allows public comment. The website, called the Uniform Public Consultation Portal (https://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?scnH=907&scnW=1680), does not contain legislation that was completed or implemented before 2019 but is a positive move towards standardizing public consultations. 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 World Economic Forum’s 2019 Global Competitiveness Report ranks Malaysia 12th 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. BNM has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions. BNM 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, a 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 ten Member States that constitute the Association of Southeast Asian Nations (ASEAN). ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the 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 efficiency of 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 Malaysia Investment Development Authority ( https://www.mida.gov.my ) under the Ministry of International Trade and Industry (MITI) is charged with attracting foreign investment and serving as a focal point for legal and regulatory questions. Other regional bodies providing support to investors include Invest Kuala Lumpur (InvestKL); Invest Penang; Invest Selangor; the Sabah Economic Development and Investment Authority (SEDIA); and the Sarawak Economic Development Corporation, among others.

Competition and Antitrust Laws

In April 2010, the Malaysian parliament passed the Competition Commission Act of 2010 and the Competition Act of 2010. 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 or imprisonment. 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 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, these acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions.

Expropriation and Compensation

Post 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, 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.

Dispute Settlement

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, which entered 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 recent complaints by U.S. investors of political interference in 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.

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.

Bankruptcy Regulations

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) 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 RM 30,000 to RM 50,000; (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; and (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.

Investment Incentives

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 (Eastern Malaysia); East Coast of Peninsular Malaysia; Iskandar Special Economic Zone (Johor); Sabah and Sarawak (Eastern Malaysia); and the 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 .

In 2020, the Malaysian government announced the Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) incentives would be extended until 2023.

Malaysia’s Green Technology Financing Scheme 2.0 (GTFS 2.0) is a program offered to investors which is supported by the government offering a two percent interest/profit rate subsidy for the first seven years and 60 percent government guarantee of green component cost to financial institutions. For more information, visit: https://www.mgtc.gov.my/our-services/green-technology-financing-scheme/.

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.

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 electronic fulfillment hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers; and an electronic services platform to 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. The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status. For more information, 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.

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.

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.

Real Property

Land administration is shared among federal, state, and local government. State governments have their own rules about land ownership, including foreign ownership. Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer. There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights. Foreign investors are allowed to borrow using real property as collateral. Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default.

Intellectual Property Rights

Malaysia is not currently listed in the Office of the United States Trade Representative (USTR) Special 301 Report. Its Petaling Street Market is listed in the 2021 Review of Notorious Markets for Counterfeiting and Piracy (the Notorious Markets List). The overhaul of IPR protections that began in 2019 under the previous government continued in 2020 and 2021 despite political uncertainty. Following Malaysia’s 2019 Trademarks Act, which brought protections in line with the Madrid Protocol, Malaysia amended its 1987 Copyright Act as part of an ongoing review of its IPR framework. New trademark provisions came into force on July 1, 2020, to strengthen copyright protection by creating an alternative avenue for dispute resolution by tribunal. The passage of three IPR acts by Malaysia’s parliament in December 2021 as part of its ratification of the Regional Comprehensive Economic Partnership (RCEP), and Malaysia’s ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on September 30, 2022, moved Malaysia further into alignment with WIPO standards.

Malaysia has a mixed but improving record of IPR enforcement, particularly for online services that stream illegal sports content. The Malaysian Communications and Multimedia Commission proactively combats illegal streaming sites that provide content in violation of copyright laws and acts against sellers and owners of non-certified Android TV boxes being used to stream illegal content.

Despite Malaysia’s success in improving IPR enforcement, key issues remain. There is relatively widespread availability of pirated and counterfeit products in Malaysia and there are concerns that the Royal Malaysian Customs Department (RMC) is not always effectively identifying counterfeit goods in transit.
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at: http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Foreigners may trade in securities and derivatives. Malaysia houses one of Asia’s largest corporate bond markets and is the largest sukuk (Islamic bond) market in East Asia. Both domestic and foreign companies regularly access capital in Malaysia’s bond market. Malaysia provides tax incentives for foreign companies issuing Islamic bonds and financial instruments in Malaysia.

Malaysia’s stock market (Bursa Malaysia) is open to foreign investment and foreign corporation issuing shares. However, foreign issuers remain subject to Bumiputera ownership requirements of 12.5 percent if the majority of their operations are in Malaysia. Listing requirements for foreign companies are similar to that of local companies, although foreign companies must also obtain approval of regulatory authorities of foreign jurisdiction where the company was incorporated and valuation of assets that are standards applied in Malaysia or International Valuation Standards and register with the Registrar of Companies under the Companies Act 1965 or 2016.

Malaysia has taken steps to promote good corporate governance by listed companies. Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end and audited annual accounts for public scrutiny within four months of each year’s end. An individual may hold up to 25 corporate directorships. All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified. A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS. Short selling of stocks is prohibited.

Money and Banking System

International investors generally regard Malaysia’s banking sector as dynamic and well regulated. Although privately owned banks are competitive with state-owned banks, the state-owned banks dominate the market. The five largest banks – Maybank, CIMB, Public Bank, RHB, and Hong Leong – account for an estimated 75 percent of banking sector loans. According to the World Bank, total banking sector lending for 2021 was 127.5 percent of GDP, and 1.7 percent of the Malaysian banking sector’s loans were non-performing for 2021.

Bank Negara prohibits hostile takeovers of banks, but the Securities Commission has established non-discriminatory rules and disclosure requirements for hostile takeovers of publicly traded companies.

Foreign Exchange and Remittances

Foreign Exchange

In March 2021, BNM introduced changes to liberalize foreign exchange management requirements and attract additional FDI into Malaysia. The changes included (1) the removal of an export conversion rule whereby exporters were required to convert 75 percent of their export earnings into Malaysian ringgit; (2) allowing exporters to settle domestic trade in foreign currency when such trade involves global supply chain partners; (3) allowing exporters to request extensions beyond six months for the repatriation of export earnings; and (4) allowing exporters to “net-off” export earnings against permitted foreign currency obligations, such as netting export earnings against import debts with the same overseas buyer and supplier.

Remittance Policies

Malaysia imposes few investment remittances rules on resident companies. Incorporated and individual U.S. investors have not raised concerns about their ability to transfer dividend payments, loan payments, royalties or other fees to home offices or U.S.-based accounts. Tax advisory firms and consultancies have not flagged payments as a significant concern among U.S. or foreign investors in Malaysia. Foreign exchange administration policies place no foreign currency asset limits on firms that have no ringgit-denominated debt. Companies that fund their purchases of foreign exchange assets with either onshore or offshore foreign exchange holdings, whether or not such companies have ringgit-denominated debt, face no limits in making remittances. However, a company with ringgit-denominated debt will need approval from the Central Bank for conversions of RM 50 million or more into foreign exchange assets in a calendar year.

The Treasury Department has not identified Malaysia as a currency manipulator.

Sovereign Wealth Funds

The Malaysian Government established government-linked investment companies (GLICs) as vehicles to generate revenue from commodity-based industries and promote growth in strategic development areas. Khazanah is the largest of the GLICs, and the company holds equity in a range of domestic firms as well as investments outside Malaysia. The other GLICs – Armed Forces Retirement Fund (LTAT), National Capital (PNB), Employees Provident Fund (EPF), Pilgrimage Fund (Tabung Haji), and Public Employees Retirement Fund (KWAP) – execute similar investments but are structured as savings vehicles for Malaysians. Khazanah follows the Santiago Principles and participates in the International Forum on Sovereign Wealth Funds.
Khazanah was incorporated in 1993 under the Companies Act of 1965 as a public limited company with a charter to promote growth in strategic industries and national initiatives. As of December 31, 2021, Khazanah’s net asset value grew from RM 79 billion to RM 86 billion. Its profit operation slipped further to RM 670 million as compared to RM 2.9 billion in 2020 due to continue financial assistance extended to its airline and tourism companies affected by the COVID-19 pandemic. Profits were also impacted by the lower fair value gains and lower dividend income from investee companies.  Nonetheless, Khazanah’s new investment amounted to RM 8.7 billion, of which 41 percent (or RM 3.6 billion) was invested locally. Khazanah also raised RM 4.8 billion from the monetization of assets in its portfolio.

For more information, visit: https://www.khazanah.com.my/our-performance/khazanah-annual-review-2022/ .

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market. However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs. The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects. UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance. UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity. The National Development Policy confers preferential treatment to the Bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding. However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

Additional Resources

Department of State

• Country Reports on Human Rights Practices ( https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/)
• Trafficking in Persons Report ( https://www.state.gov/trafficking-in-persons-report/)
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities ( https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/)
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises ( https://www.state.gov/u-s-national-contact-point-for-the-oecd-guidelines-for-multinational-enterprises/)
• Xinjiang Supply Chain Business Advisory ( https://www.state.gov/xinjiang-supply-chain-business-advisory/)

Department of the Treasury

• OFAC Recent Actions ( https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions )

Department of Labor

• Findings on the Worst Forms of Child Labor Report ( https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings  )
• List of Goods Produced by Child Labor or Forced Labor ( https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods )
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World ( https://www.dol.gov/general/apps/ilab )
• Comply Chain ( https://www.dol.gov/ilab/complychain/ )

Climate Issues

The National Policy on Biological Diversity 2016-2025 is a comprehensive strategy aimed at conserving Malaysia’s biodiversity and ecosystem services. The policy emphasizes the conservation of critical ecosystems such as wetlands, forests, and marine areas.

The government of Malaysia has also implemented a Green Technology Master Plan, which is a long-term strategy aimed at promoting the adoption of green technologies across various sectors of the economy. The plan aims to achieve sustainable development by reducing carbon emissions and enhancing energy efficiency. The government has also introduced several policies and programs to incentivize net-zero carbon emissions, such as the Energy Efficiency and Conservation Act and the Renewable Energy Act. These policies provide tax incentives and grants for companies that adopt energy-efficient and renewable energy technologies.

The Malaysian government’s strategies and policies include specific expectations and guidelines for the private sector’s contributions to preserving the country’s natural capital. For instance, the Malaysian Code of Corporate Governance 2017 highlights the importance of corporate social responsibility in preserving the environment, including biodiversity conservation. The government has introduced carbon taxes and carbon credits to reduce carbon emissions and promote sustainable development. Additionally, Malaysia has created protected areas and implemented sustainable forest management policies to preserve its biodiversity.

The Malaysian government has also implemented policies to address deforestation caused by particular commodities and supply chains. For instance, the government has implemented policies to address deforestation caused by palm oil production, which is one of the country’s major exports. Public procurement policies in Malaysia incorporate environmental and green growth considerations such as resource efficiency, pollution abatement, and climate resilience.

Resources to Report Corruption

Datuk Seri Azam Baki – Chief CommissionerMalaysia Anti-Corruption CommissionBlock D6, Complex D, Pusat PentadbiranKerajaan Persekutuan, Peti Surat 600062007 Putrajaya+6-1800-88-6000Email:  info@sprm.gov.my 

Cynthia Gabriel, DirectorThe Center to Combat Corruption and Cronyism (C4)C Four Consultancies Sdn BhdA-2-10, 8 AvenueJalan Sg Jernih 8/1, Seksyen 8, 46050 Petaling JayaSelangor, MalaysiaEmail:  info@c4center.org