Summary of entity types
Malaysia offers four main options for foreign investors establishing a presence:
- The Sdn Bhd (private limited company),
- The branch office,
- The Labuan company, and
- The representative office.
Each structure comes with distinct legal capacities, tax obligations, capital requirements, and regulatory implications. A Sdn Bhd is suited for local operations with RM income, but it faces a standard 24 percent corporate tax rate and often requires a Wholesale, Retail, Trade (WRT) license for distributive businesses.
Labuan companies, by contrast, are designed for cross-border activities with preferential tax rates as low as 0–3 percent, provided they meet substance requirements. Representative offices, while exempt from tax, cannot earn revenue and serve only for research, promotion, and coordination.
The choice of entity also influences ownership flexibility, immigration rules, and banking access. Sdn Bhd companies must meet capital thresholds for expatriate hiring, while Labuan companies risk limited banking options and potential deductibility issues for Malaysian counterparties. Representative offices require foreign funding, have capped expatriate roles, and are approved only for temporary market-testing purposes.
Ultimately, entity selection should align with long-term strategy. Businesses needing RM revenues must establish a Sdn Bhd, those focused on cross-border transactions may benefit from Labuan if conditions are met, and investors merely testing the market can start with a representative office. In some cases, combining structures—such as using a Labuan holding company alongside a Malaysian Sdn Bhd—balances tax efficiency with operational compliance. Choosing the right entity from the outset helps avoid costly restructuring and ensures smoother operations within Malaysia’s regulatory framework.
Comparison of entity types in Malaysia: Set up requirements, pros, cons, and more
|
Dimension |
Private Limited Company (Sdn Bhd / Berhad) |
Labuan Company (LBATA) |
Branch Office |
Representative Office (MIDA) |
|
Core use |
Most common entity; Suitable for local trading, services, manufacturing, and retail with RM income |
Designed for cross-border trading, holding structures, and investment vehicles; Limited to non-RM transactions |
Extension of foreign parent company, can engage in profit-making activities, taxed only on Malaysian income |
Temporary vehicle for market research, promotion, sourcing, and liaison; no revenue allowed |
|
Ownership |
Up to 100% foreign ownership in most sectors (restrictions apply in distributive trade); Max 50 members for Sdn Bhd |
Can be owned by residents or non-residents |
Wholly owned by foreign parent company |
Must be set up by a foreign parent company; Not a separate legal entity |
|
Legal status |
Separate legal entity; limited liability for shareholders; |
Separate legal entity under Labuan Companies Act 1990; Limited liability |
Not a separate legal entity; liabilities extend to the foreign parent company |
Not a legal entity; activities are on behalf of the parent |
|
Setup requirements |
Requires company name, constitution, directors and shareholders’ details, registered address, compliance declaration, and company secretary |
Must appoint a licensed Labuan trust company, reserve name (RM 50 ≈ USD 12), file Memorandum and Articles, statutory declaration, and consents |
Must register through SSM, use same name and activities as parent, appoint a Malaysian resident branch agent |
Apply via MIDA (or Central Bank/Ministry of Tourism if sector-specific); must submit certified parent company documents |
|
Registration time |
5–10 working days |
24 hours upon complete submission and due diligence |
Within 30 days of name approval |
1–2 months (varies by approval authority) |
|
Registration fees |
Flat RM 1,010 (≈ USD 237) |
RM 1,000–5,000 (≈ USD 237–1,183) based on share capital; foreign registration RM 6,000 (≈ USD 1,420); annual fee RM 2,600 (≈ USD 615, Labuan) / RM 5,300 (≈ USD 1,254, foreign Labuan company) |
RM5,000 (≈ USD1,250) to RM 70,000 (≈ USD 16,562) |
No registration fee, but must show annual operating expenditure of at least RM 300,000 (≈ USD 71,000) |
|
Paid-up Capital |
No minimum, but required for work permits: Up to RM1 million |
None required at incorporation, but substance rules apply: RM 50k–100k (≈ USD 12k–24k) annual opex, 2–3 staff for trading/finance; lighter for holding |
No paid-up capital requirement; funded by parent |
Funded entirely from parent; RM 300,000 annual opex minimum (≈ USD 71k) |
|
Corporate tax |
24% standard rate (SME reduced rates usually not available to foreign-controlled companies) |
3% on trading with substance, 0% on holding with substance; 24% if substance not met |
Taxed at 24% on Malaysian-sourced income only; eligible for double taxation treaties |
No tax (cannot earn income) |
|
Treaty access |
Full access to Malaysia’s tax treaties |
Possible if elect under Income Tax Act (but lose Labuan preferential rates); counterparty deductibility issues often arise |
Eligible under Malaysia’s treaties |
Not applicable |
|
Licensing |
Business licenses may be required depending on activities |
Business licenses may be required depending on activities |
Uses parent company’s license scope; must align with same activities |
Approval from MIDA; limited tenure |
|
Immigration |
Expatriate Services Division requires minimum paid-up capital for work permits |
Substance (staff and opex) supports expatriate approvals |
Work permits tied to parent; limited flexibility |
Limited expatriate posts (managerial/technical only); |
|
Currency and banking |
RM transactions; Malaysian bank accounts permitted |
Restricted to foreign currency; some Malaysian banks allow accounts, many rely on Singapore banks |
May open Malaysian accounts; transactions in RM permitted |
May open Malaysian accounts; payments in RM permitted |
|
Counterparty tax |
Payments deductible by Malaysian clients |
Payments may not be deductible under ITA Sec. 39(1)(r), reducing willingness of local partners |
Deductible, but treated as payments to a foreign entity |
Not applicable |
|
Audit and compliance |
Annual audits required (unaudited filings eligible when criteria met) |
Audited accounts required to prove substance and retain tax benefits |
Subject to local compliance and filing requirements |
No audit requirement (non-revenue) |
|
Tenure |
Permanent |
Permanent if compliant |
Permanent |
2 years, renewable (5 years max for government/trade bodies) |
|
Advantages |
Most common structure, limited liability, separate legal entity, credibility, easier fundraising, access to incentives |
Attractive tax rates (0–3%) if substance met, flexibility in cross-border structuring |
Cost-effective for exploring Malaysian market while keeping foreign parent control |
Lowest-risk entry option to test market without full incorporation |
|
Best suited for |
Local sales, retail, manufacturing, services, and activities needing RM income |
Cross-border trading, regional holdings, tax optimization strategies (with substance) |
Foreign companies wanting to operate in Malaysia while retaining parent control |
Market testing, promotion, and non-revenue liaison activities |
