Foreign companies increasingly view Malaysia as an attractive gateway to Southeast Asian markets, but many hesitate at the complexity and costs of establishing a legal entity. The good news is that businesses can legally operate in Malaysia without setting up a Sdn Bhd company or branch office through several strategic approaches.
Can you legally do business in Malaysia without an entity?
Operating "without an entity" means conducting business activities in Malaysia without registering a Sdn Bhd (private limited company), Limited Liability Partnership (LLP), or branch office with the Companies Commission of Malaysia (SSM). This approach leverages third-party structures and partnerships to maintain business operations while avoiding direct legal incorporation.
Malaysian law permits foreign companies to engage in business activities through compliant intermediary structures. However, certain limitations apply: foreign entities cannot directly invoice Malaysian clients for services rendered in Malaysia without proper tax registration, cannot sign contracts requiring Malaysian legal entity status, and cannot access government incentives reserved for local companies.
Permissible activities
Foreign companies can legally hire employees through compliant intermediaries, provide services through local partners or contractors, conduct market research and feasibility studies, and maintain client relationships through representative arrangements. The key is ensuring all activities comply with Malaysian employment law, tax regulations, and business licensing requirements.
Options to operate in Malaysia without a legal entity
Employer of Record (EOR)
An Employer of Record acts as the legal employer for workers in Malaysia while the client company retains operational control over day-to-day activities. The EOR handles all statutory obligations including employment contracts, payroll processing, EPF and SOCSO contributions, tax withholdings, and work permit applications for foreign employees.
Benefits of EOR services
Speed remains the primary advantage, with employee onboarding possible within days rather than months required for entity setup. EORs ensure full compliance with Malaysian employment laws, including the updated Employment Act 1955 with recent amendments covering minimum wage increases to RM 1,700 (US$ 404) from February 2025. They also handle visa sponsorship for expatriate employees and provide local HR expertise without requiring in-country legal presence.
EOR services work best for companies testing the Malaysian market, hiring specialized talent for regional operations, managing temporary or project-based teams, or scaling operations before entity establishment. Companies with 1-50 employees typically find EOR most cost-effective compared to entity setup costs.
Professional Employer Organization (PEO)
PEO vs EOR differences
While EORs act as the sole legal employer, PEOs operate under a co-employment arrangement where responsibilities are shared. PEOs require the client company to have some form of legal presence, making them less suitable for companies seeking to avoid entity establishment entirely.
The client company retains certain legal obligations while the PEO handles administrative functions.
PEO advantages and limitations
PEOs often provide lower monthly costs compared to EORs for companies that already have legal presence. However, they require more involvement from the client company in compliance matters and may not provide the same level of legal protection as EOR arrangements.
PEOs are better suited for established companies seeking to outsource HR functions rather than market entry strategies.
Engage independent contractors or freelancers
Malaysian law strictly differentiates between employees and independent contractors. Contractors must demonstrate genuine independence including controlling their work methods and schedules, providing their own equipment and workspace, working with multiple clients, and bearing financial risk for their services.
Contractors are responsible for their own EPF, SOCSO, and income tax obligations. Proper documentation of the contractor relationship is essential to avoid reclassification as employees.
Misclassification risks
Misclassifying employees as contractors can result in substantial penalties including retroactive EPF and SOCSO contributions, fines up to RM 50,000 (US$ 11,876), and legal disputes. Malaysian authorities conduct regular audits specifically targeting worker classification compliance.
Work with local distributors or resellers
Distribution agreements allow foreign companies to sell products in Malaysia through established local partners without requiring direct legal presence. Local distributors handle customer relationships, regulatory compliance, and market-specific requirements while foreign companies maintain product control and pricing strategies.
Distribution partnerships reduce market entry risks but limit direct customer relationships and brand control. Proper agreements should specify territorial rights, performance expectations, intellectual property protection, and termination conditions. Non-exclusive arrangements provide flexibility while exclusive partnerships offer stronger market commitment.
Establish a Representative Office (RO)
Representative offices can conduct market research and feasibility studies, gather information on investment opportunities, plan and coordinate business activities, identify suppliers and business contacts, and act as liaison centers for regional operations. ROs provide official presence for relationship building and market intelligence gathering.
Representative offices cannot generate revenue through direct sales, sign binding commercial contracts, engage in trading activities, or provide fee-based services. All operational expenses must be funded from overseas, with minimum annual expenditure requirements of RM 300,000 (US$ 71,300). ROs are typically approved for 2-5 years depending on the business case.
Compliance considerations when operating without an entity
Employment Law requirements
Malaysian employment law applies regardless of the business structure used. Key obligations include minimum wage compliance (RM1,700 from February 2025), maximum working hours of 45 per week, mandatory paid leave entitlements, and proper employment contract documentation. Recent amendments extend coverage to all employees regardless of salary level.
Payroll and statutory obligations
Employers must contribute to EPF (12-13% employer contribution), SOCSO (1.75% employer contribution), and EIS (0.2% employer contribution). Foreign employees with valid work permits must also contribute to EPF at reduced rates from October 2025. Accurate payroll processing and timely remittances are essential to avoid penalties.
Corporate tax and withholding requirements
Non-resident companies face 24 percent tax on Malaysian-sourced income. Withholding tax applies to various payments to non-residents: 10 percent on service fees, 15 percent on interest payments, and 10 percent on royalties. Proper documentation and compliance with double taxation treaties can reduce these rates for qualifying companies.
Immigration and work permits
Foreign employees require proper work authorization including Employment Passes (EP) for executives and professionals or Professional Visit Passes (PVP) for shorter assignments. Recent changes require employers to obtain prior approval under Section 60K of the Employment Act before hiring foreign workers.
When to transition from "no entity" to a legal entity
- Companies should consider entity establishment when employee headcount exceeds 10-15 people, monthly Malaysian revenue reaches RM 50,000+ (US$ 11,875+), or operations become permanent rather than temporary. Long-term market commitment and the need for government incentives also signal transition timing.
- Malaysian entities access local banking services, government contracts and incentives, reduced corporate tax rates (starting at 15% for qualifying companies), and enhanced credibility with customers and partners. Local entities also provide greater operational control and long-term cost advantages for substantial operations.
- Switching from EOR to entity setup requires careful planning including employee transfer agreements, contract novation procedures, tax clearance processes, and operational continuity measures. Most EOR providers offer transition support services to facilitate smooth changeover when companies are ready for entity establishment.
Pros and cons of operating without an entity
|
Aspect |
Advantages |
Disadvantages |
|
Speed of setup |
Operations can begin within days instead of the months required for entity setup. Enables quick market testing, model validation, and demand assessment without heavy upfront investment. |
Companies may lack direct customer relationships, contract-signing authority, and decision-making autonomy, relying on third-party providers. |
|
Costs |
Avoids entity setup expenses, ongoing compliance fees, and administrative overhead. Provides flexibility with easier exit strategies if conditions change. |
As operations expand, per-employee costs may outweigh the savings. Long-term viability is reduced for larger-scale operations. |
|
Administrative workload |
Compliance responsibilities are shifted to experienced local partners, freeing companies to focus on core business functions. |
Potential penalties for non-compliance with labor, tax, or worker classification laws if not carefully managed. Requires thorough due diligence in partner selection. |
FAQs: Doing Business without an Entity in Malaysia
Can I hire employees without registering a company in Malaysia?
Yes, through EOR services that act as the legal employer while you maintain operational control. The EOR handles all statutory obligations including EPF, SOCSO, and tax compliance. Dezan Shira & Associates provides EOR solutions to help companies quickly onboard their staffs without the need for immediate entity setup, reducing both cost and risk.
Is EOR legal in Malaysia?
EOR services are fully legal and regulated under Malaysian employment and tax law. Many multinational companies use EOR arrangements for regional operations and market entry strategies.
Can foreign companies invoice clients in Malaysia without an entity?
Foreign companies can invoice for services provided outside Malaysia, but services rendered within Malaysia may require proper tax registration and withholding compliance.
What taxes apply if I work with contractors in Malaysia?
Malaysian contractors handle their own tax obligations, but foreign companies must withhold 10% tax on service payments to non-resident contractors. Proper classification documentation is essential.
How do I pay employees in Malaysia from overseas?
EOR providers handle local payroll processing, currency conversion, and regulatory compliance, enabling seamless overseas funding of Malaysian operations.
Can I test the Malaysian market with a representative office?
Yes, representative offices are specifically designed for market research and feasibility studies, though they cannot generate revenue or sign commercial contracts.
What happens if a contractor is deemed an "employee" by law?
Misclassification can result in retroactive EPF and SOCSO contributions, substantial fines, and legal disputes. Proper documentation and genuine contractor relationships are essential.
Is it possible to convert EOR-hired staff to my own Sdn Bhd later?
Yes, most EOR providers offer transition services to transfer employees to client companies when they establish local entities. This requires proper documentation and compliance with employment transfer regulations. Dezan Shira assists with both the initial EOR arrangement and the smooth transition to your own Malaysian entity when the time is right.
