Tax Incentives in Malaysia

Overview of tax incentives in Malaysia

Malaysia’s tax incentives are designed to direct investment toward priority sectors, technologies, and regions by reducing the effective corporate tax burden through income exemptions, capital allowances, and enhanced deductions, thereby enabling reinvestment in growth, innovation, and workforce development.

Contributing Advisor

Quinn Lu

Senior Associate, International Business Advisory

Anchored in national policies such as NIMP 2030 and the Twelfth Malaysia Plan, the incentive framework supports manufacturing-led growth, economic inclusivity, and sustainability. Incentives are administered through a coordinated structure involving MIDA as the primary evaluation and facilitation agency, the Inland Revenue Board for tax administration and compliance, and the Ministry of Finance for policy direction and approval of high-value incentives, with legal certainty provided under the Promotion of Investments Act 1986 and the Income Tax Act 1967, and applications streamlined via the InvestMalaysia portal.

Main types of tax incentives in Malaysia

Pioneer Status (PS)

Pioneer Status represents one of Malaysia's flagship tax incentives, offering a partial exemption from corporate income tax for companies engaged in promoted activities or producing promoted products.

Under PS, qualifying companies pay tax on only 30 percent of statutory income, with the remaining 70 percent exempted for five years. The exemption period commences from the Production Day, defined as when production reaches 30 percent of capacity or the first invoice is issued.

For projects of national and strategic importance, enhanced PS provides 100 percent tax exemption on statutory income for five to ten years, recognizing the transformative impact of heavy capital investment and advanced technology. High-technology companies engaged in emerging technologies also qualify for extended benefits under this enhanced framework.

A critical advantage of PS is the treatment of unabsorbed capital allowances and losses. Capital allowances incurred during the pioneer period can be carried forward indefinitely and deducted from post-pioneer income. Accumulated losses during the pioneer period may be carried forward for seven consecutive years after the incentive expires, providing financial flexibility during the ramp-up phase.

Investment Tax Allowance (ITA)

As an alternative to Pioneer Status, Investment Tax Allowance grants companies an allowance of 60 percent on qualifying capital expenditure incurred within five years. This allowance can offset 70 percent of statutory income in each year of assessment, with the remaining 30 percent taxed at the prevailing corporate rate of 24 percent. Unutilized ITA can be carried forward indefinitely until fully absorbed, except for specific incentives with time limitations.

ITA particularly suits capital-intensive projects with substantial upfront investment in plant, machinery, factory buildings, and equipment. For companies with thinner initial profitability but high capital requirements, ITA often provides greater value than PS by allowing immediate recognition of investment outlays.

Enhanced ITA is available for strategic projects. Companies manufacturing specialized machinery and equipment may receive 100 percent ITA on qualifying capital expenditure offset against 100 percent of statutory income for five years. Projects in promoted regions such as Sabah, Sarawak, and the Eastern Corridor of Peninsular Malaysia also qualify for elevated ITA rates.

PS vs ITA: Strategic selection criteria

The choice between PS and ITA requires careful financial modeling. Pioneer Status favors projects that achieve strong margins quickly, while ITA rewards substantial capital deployment.

Reinvestment Allowance (RA)

Reinvestment Allowance encourages existing manufacturing and agricultural companies to expand, modernize, or diversify their operations. Companies that have completed their initial tax incentive period or have been in operation for at least 36 months may claim RA of 60 percent on qualifying capital expenditure. This allowance can offset 70 percent of statutory income in non-promoted areas, or 100 percent of statutory income in promoted regions, including Sabah, Sarawak, and the Eastern Corridor.

The 2024 Budget introduced a tiered Reinvestment Allowance under NIMP 2030, offering an outcome-based approach. Tier 1 provides 100 percent ITA on qualifying capital expenditure offset against 100 percent of statutory income for five years, while Tier 2 offers 60 percent ITA offset against 70 percent of statutory income. This incentive is available for one round per company undertaking expansion or diversification projects.

Industrial Adjustment Allowance (IAA)

Industrial Adjustment Allowance supports manufacturing companies undertaking approved industrial adjustment activities in machinery and engineering, wood-based industries, textile sectors, and palm oil refineries transitioning from thermal heating to high-pressure steam. Companies granted IAA receive 60-100 percent allowance on qualifying capital expenditure incurred within five years, offset against 100 percent of adjusted income.

IAA operates similarly to ITA but focuses specifically on modernization, consolidation, restructuring, rationalization, or relocation of production facilities. The exempt income is credited to an exempt account for the distribution of tax-free dividends to shareholders.

Infrastructure Allowance (IA)

Infrastructure Allowance is available to companies engaged in manufacturing, agriculture, hotel, tourism, or other industrial activities in Sabah, Sarawak, and the designated Eastern Corridor of Peninsular Malaysia. Qualifying companies receive 100 percent allowance on capital expenditure for infrastructure such as reconstruction, extension, or provision of essential facilities.

This incentive recognizes the additional costs of operating in less-developed regions and encourages balanced economic development across Malaysia's geographic landscape.

Other specific incentives

Sector-specific incentives

Manufacturing and industrial development

Malaysia's manufacturing sector benefits from a comprehensive incentive ecosystem aligned with NIMP 2030 objectives. Companies investing in automation receive accelerated capital allowances, enabling full write-off of expenditure in one year for manufacturing, services, agriculture, and commodities sectors. This accelerates cost recovery and encourages Industry 4.0 adoption.

For e-invoicing implementation, companies receive accelerated capital allowances allowing full write-off over two years for ICT equipment, software, and consulting services. This supports Malaysia's digital transformation agenda and prepares businesses for mandatory e-invoicing compliance

Digital economy and MSC Malaysia

The Malaysia Digital Tax Incentive represents a shift to outcome-based benefits for technology companies utilizing promoted enablers including artificial intelligence, big data analytics, Internet of Things, cybersecurity, cloud, blockchain, drone technology, creative media technology, integrated circuit design with embedded software, robotics, automation, and advanced network connectivity. The tiered system encourages companies to invest in high-growth areas, expand domestic networks, and balance economic growth with environmental, social, and governance sustainability.

Green, ESG, and renewable energy incentives

Malaysia's green technology incentive framework has been substantially revised and extended. Green Investment Tax Allowance (GITA) offers 100 percent allowance for Tier 1 activities (battery energy storage systems, green buildings, and approved assets) and 60 percent for Tier 2 activities (renewable energy systems, energy efficiency) on qualifying capital expenditure from January 1, 2024 to December 31, 2026. The allowance offsets 70 percent of statutory income with unutilized amounts carried forward indefinitely.

Companies involved in Carbon Capture, Utilization, and Storage (CCUS) activities receive investment tax allowances or income tax exemptions under the New Investment Incentive Framework. This aligns with Malaysia's commitment to achieving net-zero emissions by 2050.

Tourism, healthcare and wellness

Private healthcare facilities establishing new operations or undertaking expansion, modernization, or refurbishment for healthcare travel promotion qualify for income tax exemption equivalent to 100 percent ITA on qualifying capital expenditure for five years. The allowance offsets 100 percent of statutory income with unutilized amounts carried forward. Facilities must ensure at least 10 percent of patients and 10 percent of gross income derive from healthcare travelers by the third year of assessment.

Halal and food industries

Companies operating within Malaysia Halal Parks receive total income tax exemption for ten years or 100 percent ITA on capital expenditure for five years, plus exemption on import duty for plant, equipment, and raw materials. Halal manufacturers also qualify for double deduction on expenses for obtaining international quality standards including HACCP, GMP, and Codex Alimentarius. The government is considering additional tax incentives for halal industry investments within the Johor-Singapore Special Economic Zone (JS-SEZ).

Logistics, shipping and cold chain facilities

The Smart Logistics Complex incentive, introduced in Budget 2025, provides 60 percent ITA on eligible capital expenditure over five years for companies investing in warehouses of at least 30,000 square meters that adopt Industry 4.0 technologies including AI and IoT. The allowance offsets 70 percent of statutory income.

Companies providing cold chain facilities for perishable agricultural products receive Pioneer Status with 70 percent tax exemption for five years, or 60 percent ITA on qualifying capital expenditure. At least 60 percent of revenue must derive from cold room facilities, refrigerated transportation, and related services for local agricultural products.

Agriculture, fisheries and agritech

Agricultural companies undertaking expansion, modernization, or diversification qualify for Reinvestment Allowance of 60 percent on qualifying capital expenditure offset against 70-100 percent of statutory income for 15 years. Enhanced export incentives provide allowances equal to 30 percent, 50 percent, or 100 percent of increased export value depending on certification and market access achievements.

Aerospace, automotive, and EandE

Aerospace companies undertaking high-value manufacturing, maintenance, repair and overhaul (MRO), or engineering and design services qualify for income tax exemption of 70-100 percent on statutory income for 5-10 years, or 60-100 percent ITA for five years. Applications received by MIDA until December 31, 2025 are eligible.

The semiconductor industry receives targeted support through Budget 2025, including tax incentives for integrated circuit design activities, expansion of export incentives to include IC design services, and enhanced venture capital tax incentives to support startups. The RM 200 million Innovation Commercialisation Fund and RM180 million NIMP Industrial Development Fund provide additional financial support.

How to apply for tax incentives in Malaysia

The application process for Malaysia's tax incentives follows a structured workflow through MIDA's InvestMalaysia online portal, requiring careful preparation and strategic engagement.

Step 1: Eligibility assessment (1-3 months)

Companies must first confirm that their proposed project qualifies as a promoted activity or produces promoted products under the Promotion of Investments Act 1986. MIDA's website provides a comprehensive list of promoted activities across manufacturing, services, agriculture, and strategic sectors. Early engagement with MIDA is essential to understand sector-specific requirements, documentation standards, and potential conditions that may be imposed.

Step 2: Documentation preparation (1-3 months)

A comprehensive business plan or project proposal forms the core of the application. The proposal must clearly articulate:

• Company background, including shareholder structure, management team, and track record
• Detailed project description covering manufacturing processes, technology deployment, production capacity, and equipment specifications
• Market analysis identifying target markets, competitive positioning, and projected market share
• Financial projections including costs, revenue forecasts, profitability timelines, and return on investment
• Contribution to Malaysia's economy through job creation, technology transfer, local supply chain development, and export earnings

Supporting documents typically include certificates of incorporation, business licenses, financial statements, technical feasibility studies, and environmental impact assessments where applicable.

Step 3: Application submission (1-2 months)

Applications are submitted through the InvestMalaysia portal at https://investmalaysia.mida.gov.my. Upon submission, MIDA assigns a Business Analyst who conducts a preliminary eligibility check. Complete applications receive acknowledgment with an assigned case officer.

MIDA's evaluation process considers multiple factors including investment amount, technology level, value-added contribution, employment of Malaysian workers, industrial linkages, and alignment with national development objectives. The review typically takes four to six weeks for complete applications, though complex projects may require additional time.

Applications may be presented to the National Committee on Investment (NCI) for consideration and approval. The NCI's decision—approval or rejection—is communicated through MIDA. Rejected applications may be resubmitted upon fulfillment of eligibility criteria.

Step 4: Post-approval compliance

Upon approval, companies receive an interim approval letter outlining conditions associated with the incentive. Applicants may appeal unfavorable conditions at MIDA's discretion. Within 24 months of approval, companies must apply for the Pioneer Certificate or Investment Tax Allowance effective date determination.

For Pioneer Status, the certificate specifies the incentive duration and commencement date. For ITA, the effective date is determined based on when the company first incurred qualifying capital expenditure. Throughout the incentive period, companies must submit annual compliance reports to MIDA verifying adherence to approval conditions.

Double tax relief and international tax treaties

Malaysia maintains an extensive Double Taxation Agreement (DTA) network of over 70 comprehensive treaties and several limited agreements, providing certainty in cross-border taxation by reducing withholding taxes, preventing double taxation, and clarifying taxing rights. Covering major trading partners across Asia, Europe, the Middle East, and the Americas, these DTAs are broadly aligned with the OECD Model Tax Convention, with selected UN Model adaptations reflecting Malaysia’s domestic position. Key investor benefits include reduced withholding tax rates on dividends, interest, and royalties, clear permanent establishment thresholds, access to foreign tax credit mechanisms, and non-discrimination provisions that ensure foreign investors are taxed on par with domestic entities.

Strategic tax planning tips for businesses

Companies can legally combine multiple incentives when applied to different business activities or assets, provided the same asset or income does not qualify for multiple incentives simultaneously. For example, a company enjoying Pioneer Status for manufacturing may claim GITA for separate green technology assets used in operations. Strategic structuring requires careful documentation to demonstrate clear separation between incentive bases.

Tax planning focuses on optimizing legitimate tax positions through incentive utilization, timing strategies, and structural efficiency. Tax avoidance through artificial arrangements or misrepresentation violates Malaysian tax law and carries severe penalties. Companies should engage qualified tax professionals to ensure compliance while maximizing benefits.

Comprehensive documentation is essential throughout the incentive period. Companies must maintain detailed records of capital expenditure, revenue allocation, employee counts, and compliance with approval conditions. Annual compliance reports submitted to MIDA and verified by external auditors demonstrate adherence to incentive terms.

Regular review of incentive performance against approval conditions allows companies to identify and address compliance gaps proactively. If business circumstances change materially, companies should consult MIDA regarding potential modifications to approval terms rather than risking non-compliance.