Incentives for Doing Business in Malaysia

Understanding Malaysia’s fiscal incentives is key for investors planning new projects. While the headline corporate income tax rate is 24 percent, various incentive programs allow companies to significantly reduce their effective tax rate depending on the nature of the investment.

Contributing Advisor

Quinn Lu

Senior Associate, International Business Advisory

This guide explains the main incentive schemes available, how they differ, and what investors should consider when structuring their projects.

Why do these incentives matter?

Foreign direct investment (FDI) remains a cornerstone of Malaysia’s strategy to assert itself as a hub in Southeast Asia. By combining tax incentives, investment allowances, and location-based incentives, Malaysia seeks to encourage investors not merely to set up shop, but to commit to high-value activities: R&D, digital services, green technologies, semiconductor design, and smart manufacturing.

Budget 2025 supports this vision by pushing incentives that increase the economic attractiveness of Malaysia in regional supply chains. For example, the emphasis on tax deductions and allowances for digital infrastructure, e-invoicing, and logistics (including smart warehousing) helps lower operational costs and risk for entrants and incumbents alike. These measures make Malaysia more competitive relative to other ASEAN economies, especially in areas where technology, sustainability, and global trade intersect.

Aside from attracting new capital investment, Malaysia’s incentives are aimed at moving companies (or functions of companies) here—offices, regional headquarters, command centers—and not just factories. High-value jobs in management, design, digital services, IP development, and regional services are the sort of roles that raise average wages, improve local skill bases, and help build ecosystems (think universities, start-ups, tech vendors) rather than just low-cost labour pools.

Budget 2025 contributes to this by introducing HR- and business culture-oriented incentives, which in turn make Malaysia a more attractive place for highly skilled workers. Employers now get a 50 percent additional tax deduction for implementing flexible work arrangements, hiring women returning to the workforce after career breaks, or offering paid caregiving leave for up to 12 months. These kinds of incentives help address non-wage factors that increasingly matter to talent: work–life balance, family obligations, inclusive hiring, and diversity.

Here are some of the specific tools from Budget 2025, plus what they mean in practical terms:

New Investment Incentive Framework (NIIF)

Malaysia’s Budget 2025 introduces the New Investment Incentive Framework (NIIF)—a strategic overhaul of incentive policy crafted to attract high-value investment, deepen supply chains, and upgrade industrial and digital capabilities across the country. NIIF includes multiple tools designed to align business incentives with long-term competitiveness. Below are the key elements:

Tax incentive frameworks and types

Malaysia’s tax incentive landscape is designed to lower effective tax rates and encourage both new and reinvested capital in targeted sectors. The government deploys a mix of upfront exemptions, long-term allowances, and enhanced deductions to support projects at different stages of the business lifecycle. Three of the most prominent frameworks are outlined below.

Pioneer status and Investment Tax Allowance (ITA)

Pioneer Status is one of Malaysia’s best-known corporate incentives. Companies granted this status enjoy a 70 percent exemption on statutory income for five years, effectively reducing their corporate tax burden to a fraction of the standard rate. Tax is only payable on the remaining 30 percent of income. Importantly, losses and unutilized capital allowances incurred during the incentive period are not wasted — they can be carried forward once the exemption expires. Pioneer Status works best for ventures that expect strong profitability in their early years, such as new product lines or fast-scaling operations.

By contrast, the Investment Tax Allowance (ITA) rewards heavy upfront capital investment. Eligible companies receive an allowance of 60 percent (and in some cases up to 100%) of qualifying capital expenditure incurred within a five-year period. This allowance can be used to offset statutory income, usually capped at 70 percent. Any unabsorbed ITA can be carried forward to future years. The ITA structure suits businesses that invest significantly in machinery, plants, or technology but anticipate a longer runway before profits fully materialize. A common rule of thumb: choose Pioneer Status if profits arrive early, but opt for the ITA if the project is more capital-intensive with slower earnings.

Reinvestment Allowance (RA) and Automation Capital Allowance (ACA)

For established players looking to expand or modernize, Malaysia offers the Reinvestment Allowance (RA). Qualifying manufacturing and agricultural companies that reinvest in approved projects — whether upgrading equipment, diversifying product lines, or expanding facilities — may claim an allowance of 60 percent of qualifying capital expenditure for up to 15 consecutive years. This incentive is especially valuable because it extends well beyond the initial tax holiday period, allowing mature businesses to maintain a competitive effective tax rate through ongoing reinvestment.

Complementing the RA, the Automation Capital Allowance (ACA) directly supports Industry 4.0 adoption. Companies undertaking qualifying automation projects can claim a 100 percent allowance on automation expenditure, capped at RM 10 million (US$ 2.3 million) per year. The ACA is intended to push firms toward productivity-enhancing technologies such as robotics, advanced sensors, and smart manufacturing systems, helping Malaysian industries climb the global value chain.

Double deductions

Beyond exemptions and allowances, Malaysia encourages targeted activities by offering double tax deductions — meaning eligible expenditures can be deducted at twice their actual amount for tax purposes. These cover strategic areas such as research and development (R&D), export promotion activities, employee training, and even the hiring of disabled persons. The aim is to reward companies for investing in innovation, workforce development, and social inclusion while lowering their taxable income. For example, a company spending RM 1 million (US$ 237,349) on approved R&D may claim RM 2 million (US$ 475,000)  in deductions, amplifying the tax benefit far beyond the actual outlay.

Industry-specific incentives and digital economy

Malaysia Digital (“MD”) status incentives

At the heart of Malaysia’s push to position itself as a regional tech hub is the Malaysia Digital (MD) initiative, which replaced the former MSC Malaysia framework. Companies awarded MD Status can benefit from preferential corporate tax rates ranging from 0 to 10 percent on qualifying income — both intellectual property (IP) and non-IP based — for a set period.

In addition, qualifying firms may access Investment Tax Allowances (ITA) of 60 percent to 100 percent on capital expenditure for up to five years, offset against statutory income. The MD program also offers non-tax advantages: more flexible foreign talent quotas, incentives for digital exporters, and streamlined regulatory facilitation. These measures are particularly attractive for global digital service providers, fintech firms, and high-growth tech startups looking to scale in Southeast Asia while managing operating costs.

Biotech, aerospace, digital infrastructure and cold chain projects

Malaysia also tailors incentives for high-value industries seen as strategic to national growth. Sectors such as biotechnology, aerospace engineering, digital infrastructure, and cold chain logistics enjoy access to 70–100 percent tax exemptions or ITAs, sometimes coupled with industrial building allowances to ease the capital burden of facility construction.

Of special note is the Digital Ecosystem Acceleration Scheme (DESAC), which provides a 0–10 percent corporate tax rate plus a 100 percent ITA on capital expenditure for up to five years. This scheme is designed to accelerate investment in digital infrastructure projects, including data centers, cloud services, and next-generation connectivity. For industries that are capital-intensive yet critical to Malaysia’s long-term competitiveness, DESAC offers a structured path to recoup investments more quickly while supporting the country’s broader digital transformation agenda.

Green and ESG-friendly incentives

Sustainability is now a policy priority, and Malaysia’s tax system increasingly reflects this. Through the Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE), qualifying green technology projects — spanning solar power, electric vehicle charging networks, and carbon capture, utilization and storage (CCUS) — may receive up to 100 percent ITA or corresponding income exemptions.

These incentives apply not only to companies producing green solutions but also to firms adopting them, effectively broadening the ecosystem for low-carbon innovation. Malaysia has also introduced tiered, time-bound incentives for renewable energy and CCUS-compliant firms, available until 2026, reinforcing its alignment with global ESG benchmarks and climate commitments.

Regional and special economic zone incentives

Malaysia has long used geographically targeted incentives to attract strategic investment and to leverage its position as a regional hub. Special economic and financial zones provide investors with preferential tax regimes, simplified procedures, and sector-specific benefits — particularly in border regions and export-driven clusters. Two recent examples underscore the breadth of Malaysia’s approach.

Johor–Singapore Special Economic Zone (JS SEZ)

Launched as a joint initiative between Malaysia and Singapore, the Johor–Singapore Special Economic Zone (JS SEZ) is designed to transform southern Johor into a high-value industrial and services hub. Companies operating in the zone may qualify for corporate tax rates as low as 5 percent, while knowledge workers benefit from a capped personal income tax rate of 15 percent.

These incentives are not generic but tailored toward sectors that can benefit from Johor’s geographic advantage — including advanced manufacturing, logistics, green technologies, and digital services. With proximity to Singapore’s financial and innovation ecosystem, the JS SEZ offers a compelling proposition: lower-cost operations paired with access to world-class infrastructure and talent. Policymakers also intend the zone to act as a testing ground for regulatory innovation, ensuring smoother cross-border flows of goods, capital, and people.

Forest City Special Financial Zone and Free Industrial Zones

Qualified companies can enjoy corporate tax rates between 0 percent and 5 percent, while individuals working in designated sectors are eligible for a 15 percent personal income tax rate In the Forest City Special Financial Zone. Additional reliefs include special deductions and exemptions from certain withholding taxes, designed to attract both financial services firms and international investors.

Malaysia also maintains a network of Free Industrial Zones (FIZs), such as Sama Jaya in Sarawak and Port Klang in Selangor. These zones focus on export-oriented industries by granting full exemption from import and export duties, as well as relief from sales and service taxes for approved operations. By removing customs and indirect tax frictions, FIZs lower the cost of doing business for manufacturers and logistics players while anchoring supply chain resilience.

How to apply for incentives

While Malaysia’s incentive ecosystem is extensive, accessing it requires navigating a structured approval process. Multiple government agencies serve as gatekeepers, depending on the sector and type of incentive. For investors, understanding which body to approach and how to prepare a compelling application is just as important as knowing which incentives to pursue.

Key agencies include:

• Malaysian Investment Development Authority (MIDA): Oversees most manufacturing, services, and capital-intensive investment incentives.
• Malaysia Digital Economy Corporation (MDEC): Handles digital-sector approvals, including Malaysia Digital (MD) Status.
• Malaysian Green Technology and Climate Change Corporation (MGTC): Manages green and ESG-related schemes such as GITA and GITE.
• Inland Revenue Board (IRB/LHDN): Administers tax allowances, deductions, and compliance reporting.
• Ministry of International Trade and Industry (MITI): Coordinates broader trade and industrial policy incentives, including regional and sector-specific frameworks.

Application process:

• Companies should first confirm that their business activity, sector, and project size qualify under the relevant scheme. Agencies typically publish updated guidelines and sector lists.
• Applicants prepare a formal proposal to the relevant authority, highlighting the project’s objectives, sectoral alignment, and potential economic impact.
• Detailed projections — including expected investment amounts, job creation, and technology adoption — are required to demonstrate the project’s viability and contribution to national goals.
• Authorities evaluate applications against policy priorities, sectoral targets, and compliance with incentive frameworks. The review may involve site visits or interviews.
• Once approved, companies must maintain proper documentation, file periodic progress reports, and ensure compliance with incentive conditions. Failure to meet milestones (such as capex commitments or employment targets) can result in clawbacks or withdrawal of benefits.

For multinational investors, the process can appear daunting, but agencies such as MIDA and MDEC often provide pre-application consultations to clarify requirements. Increasingly, Malaysia is also digitizing the process, with online portals streamlining submissions and reducing approval timelines.