In recent years, Malaysia has seen a significant increase in foreign direct investment (FDI), driven by its attractive tax policies, robust infrastructure, and a competitive regulatory framework. In 2024, net FDI rose to RM 51.5 billion from RM 38.6 billion in 2023. Approved investments exceeded Ringgit 378.5 billion, with RM 170.4 billion from foreign investors. By the first quarter of 2025, RM 89.8 billion had been approved, including RM 60.4 billion from foreign sources.
This article outlines key tax and fiscal incentives for foreign investors in Malaysia and assesses their strategic implications, with a focus on Transfer Pricing.
Key Corporate Incentives in Malaysia
Malaysia has structured a tax incentive regime to attract foreign direct investment (FDI) in prioritized sectors for economic development. These benefits are mainly regulated by the Promotion of Investments Act 1986, the Income Tax Act 1967, and the provisions issued by the Malaysian Investment Development Authority (MIDA). The following describes the main mechanisms available:
- Pioneer Status (PS): It grants an exemption of up to 70% of statutory income for five years (extendable), taxes only the remaining 30%, and allows losses to be carried forward. It is ideal for companies in high-value-added sectors in the early stages.
- Investment Tax Allowance (ITA): It grants a deduction of 60% of qualified capital expenditure for five years, applicable against 70% of statutory income. It particularly benefits expanding companies that invest in plants, machinery, or processes.
- Reinvestment Allowance (RA): It offers a deduction of 60% of capital expenditure for modernization or expansion, applicable against 70% of statutory income, for up to 15 years. It targets established manufacturing and agricultural companies.
- Malaysia Digital (MD): It allows for preferential rates of 0% on intellectual property income and 5-10% on other income for up to 10 years or for an ITA of 60-100% on qualifying capital. It targets technology and digital companies under the MyDIGITAL plan.
Additional Strategic Benefits
2.1. Double Taxation Avoidance Agreements (DTAs)
Malaysia has signed 73 bilateral agreements that reduce withholding taxes on dividends, interest, and royalties and prevent double taxation through tax credits or exemptions. For example, Japanese investors could see a reduction in withholding taxes on dividends from 10% to 5%.
2.2. Free Trade Agreements (FTAs)
The country is part of numerous agreements (AFTA, RCEP, and CPTPP, among others), which allow preferential access to markets, elimination of tariffs, and usual regulations, boosting sectors such as manufacturing, technology, finance, pharmaceuticals, and agri-industry.
2.3. Johor-Singapore Special Economic Zone (JS-SEZ)
The Johor-Singapore zone offers a preferential corporate tax rate of 5% for up to 15 years, in addition to a rate of 15% for highly skilled workers.
2.4. Investor Pass
Introduced in April 2025, this visa facilitates the stay and management of investments by businesspeople and high-net-worth investors, integrating with existing tax incentives.
Transfer Pricing: A Relevant Approach
The use of tax incentives may deepen the need for a rigorous approach to Transfer Pricing (TP), which is especially relevant when a foreign entity transfers funds, services, or intellectual property to its companies in Malaysia to take advantage of benefits such as pioneer status or ITA. In these cases, it is crucial to ensure that transfer prices reflect market conditions, along with supporting documentation to demonstrate their legitimacy.
In Malaysia, Transfer Pricing rules are governed by Section 140A of the Income Tax Act 1967 and the new TP Rules 2023, complemented by the TP Guidelines 2024, which incorporate BEPS principles and require transactional analysis, comparables, and contemporaneous documentation complying with international standards.
Strategic tax planning must consider, in addition to incentives, TP compliance to avoid adjustments, penalties, or challenges by the Inland Revenue Board (IRB), both in domestic and cross-border transactions.
Conclusion
Malaysia is highly favourable for foreign investment due to its strong tax incentives, trade facilities, and favorable immigration policies, such as the Investor Pass. Conversely, the effectiveness of these benefits is closely related to a proper TP strategy and regulatory compliance. An integrated approach combining financial modeling, thorough TP documentation, and leveraging treaties and FTAs will enable Malaysia to maximize its tax and operational potential as a regional investment hub.
Source: AseanBriefing