Principal Hub Incentives in Malaysia

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Principal Hub Incentives in Malaysia

By Lee Kin Hing*

 

A. Introduction

 

A principal hub is defined as a Malaysian base used by a locally incorporated company for conducting its regional and global operations to manage, control and support its key functions including management of risks, decision making, strategic business activities, trading, finance, management and human resource. MNCs interested in applying for the Malaysian Principal Hub incentive must submit an application to the Malaysian Investment Development Authority (MIDA).

 

B. Incentives and Benefits

 

Tax Incentives

 

An approved Principal Hub Company is eligible for a 3-tiered corporate taxation rate as follows:

 

Other Benefits under the Principal Hub Incentives:

In addition to the tax incentive, the Principal Hub Company will enjoy the following benefits:


1.      Customs Duty Exemption and Cost saving

For a goods based company, the PH status will allow it to enjoy customs duty exemptions for import of raw materials, components, or finished products into free industrial zones, licensed manufacturing warehouses, free commercial zones, and bonded warehouses for production or repackaging, cargo consolidation, and integration before distribution to end customers.


2.      Retain full control

There is no local equity/ownership requirement imposed on the shareholders’ structure of the PH Company. For foreign applicants, they will retain full control in the ownership of the PH Company even though it is a company incorporated under the law of Malaysia;


3.      Flexibility on engagement of foreign professional services

The applicant is entitled to engage foreign professional services in relation to its business operations in Malaysia if such services are not available locally;

 

4.      Flexibility on the recruitment of foreign talent

The applicant is entitled to recruit foreign expatriates based on the requirements of its business plan subject to the government of Malaysia’s current policy on expatriates;

 

5.      Foreign Exchange Administration flexibilities

Foreign Exchange Administration flexibilities will be accorded in support of business efficiency and competiveness of companies under the Principal Hub;

 

6.      Acquisition of fixed assets

A foreign-owned company may acquire fixed assets in Malaysia in connection with the carrying out of business operations.

 

C. Eligibility Criteria

 

To qualify for the Principal Hub incentive, companies will have to satisfy the following criteria:

 

1.    Incorporation of a private limited company under the Companies Act 1965;

 

2.   Paid-up capital of more than RM2.5 million;

 

3.    Minimum annual sales turnover of (RM 300 million) additional requirement for goods-based applicant company;

 

4.    Serves and control "network companies" in at least 3 countries outside Malaysia:

    • Tier 1: minimum of 5 countries;
    • Tier 2: minimum of 4 countries;
    • Tier 3: minimum of 3 countries.

A “network company” is a related company or any entity within the group, including subsidiaries, branches, joint ventures, franchises or any other company related to the applicant’s supply chain and business with contractual agreements;


5.    
Carries out at least three Qualifying Services set out in Table below, including at least one Strategic Service:

    • Tier 1: Regional P&L + two other services;
    • Tier 2: Regional P&L + two other services;
    • Tier 3: Strategic Service + two other qualifying services;

 

6.    Employment Requirement:

  

7.    Annual Business Spending Requirement:

 


8.    
Must have HR (Human Resources) training and development plans for Malaysians in the company;


9.    The applicant (whose application if successful will be granted a Principal Hub Company status) should be the planning, control and reporting centre for the qualifying services;

 
10.   Malaysian-owned and incorporated businesses are encouraged to provide headquarters related services and expertise to their overseas companies;


11.   Significant use of Malaysia’s banking and financial services and other ancillary services and facilities (e.g. trade and logistics services, legal and arbitration services, finance and treasury services);


12.   Income tax exemption threshold received from services / goods based company inside and outside of Malaysia is based on the ratio of 30:70 (inside: outside).

 

D. Conclusion

 

The Principal Hub policy is one of the Government of Malaysia’s efforts in encouraging both local and international companies to establish their regional operations in Malaysia and provides various investment incentives including income tax exemptions or reductions. Local companies intending to go overseas or international companies with cross-border operations are advised to consider participating in and taking advantage of this policy accordingly.

 


 

*Lee Kin Hing is a senior associate in Corporate & Commercial Practice Group in the main office of Azmi & Associates. Mr. Lee can be contacted at leekinhing@azmilaw.com.

photo
Kuala Lumpur,
Wednesday, April 26, 2017
Taxation, Corporate