New Tax Incentive for Malaysia Digital Companies

Malaysia Digital Economy Corporation (“MDEC”) Sdn Bhd has announced on 31 May 2024 that a new outcome-based Malaysia Digital (“MD”) tax incentives is available to eligible companies that undertake activity utilising any of the MD promoted technology enablers.

The type of incentives and their specifications are summarised in the table below:-

Incentive optionsNew Investment IncentiveExpansion Incentive
Reduce Tax RateInvestment Tax Allowance Note 1Reduce Tax RateInvestment Tax Allowance Note 1
Tax incentive0% on qualifying intellectual property (IP) income Note 2 and 5% Note 3 or 10%

on qualifying non-IP income		60% or 100% Note 4 on qualifying capital expenditure against up to 100% statutory income15% on qualifying IP Note 2 and non-IP statutory income30% or 60% Note 4 on qualifying capital expenditure against up to 100% statutory income
Incentive
period		10 consecutive YAs5 consecutive years5 consecutive YAs5 consecutive years
Conditions1. Employ an adequate number of full-time employees (FTE) in Malaysia to carry on the qualifying activity Note 5

2. To undertake qualifying activity in Malaysia

3. To remain an MD status company and comply with all conditions under MD status

4. Any other conditions stated in the approval letter		1. Maintain the number of existing FTE

2. Employ an adequate number of new FTE in Malaysia to carry on the Approved Qualifying Activity Note 5

3. To undertake Approved Qualifying Activity in Malaysia

4. To remain an MD status company and comply with all conditions under MD or MSC Malaysia status

5. Any other conditions stated in the approval letter
5. Ensure FTE comprises adequate number of knowledge workers with minimum average monthly basic salary of RM5,000

6. Incur adequate amount of annual operating expenditure in
Malaysia to carry on the qualifying activity

7. Submit to MDEC annually a self-declaration form within 7 months from the
end of each YA (information submitted must be verified by external auditor)		5. Incur an adequate amount of qualifying capital expenditure6. Ensure new FTE comprises adequate number of knowledge workers with minimum average monthly basic salary of RM5,000 to carry on the Approved Qualifying Activity

7. Incur adequate amount of annual operating expenditure in Malaysia to carry on the Approved Qualifying Activity

8. To meet minimum 2 conditions related to sustainable economic development at the end of each YA as stated in the approval letter

9. Submit to MDEC annually a self-declaration form within 7 months from the end of each YA (information submitted must be verified by external auditor)		6. Incur an adequate amount of qualifying capital expenditure
Eligibility
criteria		1. Incorporated or registered under Companies Act 2016 and resident in Malaysia;

2. Has a minimum paid up capital of RM50,000;

3. Has made an application for the award of MD Status;

4. Is proposing to undertake the qualifying activity in Malaysia;

5. Has not issued any sales invoice for the qualifying activity in Malaysia prior to the application of tax incentive; or has 60% Malaysian equity ownership (direct or indirect) and has not issued any sales invoice for the qualifying activity in Malaysia in the past 12 months prior to application of tax incentive; and

6. Is not granted any tax incentive by Malaysian Government in relation to the qualifying activity.		1. Incorporated or registered under Companies Act 2016 and resident in Malaysia;

2. Has a minimum paid up capital of RM250,000;

3. In operation for at least 36 months;

4. Is an MD or MSC status company;

5. The company has met all conditions under its existing MD or MSC Malaysia Status financial incentive or has surrendered the tax incentive (if any);

6. Is proposing to undertake the qualifying activity in Malaysia;

7. Has not issued any sales invoice for the qualifying activity in Malaysia prior to the application of tax incentive; and

8. Is not granted any tax incentive by Malaysian Government in relation to the qualifying activity;

9. Completed initial incentive or have not been granted any incentive on existing activities.
Application
period		1 January 2024 to 31 December 2027
Commenceme
nt of tax
incentive		Request for determination of commencement of YA shall be made to MDEC not later than 24 months from the date of principle approval of tax incentiveDate of which the first qualifying capital expenditure is incurred by the company after the tax incentive application and not earlier than MD status approval dateRequest for determination of commencement of YA shall be made to MDEC not later than 24 months from the date of principle approval of tax incentiveDate of which the first qualifying capital expenditure is incurred by the company after the tax incentive application and not earlier than MD or MSC status approval date

Notes:

  1. The company must comply with all conditions within 3 years from the principal approval date.
  2. Qualifying IP income includes royalty and / or licensing fees. The reduced tax rate shall apply on a percentage of qualifying IP income derived from the qualifying IP right in connection with the qualifying activity. The percentage of qualifying IP income is determined by modified nexus approach formula. The details of the modified next approach will be specified in a subsidiary legislation that is yet to be gazetted.
  3. To meet minimum 3 conditions related to sustainable economic development at the end of each YA as stated in the approval letter.
  4. To meet minimum 3 conditions related to sustainable economic development each in year 4 and year 5 of the ITA period, as stated in the approval letter
  5. Qualifying activity means one or more activities (or new activities in the event of expansion incentive), which fulfils the following criteria of MD Promoted activities which address opportunity or problem by utilising any of the following promoted tech enablers:-
    • Artificial Intelligence (AI) and / or big data analytics (BDA);
    • Internet of Things (IOT);
    • Cybersecurity;
    • Cloud;
    • Blockchain;
    • Drone technology;
    • Creative media technology, including extended reality (XR) and / or mixed reality (MR);
    • Integrated circuit (IC) design with embedded software;
    • Robotics and / or automation;
    • Advanced network connectivity and / or telecommunication technology.

A company shall not be qualified to be granted tax incentive in respect of the qualifying activity / Approved Qualifying Activity under following circumstances:-

  1.  Its related company has been granted tax incentive in respect of the same qualifying activity / Approved Qualifying Activity; or
  2. Its related company has issued any sales invoice for the qualifying activity / Approved Qualifying Activity prior to the application of tax incentive by the Company

The approved MD status company shall maintain a separate account each for qualifying and non-qualifying activities.

How can GTS help you?

  • Recommendation of suitable tax incentives under MD

  • Advise on fulfillment of eligibility criteria based on business plans

  • Preparation and submission of tax incentive application documents

  • Monitoring compliance and maximization of tax incentive benefits during incentive period

  • Negotiations with authorities during incentive period for amendments to incentive conditions

Table of content