Malaysia

Aderson Business
Consulting Sdn Bhd
Level 15.01, 1 First Avenue, D’taran Bandar Utama
PJ 47800 Selangor, Malaysia
Email: Malaysia@1stopconsultant.com

Malaysia continues to improve its regulatory framework to attract foreign investment. Foreign investment remains an important part of the Malaysian economy. Gross inflows of foreign direct investment, as released by the Department of Statistics, amounted to RM4.6 billion in the first quarter of 2010, channeled mainly into the manufacturing, services, and oil and gas sectors. Meanwhile, portfolio investments turned around to record a net inflow of RM3.9 billion, mainly into the domestic debt market. The inflows reflected improved investor sentiments on the stronger growth prospects of the Malaysian economy.

Since 17 June 2003, 100 per cent foreign equity holding has been allowed, irrespective of sector and level of export, for all new manufacturing projects and investments for expansion/diversification by existing companies. Following the deregulation of the Foreign Investment Committee investment guidelines in June 2009, equity conditions are imposed only on certain sectors which are deemed strategic (such as information and communication technologies, oil and gas, mining, manufacturing etc.) by the respective sector regulators.

Employment of expatriates in manufacturing or related services sectors has also been relaxed since 17 June 2003. The existing incentive schemes were further improved in 2003.

Malaysia is positively ranked as the 24th most competitive economy in the World Economic Forum’s Global Competitiveness Report 2009–10. Furthermore, in the World Competitiveness Yearbook 2010, published by the Switzerland International Institute for Management Development, Malaysia was ranked as the world’s 10th most competitive economy. The Third Industrial Master Plan (IMP3) 2006–20 recognizes the need for Malaysia to maintain and enhance its competitiveness in order for it to further progress along the value chain from assembly-based and low value-added activities towards higher value-added activities. IMP3 outlines the industrial strategies and policies which form part of the country’s continuing efforts towards realizing Malaysia’s objective of becoming a fully developed nation by 2020, as stated in Vision 2020. The overriding objective of the IMP3 is to achieve global competitiveness through innovation and transformation of the manufacturing and service sector that contributes to the other development thrusts of the National Mission of the Ninth Malaysia Plan (RMK-9), 2006–10.

As the second largest contributor to intra-ASEAN trade, Malaysia promotes itself as a base for foreign investors to access the larger ASEAN market of half a billion people and combined GDP of US$750 billion through the ASEAN Free Trade Area that was realized on 1 January 2003. Based on the World Bank’s report Doing Business 2010, Malaysia has also been ranked 23rd among 183 countries for ease of doing business.

Employment of expatriates in manufacturing or related services sectors has also been relaxed since 17 June 2003. The existing incentive schemes were further improved in 2003.

Visas and work permits

All persons entering Malaysia must possess valid national passports or other internationally recognized travel documents valid for travel to Malaysia. These documents must be valid for at least six months beyond the date of entry into Malaysia.

Citizens of the following countries:

- do not require a visa to enter into Malaysia: Commonwealth countries (except Bangladesh, Cameroon, Ghana, Mozambique, Nigeria, Pakistan and Sri Lanka), and the United States (except for employment purposes)
- do not require a visa for visits not exceeding two weeks: Iran, Iraq, Libya, Macao SAR (Travel Permit/Portugal CI), Palestine, Sierra Leone, Somalia, South Yemen and Syria
- do not require a visa for visits not exceeding one month: All ASEAN countries (except Myanmar), Armenia, Azerbaijan, Barbados, Belarus, Benin, Bolivia, Bulgaria, Cambodia, Cape Verde, Chad, Chile, Costa Rica, Ecuador, El Salvador, Estonia, Gabon, Georgia, Greece, Guatemala, Guinea Republic, Haiti, Honduras, Hong Kong SAR, Kazakhstan, Latvia, Lithuania, Macao SAR, Macedonia, Madagascar, Moldova, Mauritania, Mexico, Moldova, Monaco, Mongolia, Nicaragua, North Korea, North Yemen, Panama, Paraguay, Portugal, Russia, Sao Tome & Principe, Senegal, Slovenia, Sudan, Surinam, Tajikistan, Togo, Ukraine, Upper Volta, Uzbekistan, Vatican City, Venezuela, Zaire and Zimbabwe
- do not require a visa for visits not exceeding three months: Albania, Algeria, Argentina, Australia, Austria (Vienna), Bahrain, Belgium, Bosnia-Herzegovina, Brazil, Croatia, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Jordan, Kyrgyzstan, Kuwait, Kyrgyz Republic, Lebanon, Liechtenstein, Luxembourg, Morocco, Netherlands, Norway, Oman, Peru, Poland, Qatar, Romania, San Marino, Saudi Arabia, Slovakia, South Korea, Spain, Sweden, Switzerland, Tunisia, Turkey, Turkmenistan, United Arab Emirates, United Kingdom, Uruguay and Yemen
- require a visa to enter into Malaysia: Afghanistan, Angola, Bangladesh, Bhutan, Burkina Faso, Burundi, Cameroon, Central African Republic, China, Colombia, Comoros, Congo Democratic Republic, Congo Republic, Cote d’Ivoire, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Ghana, Guinea-Bissau, Hong Kong (Certificate of Identity or Document of Identity), India, Liberia, Mali, Mozambique, Myanmar (normal passport), Nepal, Niger, Nigeria, Pakistan, Rwanda, Serbia & Montenegro, Sri Lanka, Taiwan, United Nations (Laissez Passer) and Western Sahara
- require a visa, and permission must be granted by the Ministry of Home Affairs: Israel.

For countries other than those stated above, no visa is required for visits not exceeding one month. For ASEAN countries, a visa will be required for a stay exceeding one month (except for nationals of Brunei and Singapore).

Foreign nationals who wish to visit Malaysia have to obtain a pass at the point of entry in addition to a visa (where required), which allows them to stay temporarily. A pass is an endorsement in the passport constituting permission to stay for the approved duration. Applications for passes, other than applications for tourist, social or business visits, must be made before arrival in the country. All applications must have sponsorship in Malaysia. The sponsors must agree to be responsible for the maintenance and repatriation of the visitors from Malaysia if it should become necessary.

General

The most common types of business organization include sole proprietorships, partnerships and companies. Foreign companies may also operate through a branch in Malaysia.

Sole proprietorships and partnerships

Sole proprietorship is a type of business organization owned by one person only and a partnership may be formed by two or more persons, up to 20 persons.

The sole proprietor and partners do not have a separate legal identity from the sole proprietors and partnerships. A sole proprietorship or partnership must be registered with the Companies Commission of Malaysia (CCM).

Companies

The most common company structure in Malaysia is a company limited by shares. Such limited companies may be either private or public companies.

A private company is one which restricts the transfer of its shares and has no more than 50 shareholders. A private company may not offer its shares to the public.

There are two means of setting up a subsidiary in Malaysia: by incorporating a new company or buying a shelf company. Buying a shelf company may take less time than forming a new company, although if all relevant documents are duly submitted, incorporating a new company may take less than one month.

The secretary of a company must be a natural person of full age who has their principal or only place of residence in Malaysia. The person must be a member of a prescribed body or be licensed by the CCM. The company must also appoint an approved company auditor to be the company auditor in Malaysia.

In addition, the company shall have at least two directors who each has his or her principal or only place of residence within Malaysia.

Branch

A foreign company may set up a branch in Malaysia by registering itself as a “foreign company” with the CCM under the Companies Act 1965. The foreign company must appoint one or more “agents” in Malaysia, who must be residents of Malaysia to accept, on the foreign company’s behalf, service of process and any notices required to be served on the foreign company.

Exchange controls

Malaysia has currency and capital controls governed by the Exchange Control Act 1953. Since 1 April 2005, the foreign exchange administration rules have been liberalized and simplified.

There is no restriction on the amount payable by residents to non-residents for the import of goods and services, or by non-residents to residents for the export of goods and services. However, such payment must be made in foreign currency with the exception of the currency of the state of Israel (Restricted Currency). There is no restriction for residents to enter into a forward foreign exchange contract with licensed onshore commercial and Islamic banks (licensed onshore banks) or approved investment banks, to buy foreign currency against the Malaysian ringgit or another foreign currency to make payment to a non-resident in respect of the imported goods.

Resident travelers are allowed to import or export Malaysian ringgit notes up to RM1,000, and to export foreign currency notes, including traveler’s cheques, up to an equivalent of uS$10,000. There is no limit on the value of foreign currency notes or traveler’s cheques that a resident may bring into Malaysia.

Non-resident travelers are allowed to bring in or take out of Malaysia ringgit notes up to RM1,000. A non-resident traveler may bring in any amount of foreign currency notes, including traveler’s cheques, into Malaysia. A declaration is required where the amount of foreign currency notes and traveler’s cheques exceeded uS$10,000. A non-resident traveler may take out foreign currency notes and traveler’s cheques up to the amount brought into the country or uS$10,000, whichever is higher.

There is no restriction on non-residents for the repatriation of capital, profits, dividends, interest, fees or rental by foreign direct investors or portfolio investors. Malaysian ringgit assets purchased by residents from non-residents may be settled in ringgit or foreign currency, other than a Restricted Currency. However, all remittances abroad must be made in a foreign currency other than in a Restricted Currency.

Resident companies and resident individuals with no domestic borrowing are free to invest abroad.

Resident companies with domestic borrowing can equally invest with no restriction on the amount if the investment is funded with their own foreign currency funds retained onshore or offshore, or funded from proceeds of listing through initial public offering on Bursa Malaysia Securities Berhad or any other foreign stock exchanges. However, they may only invest up to the equivalent of RM100million in aggregate on a corporate group basis if funded by foreign currency borrowing, or up to the equivalent of RM50million in aggregate on a corporate group basis per calendar year if funded from conversion of ringgit.

Similarly, resident individuals with domestic borrowing can also invest with no restriction on the amount if the investment is funded with their own foreign currency funds retained onshore or offshore. However, they may only invest up to the equivalent of RM10million in aggregate if funded by foreign currency borrowing, or up to the equivalent of RM1million in aggregate per calendar year if funded from conversion of ringgit.

Resident companies converting ringgit for overseas investments must have minimum shareholders’ funds of RM100,000 and must be in operation for at least one year. Individuals who are residents may convert ringgit into foreign currency up to the amount required for investment in foreign currency securities under an employee share option or purchase scheme offered by their employer’s overseas parent or related companies.

Residents may also obtain trade financing facilities in foreign currency from licensed onshore banks nd licensed investment banks. A resident company is free to obtain trade financing facilities of any amount in foreign currency up to the equivalent of RM100 million in aggregate on a corporate basis from non-residents as well as through issuance of onshore foreign currency denominated bonds onshore and offshore. A resident individual may also obtain credit facilities in foreign currency up to an equivalent of RM10 million in aggregate from licensed onshore banks, licensed International Islamic Banks and non-residents. Any amount exceeding the above permitted limits would require prior permission of the Controller. There is no restriction for the resident to use the foreign currency credit facilities to finance its own activities in and outside Malaysia. There is also no restriction to repay or prepay permitted credit facilities.

With effect from 1 October 2007, the Central Bank of Malaysia has abolished the registration requirements on both the prepayment exceeding RM50 million equivalent on permitted foreign currency borrowing from a non-resident lender, and the repayment of foreign currency borrowing with no fixed tenure or repayment schedule which is deemed to be a prepayment.

Licensed onshore banks and approved investment banks may extend credit facilities in foreign currency to non-residents for any purpose. However, credit facilities extended for the purchase or construction of immovable property in Malaysia are subject to the same requirements as for ringgit credit facilities. There is no restriction on residents to extend any amount of ringgit credit facilities to non-resident controlled companies.

Malaysia welcomes foreign investments, especially those involving activities that support the policies identified in The Third Industrial Master Plan 2006– 2020. Activities such as research and development, product design, distribution and marketing, or which promote productivity-generated growth such as those involving usage of high technology (automation/robotizing), emphasizing knowledge and capital-intensive manufacturing, applying new technology, innovation, best management practices and more efficient usage of resources.

The Ministry of International Trade and Industry (MITI) is usually the first ministry encountered or approached by foreign investors. MITI and its agencies regularly organize seminars, roadshows or exhibitions in foreign countries to update investors on the government’s current policies, incentives, facilities and support services available, as well as to highlight business opportunities available in Malaysia. MITI and its agencies have offices in many foreign countries.

Malaysia, however, does not have a centralized department dealing with all matters relating to the regulation of foreign investors or foreign investments. Foreign investments are subject to the supervision or approval by the regulatory and approving bodies or authorities that oversee the relevant industries, just as for local investments.

MITI and its agencies focus more on manufacturing activities. One of its agencies, the Malaysian Industrial Development Authority, as part of its regular functions, has been assigned the task of evaluating applications for incentives provided under the Promotion of Investments Act 1986 and application of manufacturing licenses under the Industrial Coordination Act 1975.

Franchising businesses, for example, are subject to the supervision of the Ministry of Entrepreneur Development while shipping, transport and logistic businesses are subject to the Ministry of Transport. For a business that is not subject to the scrutiny of any specific authority, the Foreign Investment Committee (FIC) will be the regulatory body. The FIC has issued various guidelines and circulars through the years which cover two main areas: the acquisition of interests, mergers and takeovers by local and foreign interests; and the acquisition of properties by local and foreign interests.

Foreign investments are generally subject to a cap on foreign shareholdings. The cap varies according to industries but generally it was 30 per cent, with a minimum of 30 per cent shareholding by Bumiputera or indigenous people and the rest by Malaysians.

On 30 June 2009, the Prime Minister announced a comprehensive rationalization of the investment guidelines administered by the FIC. To allow Malaysia to strengthen its business and regulatory environment to attract greater investment, the government has decided to substantially deregulate FIC investment guidelines.

Accordingly, the government has implemented, inter alia, the following changes to the FIC guidelines with immediate effect:

- the FIC guidelines on the acquisition of interests, mergers and takeovers by local and foreign interests are repealed. The FIC will, therefore, no longer process such share transactions, nor impose equity conditions on such transactions. However, the equity conditions imposed by the respective sector regulators will continue to apply. For strategic sectors (such as information and communication technologies, oil & gas, mining, manufacturing etc.), sector regulators are best placed to oversee their respective sectors and to tailor equity conditions according to the requirements and strategic nature of each sector. There will no longer be any equity conditions imposed on sectors not deemed strategic
- the conditions imposed on fund-raising exercises by listed companies has also been significantly eased in the context of raising Malaysia’s attractiveness as a listing destination
- pursuant to the revised FIC guidelines on the acquisition of properties by local and foreign interests effective from 1 January 2010, FIC will only process transactions involving the following: – direct acquisition of property valued at rM20 million and above, resulting in the dilution in the ownership of property held by Bumiputera interest and/or government agency – indirect acquisition of property by other than Bumiputera interest through acquisition of shares, resulting in a change of control of the company owned by Bumiputera interest and/ or government agency, having property more than 50 percent of its total assets, and the said property is valued more than rM20 million.

Government initiatives and incentives

Tax incentives, both direct and indirect, are provided for in the Promotion of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Sales Tax Act 1972, Excise Act 1976 and Free Zone Act 1990. These Acts cover investments in the manufacturing, agriculture, tourism (including hotel) and approved services sectors as well as research and development, training and environmental protection activities. The direct tax incentives grant partial or total relief from income tax payment for a specified period, while indirect tax incentives come in the form of exemptions from import duty, sales tax and excise duty. Some of the main incentives are summarized below.

Incentives for manufacturing companies

The major tax incentive for companies investing in the manufacturing sector is the pioneer status or investment tax allowance (ITA). Eligibility for pioneer status or ITA is based on certain priorities, including the level of value-added, technology used and industrial linkages. Eligible activities and products are termed “promoted activities” or “promoted products”. The package of incentives may vary according to the products manufactured.

Pioneer status

A company granted pioneer status enjoys a five-year partial exemption from the payment of income tax. It pays tax on 30 per cent of its statutory income. Companies located in the promoted areas, namely the states of Perlis, Sabah and Sarawak and the designated “Eastern Corridor” (covering the states of Kelantan, Terengganu and Pahang, and the district of Mersing in the State of Johor) of Peninsular Malaysia will enjoy 100 per cent tax exemption of their statutory income during the five-year exemption period. All project applications received by 31 December 2010 are eligible for this incentive.

Investment tax allowance

As an alternative to pioneer status, a company may apply for an ITA. A company granted ITA gets an allowance of 60 per cent on its qualifying capital expenditure (such as factory, plant, machinery or other equipment used for the approved project) incurred within five years from the date on which the first qualifying capital expenditure is incurred. The company can offset this allowance against 70 per cent of its statutory income for each year of assessment. Any unutilized allowance can be carried forward to subsequent years until fully utilized. The remaining 30 per cent of its statutory income will be taxed at the prevailing company tax rate.

Companies located in the promoted areas, namely the states of Perlis, Sabah and Sarawak and the designated “Eastern Corridor” of Peninsular Malaysia enjoy an allowance of 100 per cent on the qualifying capital expenditure incurred within a period of five years. The allowance can be utilized to offset against 100 per cent of their statutory income for each year of assessment. All applications received by 31 December 2010 are eligible for this incentive.

Incentives for relocating manufacturing activities to promoted areas

Existing companies who relocate their manufacturing activities to the promoted areas are eligible for a second round of the following incentives:

·pioneer status with tax exemption of 100 per cent of statutory income for a period of five years. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period can be carried forward and deducted against post-pioneer income of the company

·ITA of 100 per cent on the qualifying capital expenditure incurred within a period of five years. The allowance can be utilized to offset against 100 per cent of the statutory income for each year of assessment. Any unutilized allowance can be carried forward to subsequent years until fully utilized.

Incentives for high technology companies A high-technology company that fulfils certain criteria qualifies for pioneer status with a tax exemption of 100 per cent of its statutory income for a period of five years. Unabsorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted against post-pioneer income of the company. Additionally, a high-technology company qualifies for an ITA of 60 per cent (100 per cent for promoted areas) on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. Any unutilized allowance can be carried forward to subsequent years until the whole amount has been fully utilized. The allowance can be utilized to offset against 100 per cent of its statutory income for each year of assessment.

Incentives for strategic projects

Strategic projects involve products or activities of national importance. They generally involve heavy capital investments with long gestation periods, have high levels of technology and are integrated, generate extensive linkages, and have significant impact on the economy. Such projects qualify for:

·pioneer status with income tax exemption of 100 per cent of statutory income for a period of ten years. Unabsorbed capital allowance as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post-pioneer income of the company

·ITA of 100 per cent on qualifying capital expenditure incurred within five years from the date on which the first qualifying capital expenditure is incurred. This allowance can be offset against 100 per cent of statutory income for each year of assessment. Any unutilized allowance can be carried forward to subsequent years until fully utilized.

Incentives for small and medium-scale companies

Effective from the year of assessment 2009, for small and medium-sized companies with paid-up ordinary share capital not exceeding RM2.5 million to the extent of that portion of their chargeable income of up to RM500,000, the corporate tax rate is reduced to 20 per cent. The tax rate on the remaining chargeable income is maintained at 26 per cent. Small-scale manufacturing companies incorporated in Malaysia with shareholders’ funds not exceeding RM500,000 and having at least 60 per cent Malaysian equity can obtain, under the Promotion of Investments Act 1986, pioneer status with an income tax exemption of 100 per cent of the statutory income for a period of five years. Unabsorbed capital allowance as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post-pioneer income of the companies. Additionally, they are eligible for an ITA of 60 per cent (100 per cent for promoted areas) on the qualifying capital expenditure incurred within five years from the date the first qualifying capital expenditure is incurred. This allowance can be offset against 100 per cent of statutory income for each year of assessment. Any unutilized allowance can be carried forward to subsequent years until the whole amount has been fully utilized.

A sole proprietorship or partnership is eligible to apply for this incentive provided a new private limited/limited company is formed to take over existing production/activities. The applicant company must not be a subsidiary of another company with shareholders’ funds of more than RM500,000. To qualify for the incentive, the small-scale company must have either achieved at least 15 per cent value-added, or the activities of the company contribute towards the socio-economic development of the rural population.

Incentives for the Multimedia Super Corridor

The Multimedia Super Corridor (MSC), a 15km x 50km zone extending south from Malaysia’s capital city and business hub, Kuala Lumpur, is a perfect environment for companies wanting to create, distribute and employ multimedia products and services.

MSC status is the recognition granted by the Malaysian government through the Multimedia Development Corporation (MDeC) to companies that participate and undertake information and communication technology activities in the MSC. Companies with MSC status enjoy a set of incentives and benefits that is backed by the Malaysian government’s Bill of Guarantees.

Generally, MSC status multimedia companies as well as multimedia faculties located in institutions of higher learning outside the cyber cities are eligible for the following incentives/facilities:

- pioneer status with income tax exemption of 100 per cent of the statutory income for a period of ten years or ITA of 100 per cent on the qualifying capital expenditure incurred within a period of five years to be offset against 100 per cent of statutory income for each year of assessment
- eligibility for R&D grants (for majority Malaysian-owned MSC status companies).

In addition, there are other benefits such as duty-free import of multimedia equipment, and import duty, excise duty and sales tax exemption on machinery, equipment and materials.

Business incentive and support package developed by the Iskandar Regional Development Authority

The Iskandar Malaysia project is the new main southern development corridor in Johor, Malaysia. It aims to become Southern Peninsular Malaysia’s most developed region where living, entertainment, environment and business seamlessly converge within a bustling and vibrant metropolis. The five economic/flagship zones in the Iskandar Malaysia Region, namely Johor Bahru City Centre, nusajaya, Western Gate Development, Eastern Gate Development and Senai-Skudai, are proposed as key focal points for developments in Iskandar Malaysia.

The Iskandar Regional Development Authority (IRDA), a federal statutory body formed under the IRDA Act 2007, is the single authority entrusted with the responsibility of planning, promoting, processing, stimulating, facilitating and undertaking development in Iskandar Malaysia.

IRDA has developed a comprehensive business incentive and support package (ISP). The ISP, which was announced initially on 22 March 2007, is designed to encourage and kick-start early investment into Iskandar Malaysia. It focuses on the following six targeted services-based sectors at designated nodes:

- creative industries and related services
- educational services
- financial advisory and consulting services
- healthcare and related services
- logistics services ·tourism-related activities.

The ISP includes fiscal and non-fiscal incentives as follows:

- corporate tax exemption for ten years provided operations commence on or before 31 December 2015
- exemption from withholding tax provisions on payments for services and royalties to non-residents for a period of ten years from the date of commencement of operations
- exemption from the FIC’s rulings
- permission to source capital globally ·permission to employ foreign knowledge workers without restriction.

The company must be an IRdA-status company to qualify for the above incentives. Essentially, an IRdA-status company must fulfil the following two general criteria:

- involving in one of the six targeted services-based sectors mentioned above
- be situated in the designated IRdA-approved zones.

The latest incentive package, which was announced by IRdA on 9 October 2007, complements the initial announcement. The Isp is not only intended for Iskandar Malaysia-status companies and foreign knowledge workers, but is now extended to include approved developers and approved development managers.

All income of companies and individuals accrued in, derived from or remitted to Malaysia are liable to tax. However, income derived from outside Malaysia and remitted to Malaysia by resident companies (except those involved in the banking, insurance, air and sea transportation business), non-resident companies and non-resident individuals is exempted from tax. Apart from income tax, there are other direct taxes such as stamp duty and real property gains tax, and indirect taxes such as sales tax, service tax, excise duty, import duty and export duty.

The following sources of income are liable to tax:

- gains and profits from a trade, profession and business
- gains or profits from an employment (salaries, remunerations, etc.)
- dividends, interests or discounts
- rents, royalties or premiums
- pensions, annuities or other periodic payments
- other gains or profits of an income nature.

A company, whether resident or not, is assessed on income accrued in or derived from Malaysia. Income derived from sources outside Malaysia and remitted by a resident company is exempt from tax, except in the case of the banking and insurance business, and sea and air transport undertakings. A company is considered a resident of Malaysia if the control and management of its affairs are exercised in Malaysia. Between the years of assessment 1998 and 2002, a corporate tax rate of 28 percent applied.

For the year of assessment 2003, companies with paid-up capital not exceeding RM2.5 million at the beginning of the year are taxed at 20 percent on the first RM100,000 of chargeable income and 28 percent on subsequent chargeable income. Companies with paid-up capital exceeding RM2.5 million at the beginning of the 2003 tax year are taxed at a flat rate of 28 percent.

From the year of assessment 2004, companies with paid-up capital not exceeding RM2.5 million are taxed at 20 percent on the first RM500,000 of chargeable income and 28 percent on subsequent chargeable income. The corporate tax rate for companies with paid-up capital exceeding RM2.5 million remains as for year of assessment 2003. A company carrying on petroleum upstream operations is subject to a petroleum income tax of 38 percent.

To promote greater private sector investment and to enhance the nation’s competitiveness, the corporate tax rate for the year of assessment 2009 is reduced to 25 percent for companies (including small and medium-scale companies) resident in Malaysia with paid-up ordinary share capital not exceeding RM2.5 million, to the extent of that portion of their chargeable income in excess of RM500,000.

Tax on individuals

All individuals are liable to tax on income accrued in, derived from or remitted to Malaysia. However, a non-resident individual will only be taxed on income earned in Malaysia. Generally, an individual residing in Malaysia for more than 182 days in a year has resident status. Effective from the year of assessment 2004, income remitted to Malaysia by a resident individual is exempt from tax. Resident individuals are taxed on their chargeable income at a graduated rate from 0 percent to 27 percent after deducting personal tax relief effective from the year of assessment 2009. Non-resident individuals are liable to tax at the rate of 27 percent without any personal relief. However, the non-resident can claim rebates in respect of levies paid to the government for the issuance of an employment work permit. Non-residents are also subject to withholding tax between 3 percent and 15 percent depending on the nature of the income.

Employment conditions

The terms of an individual’s employment are governed by their employment contract (which may include terms implied through dealings between the employer and the employee, terms incorporated from other documents such as employee manuals and collected agreements), statutes and statutory instruments.

For an employee whose monthly salary does not exceed Rm1,500 or an employee engaging in work such as manual labor or domestic servant irrespective of his wage, the minimum protection given by the Employment Act 1955 (revised 1981) will apply to the employment contract.

Under the Employment Act:

- the contract of employment must be in writing and state the notice period required to terminate it
- wages must be paid by the seventh day after the last day of any wage period. A pay slip must be given to the employee, detailing the wages and deductions made
- normal hours of work must not exceed eight hours per day, 48 hours per week, more than five consecutive hours a period of leisure of not less than 30 minutes’ duration and in excess of a spread over period of 10 hours in one day
- employees are entitled to paid holidays on at least 10 gazette public holidays in any one calendar year and on any day declared as a public holiday under section 8 of the Holiday Act 1951
- employees must be given eight days’ paid annual leave if having less than two years of service, 12 days’ paid annual leave if having two years but less than five years of service, and 16 days’ paid annual leave if having five or more years of service
- employees are entitled to 14 days’ paid sick leave if having less than two years of service, 18 days’ paid sick leave if having two but less than five years of service and 22 days’ paid sick leave if having over five years of service per calendar year, and where hospitalization is necessary, up to a maximum of 60 days’ paid sick leave per calendar year
- female employees are entitled to not less than 60 days’ consecutive paid maternity leave for up to five surviving children
- overtime work must be paid at a minimum of one and a half times the hourly rate of pay on normal working days, twice the hourly rate on rest days and triple the hourly rate on public holidays
- an employer may not terminate the services of a local employee in favor of a foreign employee and, if retrenchment is necessary, to first terminate the services of all foreign employees before the locals.

Employees’ Provident Fund

The Employees’ Provident Fund Act 1991 requires all employers and employees to pay monthly contributions to the Employees’ Provident Fund at minimum rates of 12 percent and 11 percent of an employee’s monthly wages respectively. Both employers and employees are encouraged to contribute at a rate higher than this mandatory contribution.

All foreign workers and expatriates and their employers are exempted from compulsory contributions. They can, however, choose to contribute at the rate of Rm5 per employee per month by the employer and 11 percent of the monthly wages by the employee. Employment injury insurance scheme and invalidity pension scheme These schemes are administered by the Social Security Organization under the Employees’ Social Security Act 1969. The schemes cover only Malaysian workers and permanent residents. All employers of workers earning wages not exceeding RM3,000 per month must insure their workers under the schemes.

The Employment Injury Insurance Scheme provides employees with coverage of cash benefits and medical care for any disablement or death due to employment injury.

The Invalidity Pension Scheme provides 24-hour coverage to employees against invalidity and death due to any cause not connected with their employment before the age of 55. The principal employer must make a monthly contribution for each eligible employee according to the rates specified under the Act. The employee’s share of 0.5 percent of wages should be paid for coverage under the Invalidity Pension Scheme while the employer pays 1.75 percent for the Employment Injury Insurance Scheme and the Invalidity Pension Scheme. Contributions should be made from the first month the employee is employed.

Workmen’s compensation

Under the Workmen’s Compensation Act 1952, an employer must pay compensation for expenses incurred in the treatment and rehabilitation of a workman for personal injuries caused by employment-related accidents.

Generally, a “workman” under the Workmen’s Compensation Act refers to private sector employees who earn less than RM500 a month and all manual workers irrespective of their wages. The Act fixes the amounts of compensation under different circumstances to the workman or, if death resulted from the injury, to the dependants.

Malaysians and permanent residents who are covered by the schemes administered by the Social Security Organization are not covered by the Workmen’s Compensation Act. This Act applies to all foreign workers whether the compensation relates to employment or non-employment injury.

Employees’ safety and health

The Factories and Machinery Act 1967 requires occupiers of factories to provide certain minimum standards (for example, the factory buildings are structurally sound, proper storage of goods and dangerous substances, fire protection, cleanliness, ventilation) of safety and welfare for employees working within the factories. The occupiers must report in writing to the inspector appointed under the Act of any accidents involving death or serious injury or serious damage to properties.

The Occupational Safety and Health Act 1994 requires an employer to ensure the health and safety of its employees by properly maintaining safe plant and systems in areas of storage, transport, etc. of substances, and by providing adequate training, supervision etc. to employees. An employer must inform the nearest occupational safety and health office of any accident, dangerous occurrence, occupational poisoning or disease which has occurred or is likely to occur. The Act also requires an employer to ensure its employee’s activities do not affect the health of non-employees.

Industrial relations

Trade unions are regulated by the Trade Unions Act 1959 and the Trade Unions Regulations 1959, which require:

- membership of a trade union be confined to employees within any particular establishment, trade, occupation or industry
- registration of all trade unions
- a trade union to obtain prior consent by secret ballot of at least two-thirds of total members before organizing a strike
- all unions to be inspected regularly to ensure compliance with the laws.

Relations between employers and workmen and their trade unions, including the prevention and settlement of trade disputes, are regulated by the Industrial Relations Act 1967, which covers:

- the protection of the legitimate rights of employers, workmen and their trade unions
- the procedure for submission of claims for recognition and the scope of representation of trade unions and collective bargaining
- matters not allowed to be included in the proposals for collective bargaining, such as those relating to promotion, transfer, recruitment, retrenchment, dismissal, reinstatement, allocation of duties, and prohibition of strikes and lockouts over any of these issues
- the prohibition of strikes and lockouts once a trade dispute has been referred to the Industrial Court and on any matter covered by a collective agreement or by an award of the Industrial Court
- the protection of pioneer industries during the initial years of their establishment against any unreasonable demands from a trade union.

Collective agreements cannot contain more favorable terms of employment than those stipulated under the Employment Act 1955 unless approved by the Minister of Human Resources.

The Industrial Relations Act emphasizes direct negotiation between employers, workmen and their trade unions to settle any differences. Where this fails, the Act provides for speedy and just settlement of trade disputes by conciliation or arbitration. The Minister of Human Resources may intervene and, at any time, refer a trade dispute to the Industrial Court for arbitration.

Employment of expatriates

Where there is a shortage of trained Malaysians, foreign companies are allowed to bring in expatriate personnel. Qualified foreign companies are also allowed to apply “key posts” for its expatriate personnel, that is, posts that are permanently filled by expatriates.

Effective from 17 June 2003, the new guidelines on the employment of expatriates are as follows:

- for manufacturing companies with foreign paid-up capital of uS$2 million and above, automatic approval is given for up to 10 expatriate posts, including five key posts. Expatriates may be employed for up to a maximum of ten years for executive posts and five years for non-executive posts
- for manufacturing companies with foreign paid-up capital of more than uS$200,000 but less than uS$2 million, automatic approval is given for up to five expatriate posts, including at least one key post. Expatriates may be employed for up to a maximum of ten years for executive posts and five years for non-executive posts
- for manufacturing companies with foreign paid-up capital of less than uS$200,000, applications may be considered on a case-by-case basis for both key posts and time posts. Applications for key posts may be considered where the foreign paid-up capital is at least RM500,000. Time posts can be considered for up to ten years for executive posts that require professional qualifications and practical experience and five years for non-executive posts that require technical skills and experience. Malaysians must be trained to eventually take over these time posts.

Employment passes for key post holders are generally issued on a five-year renewable basis. All employment passes for non-key post holders are valid for the period approved for the post. Employment pass holders will be issued with multiple entry visas valid for the duration of the relevant employment passes.

Dispute resolution

Background

Foreign court judgments are not enforceable in Indonesia unless a reciprocal enforcement treaty exists between Indonesia and the country in which the foreign judgment is handed down. No such treaties are currently in force. Accordingly, a judgment handed down by a foreign court against an Indonesian company would be enforceable against the Indonesian company only to the extent that the Indonesian company has assets located in the jurisdiction of the judgment (against which the judgment may be satisfied).

Indonesian governing law

The most practical choice of law and jurisdiction in agreements would be the laws and courts of Indonesia. However, the judicial process in Indonesia is notoriously slow and expensive, and judges tend to be unpredictable in their decision making. As an alternative to Indonesian law and jurisdiction, it is possible to state that:

- the laws of Indonesia govern the agreement
- disputes are to be referred exclusively to foreign arbitration and may not be referred to Indonesian courts for resolution (see below).

If an agreement is governed by Indonesian law, certain standard provisions need to be included (for example, an express waiver of certain provisions of the Civil Code 1847 would be required to prevent the need for a court order to allow early termination of an agreement).

Foreign governing law

While theoretically possible, in practice Indonesian courts are reluctant to apply foreign law (in the event that an agreement stated it was governed by a foreign law but disputes were to be referred to Indonesian courts for resolution). We are aware of some cases where an Indonesian party to an agreement governed by foreign law has referred a dispute to an Indonesian court despite the governing law clause, and the judge has accepted jurisdiction but applied Indonesian law.

Foreign arbitration

In contrast to foreign court judgments which are not enforceable in Indonesia, Indonesia is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and, accordingly, an arbitral award handed down overseas may be enforced in Indonesia provided that:

- the country in which the award is handed down is also a party to the New York Convention
- the award does not contravene national order
- the District Court has provided an execution order in relation to the award.

The likelihood of the District Court refusing to provide an execution order in relation to a foreign arbitral award is reduced where the agreement in question is governed by Indonesian law. A recent court decision has raised questions as to how foreign arbitral awards are to be treated in Indonesia (see below).

Issues with enforcement

Indonesian judges have indicated a recent tendency to question foreign arbitral awards in relation to which application has been made for enforcement through the District Court. In a particularly controversial recent case, the Central Jakarta District Court overruled the decision of a Swiss arbitration panel ordering the state-owned oil and gas company Pertamina to pay US$261 million to the local independent power producer, Karaha Bodas (which is controlled by American interests). The District Court claimed that the Swiss arbitration panel had overstepped its authority in ordering Pertamina to pay compensation. The decision is now being challenged on the basis that only Swiss courts have the right to annul the ruling.

As a result of this case, the issue of governing law and dispute resolution to be included in agreements is now a little uncertain. We usually recommend that, unless a client has strong reasons to the contrary, such agreements be governed by Indonesian law because of the issues referred to above.

Consumer protection

Indonesia’s first Consumer Protection Law No. 8 of 1999 (Undang Undang Tentang Perlindungan Konsumen) came into force in April 2000. The Consumer Protection Law sets out basic rights of consumers (including the right to bring class actions) and the obligations of business entities (manufacturers, distributors, retailers and importers) with respect to the sale of their products and services in Indonesia. The Consumer Protection Law provides that business entities must:

- include an expiry date or “best before” date on their products
- follow “halal” production processes (that is, processes in accordance with or permitted under Islamic Shari’a law) for products with such “halal” labels
- include labels on their products stating the name of the product, size, weight, volume (gross or net), composition, directions for use, production date, details of any side effects, name and address of the “business entity” (it is not clear whether this refers to the manufacturer, the distributor or some other entity) and other information required to be included on the label by law
- provide information in Indonesian relating to the use of the products
- ensure that their products comply with the information contained on the product labels and any required standards under the general law.

Business entities are prohibited from offering, promoting or advertising particular products or services involving the provision of misleading or false information to consumers. When advertising, promoting or offering their products or services for sale, business entities are also prohibited from directly or indirectly disparaging other goods and/or services. In addition, business entities are prohibited from using descriptions such as “safe”, “not harmful”, “not risky” or “no side effects” without including a detailed explanation of these warranties. Pursuant to the Consumer Protection Law, advertisers may be liable for all consequences arising from any false or misleading advertising carried out by them.

Under the Consumer Protection Law, a local importer (other than an agent or foreign representative of the foreign manufacturer) will be treated the same as a manufacturer. In practice, this means that a consumer who suffers damage arising from the purchase of a defective product can make a claim against the importer and the importer will be liable to the consumer for any such damage.

A violation of the Consumer Protection Law may result in a fine of up to Rp2 billion or imprisonment of a violating company’s management for up to five years. In light of the harsh sanctions that may be imposed under the Consumer Protection Law, it is important for foreign companies to be fully aware of their obligations and the restrictions that now apply concerning the sale of products and services in Indonesia.

Intellectual property rights
Indonesia is a signatory to the Trade Related Aspects of Intellectual Property Rights Agreement (TRIPS), an agreement scheduled to the General Agreement on Tariffs and Trade (GATT) Agreement of the World Trade Organization. As such, Indonesia has enacted a raft of new legislation from 1997 onwards in order to enhance Indonesia’s compliance with the TRIPS requirements.

The problem with enforcement of intellectual property rights in Indonesia comes from a number of sources – industrial, technical, social, cultural and legal. The Indonesian government is hoping to tackle the issue of enforcement through new laws. On the positive side, there is a general coherence amongst the laws in terms of the definitions, alternative dispute settlement procedures, civil proceedings and criminal sanctions available for intellectual property rights enforcement. Although enforcement of intellectual property rights is, at present, difficult, it is hoped that over time Indonesia will create a comprehensive and structurally sound intellectual property rights protection regime. Indonesia also has substantial interest in providing protection for indigenous intellectual property and, to a lesser extent, geographical indicators.

The Directorate General of Intellectual Property Rights (Direktorat Jenderal Hak Atas Kekayaan Intelektual) under the MOLHR administers the enforcement of intellectual property rights in Indonesia. Registration is the basis upon which intellectual property rights in Indonesia are claimed and it is at this point that the greatest reform has been made. In theory, a new streamlined procedure should result in significant reductions in registration times – however, this has not yet happened in practice.

Enforcement of intellectual property rights is now provided through the Commercial Court. The Commercial Court was initially established for bankruptcy proceedings and the perception of the court is of speedy and effective, if not more expensive, legal proceedings. However, in practice, intellectual property rights enforcement is usually through more practical remedies. Infringements can sometimes be remedied by a “cease and desist” letter and/or with the follow-up of a notice published in newspapers of the intellectual property owner’s intention to take further enforcement action.

Copyright

The Indonesian Copyright Law No. 19 of 2002 (Copyright Law) came into effect in July 2003. The reasons for replacing the old regime with the new Copyright Law were that the old laws had not accommodated TRIPS in terms of encouraging the development of intellectual works originating from Indonesian art and other cultural sources and there was a need to distinguish the position of copyright from that of related rights in order to give clearer protection to relevant intellectual works.

The Copyright Law distinguishes between copyright and related rights in terms of the period of protection and penalties. “Related rights” which are covered by the new Copyright Law consist of exclusive rights possessed by a licensed agent, a sound recording producer or a broadcast institution.

While the period of protection of copyright is granted for 50 years, the protection period for related rights of a licensed agent and a sound recording producer is 50 years, and 25 years for a broadcasting institution. Different civil and criminal penalties apply to infringement.

Matters covered by the new Copyright Law include:

- protection of databases
- usage of wire or wireless devices, including the Internet, to operate optical disc products through audio, audio-visual and other telecommunication devices
- court injunctions
- a time limit for settling copyright disputes in the Commercial Court and on appeal to the Supreme Court
- electronic information management and technological control device rights
- protection for hi-tech products
- penalties for violation of related rights
- a penalty for the reproduction of computer programs for illegal and unlawful commercial purposes.

Indonesia ratified the World Intellectual Property Organization Phonograms and Performance Treaty which came into effect in 2002. This treaty prohibits the unauthorized exploitation of recorded or live performances on the World Wide Web.

Domain names

In April 2008 Indonesia introduced its first electronic information and transactions law dealing with electronic commerce, domain names and related intellectual property rights (see further below).

Currently, domain name registration is available at the Indonesian Internet Domain Name Management Organization (PANDI), which has the authority to assign, check and reject domain name registration in Indonesia.

Indonesia has several domain name registrations including: ac.id, sch.id, co.id, net.id, go.id, mil.id, or.id and web.id. To obtain a “co.id” domain name requires the applicant to hold an Indonesian taxpayer registration number and trading license number. However, the documentation for obtaining a “web.id” domain name does not rely upon the applicant having a local presence in Indonesia. A foreign company could register the “web.id” domain name so long as they have a “local administrative contact address”.

Patents

The Patent Law No. 14 of 2001 provides, amongst other things, that petty patents are limited to tangible items only and a patent on a process must be in the nature of a full patent. Patents are valid for 20 years and are not renewable. Simple patents are valid for ten years and are also not renewable.

Holders of a patent have the right to grant licenses to other parties based on a license agreement. A license agreement must be registered and announced in the Official Gazette of Patents.

Trademarks

The Trademark Law No. 15 of 2001 addressed a primary concern of foreign investors as it provided for further legislative measures to be taken to stop use of a brand name where the name is registered as a trademark in another country. The Trademark Law prevents the registration in Indonesia of trademarks which are registered and “well-known” overseas where the applicant party is acting in bad faith.

Trademark registrations are valid for ten-year periods and are renewable. Assignment of a trademark must be in writing, confirming that the trademark to be assigned will be used for the trade of goods and services. Goodwill, reputation or other related aspects of the trademark may also be assigned.

The Trademark Office accepts applications for trademarks with “priority rights” where the trademark has been registered in another country under the 1883 Paris Convention for the Protection of Industrial Property and the 1994 GATT. Priority application must be submitted within six months of the filing date of the application for registration of the trademark in the other country.

The Trademark Law requires trademark licenses to be registered. However, at the time of writing, no system had been established within the Trademark Office for such registration.

The registered owner of a trademark may submit a claim for damages against an infringer and apply for interlocutory injunctions. The Trademark Law also provides for alternative dispute resolution, including arbitration.

Trade secrets

Indonesia’s first law on trade secrets came into effect in December 2000. Trade secrets refer to information not identifiable by the public in technology and/or business fields which has economic value (that is, commercial or profit-making value). The information must be “secret”, that is, only identifiable by certain parties, and must have been disclosed in circumstances where confidentiality was intended to be protected.

Trade secret holders have sole right to use, to license and to prohibit other parties from using or revealing the trade secret. Ownership of trade secrets may change by inheritance, grant, written agreement or assignment. Under the Trade Secrets Law, changes in ownership of trade secrets licenses must be registered and announced in the official Gazette of Trade Secrets. However, at the time of writing, the registration and announcement procedures had not been established.

Industrial designs

The Indonesian Law on Industrial Designs No. 31 of 2000 refers to the creations of forms, configurations or compositions of lines or colors, or combinations thereof in the form of two or three dimensions. Industrial designs may only be registered where there has been no previous disclosure of the design in exhibitions in Indonesia, the design has not been publicly exhibited and is not already being used in Indonesia by designers in the framework of trial assets for educational, research or development purposes.

Industrial design rights are granted for ten-year periods. The industrial design right holder has exclusive rights to prohibit other parties from making, selling, exporting, importing and distributing goods using the industrial design right in question without their approval. Transfers and licenses of industrial design rights must be registered and recorded in the Official Gazette of Industrial Designs and registered at the office of the Directorate General of Intellectual Property Rights.

Technical assistance agreements

Technical assistance agreements are entered into in order to transfer expertise and valuable information on the making and marketing of various manufactured goods. The owner of certain patent or trademark rights relating to particular licensed products may provide a license to a subsidiary body or franchise partner. Information generally shared is the technically and commercially useful information necessary for the manufacture and sale of a particular licensed product. Information usually includes technical information, know-how, plant layout, drawings, specifications and treatment of materials relating to the manufacture and sale of a particular licensed product.

Technical assistance may also take the form of coordination and liaison services between the parties, visits of technical officers and other communications.

E-commerce

In April 2008 Law No. 11/2008 Regarding Electronic Information and Transactions (E-Commerce Law) was enacted to regulate matters relating to information and electronic transactions in all electronic forms. The E-Commerce Law is the first piece of legislation that regulates electronic transactions in Indonesia.

The E-Commerce Law sets out the legal basis for electronic transactions, including defining terms such as information technology, computers, electronic information, electronic contracts, electronic signatures, and electronic certificates. The E-Commerce Law prescribes a method for determining when electronic information is deemed to have been transmitted and received. It also provides for the creation of a certification body which can audit and issue certificates regarding the reliability of parties engaged in, and products the subject of, electronic trading.

The E-Commerce Law applies to all electronic transactions and all persons or institutions involved in electronic transactions (that is, local and foreign subjects), and ensures those transactions are legally protected. For the first time, electronic evidence will be able to be used in court. The E-Commerce Law also covers registration and use/misuse of domain names, the protection of certain electronic information as intellectual property and the use by electronic media of information that affects an individual’s right to privacy. Not surprisingly, it also prohibits dissemination of material relating to pornography, gambling or violence by means of computer or electronic systems.

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