May 2012

International Tax and Business Guide Connecting you to worldwide information

Malaysia
A publication of Deloitte Touche Tohmatsu Limited

Malaysia International Tax and Business Guide

Tax professionals of the member firms of Deloitte Touche Tohmatsu have created the Deloitte International Tax and Business Guides, an online series that provides information on investment conditions, tax regimes and regulatory requirements, along with information for executives working abroad. The Guides are supplemented by the Highlights series, an at-a-glance summary of basic information, including tax rates, for over 120 jurisdictions.

Contents
1.0 The investment climate 1.1 Economic structure 1.2 Banking and financing 1.3 Foreign trade 2.0 Business regulations 2.1 Registration and licensing 2.2 Price controls 2.3 Monopolies and restraint of trade 2.4 Intellectual property 2.5 Mergers and acquisitions 3.0 Foreign investment 3.1 Foreign investment incentives and restrictions 3.2 Exchange controls 4.0 Choice of business entity 4.1 Principal forms of doing business 4.2 Establishing a branch 4.3 Setting up a company 5.0 Business taxation 5.1 Overview 5.2 Taxable income and rates 5.3 Capital gains taxation 5.4 Withholding tax 5.5 Foreign income and tax treaties 5.6 Transactions between related parties 5.7 Turnover and other indirect taxes and duties 5.8 Other taxes 5.9 Tax compliance and administration 6.0 Personal taxation 6.1 Residency 6.2 Taxable income and rates 6.3 Special expatriate tax regime 6.4 Capital taxes 7.0 Labour environment 7.1 Employees rights and remuneration 7.2 Wages and benefits 7.3 Termination of employment 7.4 Labour-management relations 7.5 Employment of foreigners 8.0 Office locations

This Guide was updated in May 2012

1.0 The investment climate

Malaysia is a federated constitutional monarchy, with a bicameral federal parliament consisting of an appointed Senate and an elected House of Representatives. 1.1 Economic structure Following independence in 1957, rapid industrialisation has transformed the economy from one relying primarily on the production of mineral and agricultural export commodities into one dominated by manufacturing and services. Under the Vision 20/20 blueprint and Economic Transformation Programme for economic development, Malaysia aims to become a fully developed and high income nation by 2020. Malaysia continues to play a leading role in world markets for some of its commodities. It is one of the leading producer of palm oil and one of the main sources of rubber. The country is also a producer and exporter of oil and natural gas and electrical and electronic goods, the latter of which accounts for more than 46% of total export value. However, to elevate the nation to a more advanced economy, Malaysia is shifting to a new economic model based on innovation, creativity, services and knowledge-based activities. 1.2 Banking and financing In this recent decade, the Malaysian banking sector has undertaken significant restructuring, consolidation and rationalisation efforts in accordance with the Financial Sector Master Plan. These financial reforms have placed the banking sector on a stronger foundation with increased resilience and improved performance to face foreign competition. Progressive deregulation and liberalisation measures had been introduced since 2010. A new area of growing significance is Islamic banking where the Malaysia International Islamic Financial Centre initiative was launched in August 2006 to position Malaysia strategically in this area. A new international Islamic bank business licence was issued in 2011. Malaysia also continues to promote Labuan as an international financial centre for offshore services. 1.3 Foreign trade Malaysia is committed towards a multilateral trading system. The country maintains a relatively open trade policy regime where policies aim to improve market access for exports of primary commodities, manufactured products and, increasingly, services. As one of the founding member of the Association of Southeast Asian Nations (ASEAN) and signatory of ASEAN Free Trade Area agreement (AFTA), Malaysia intends to eliminate import duties on all products and thereby realise AFTAs ultimate target of creating an integrated market with free flow of goods within the region. Malaysia also enjoys generalised system of preferences (GSP) privileges from the European Union, Norway, Switzerland, Belarus, Russian Federation and Turkey. Malaysia has signed bilateral free trade agreements with Japan, Pakistan, India (trade in goods), Australia, New Zealand and six regional free trade agreements which are ASEAN, ASEAN-Japan, ASEAN-China, ASEAN-Korea, ASEAN-India (trade in goods) and ASEAN-Australia-New Zealand Free Trade Area Agreement. The following FTAs are under negotiation: Malaysia-EU, Malaysia-Turkey and ASEAN-EU.

2.0 Business regulations

2.1 Registration and licensing The countrys economic expansion has been accompanied by a steady rise in technical assistance as a means to transfer technology to new ventures. Nevertheless, most such transfers through licensing agreements have been limited to subsidiaries and to affiliates of the foreign licenser. Previously, the Malaysian Investment Development Authority (MIDA) must approve all technology transfer agreements, including joint ventures, technical assistance, licensing and engineering services. Strict MIDA guidelinesparticularly on the terms and size of royalty payments are a disincentive to licensing. However this requirement is no longer imposed by MIDA due to confidentiality and protection of trade secrets.

2.2 Price controls Pursuant to the Price Control and Anti-Profiteering Act 2011, the Ministry of Domestic Trade, Co-operatives and Consumerism controls prices of petrol, diesel, liquefied petroleum gas, sugar, cooking oil and flour. Prices of selected essential foods are also placed under price control scheme during festive seasons. 2.3 Monopolies and restraint of trade As a free enterprise economy, it encourages healthy competition and fair play of the market forces of supply and demand. Industry consolidation are undertaken especially in the financial, communications and multimedia and plantation sectors to strengthen the local companies in lieu of implementing the trade and investment liberalisation measures under the countrys World Trade Organisation commitments. However, certain strategic sectors are still protected from competition through government procurement and trade licensing or permits. The government has gazetted a Competition Act 2010, which is enforced from 1 January 2012. The Act which is anti-monopoly and anti-cartel includes the traditional pillars of competition law concerning anti-competitive agreements and abuses of dominant position having the effect of substantially lessening competition. The Price Control Act 1946 has been replaced by the Price Control and Anti-Profiteering Act 2011 with effect from 1 April 2011. The Price Controller is empowered to determine the price of goods and charges for services. Three other Acts which protect consumers have also been amended namely the Hire-Purchase Act 1967, Consumer Protection Act 1999 and Direct Sales Act 1993. 2.4 Intellectual property Malaysia is a member of the World Intellectual Property Organisation (WIPO) and a signatory of the Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works. Besides that, Malaysia has signed the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and acceded to the Patent Cooperation Treaty and the Nice and Vienna Agreement to ensure intellectual property protection in Malaysia is in line with international standards and provides protection to both local and foreign investors. Intellectual property protection in Malaysia comprises of trademarks, patents, copyright, industrial designs, geographical indications and layout designs of integrated circuits. In this regard, Malaysia has strong laws with adequate civil and criminal penalties, and takes a proactive approach to enforcement. In 2007, the government had established the Intellectual Property Court, tasked to deliberate on intellectual property cases and launched the National Intellectual Property Policy. The Intellectual Property Corporation of Malaysia manages and regulates the laws and other matters relating to intellectual property. The Patents Regulations 1986 and Trade Marks Regulations 1997 have been amended in 2011 and the Industrial Design Regulations 1999 and the Copyright Act 1987 have been amended in 2012 to expedite registration and incorporate new technology which includes non-traditional trademarks, brand dilution, copyright protection and colour marks. 2.5 Mergers and acquisitions Previously, the Foreign Investment Committee (FIC) regulates the guidelines on the acquisition of assets, mergers and takeovers of existing companies and businesses in Malaysia to ensure consistency with the objectives of the New Economic Policy. On 30 June 2009, the government announced that FIC was disbanded and the guidelines were liberalised. No equity conditions except those imposed by the regulator in strategic sectors. However, any direct or indirect acquisition of property valued at MYR 20 million and above which results in dilution of ownership held by Bumiputera interest and/or government agency would require the approval from the Economic Planning Unit (EPU). All other property acquisitions do not require EPUs approval but foreign interest is not allowed to acquire property valued less than MYR 500,000 per unit. The government has used stamp duty exemptions to encourage corporate restructuring. Provided certain conditions are met, exemption is given for transfer instruments on sale of properties relating to reconstruction or amalgamation of companies. Mergers of public listed companies approved by the Securities Commission are also exempt from stamp duty on merger documents. Similar exemptions apply to merging of vendors licensed with PETRONAS and biotechnology companies.

3.0 Foreign investment

3.1 Foreign investment incentives and restrictions Malaysia offers a broad range of incentives for companies seeking to invest in new projects or expand existing ones. These include pioneer status, special investment capital allowances, a variety of tax deductions, access to government-sponsored industrial estates, and concessional grants and loans from government agencies. Investments in less developed areas qualify for many of the same programmes, but they receive additional benefits for bringing business activity to these areas. The government has promulgated incentives for high-technology companies in the Multimedia Super Corridor Malaysia (MSC), companies in the Economic Development corridors and small- and medium-sized enterprises (SMEs). Other favoured activities include biotechnology, Islamic finance, venture capital, services, tourism, certain types of agriculture, petroleum, car component manufacturing, specialised machinery and equipment, and energy conservation and environmental protection. Offshore financial services are favoured on the island of Labuan. Incentives are also available to firms that succeed in creating operational headquarters, international procurement centres, regional distribution centres and treasury management centres. Recognising the growth potential in the service sector, the government decided on 22 April 2009 to liberalise 27 services sub-sectors, with no equity condition imposed. These sub-sectors are in the areas of health and social services, tourism, transport, business services and computer and related services. A National Committee for Approval of Investments in the Services Sector was established to facilitate investments. Further liberalisation of 17 services sub-sector was announced in Budget 2012 in telecommunication, education, healthcare and professional services. 3.2 Exchange controls Malaysia maintains a liberal system of exchange controls that apply uniformly to transactions with its trading partners. The central bank handles foreign exchange controls and regulations aimed to assist the bank in monitoring settlement payments and receipts of international transactions. Repatriations of capital, profits and income which includes dividends, interest, royalties, rental and commissions are freely permitted. Foreign exchange administration rules have been relaxed or eliminated. Generally, restrictions only apply to a resident with domestic ringgit borrowing.

4.0 Choice of business entity

4.1 Principal forms of doing business The main types of business organisation include the limited company (either public or private), a local branch of a foreign company, partnership, limited liability partnership and sole proprietorship. Among foreign investors, the limited company is the most popular form. It limits liability to the unpaid portion of the nominal value of the shares held, safeguarding the interests of all parties (including the foreign parent company). Private limited companies restrict the right of share transfers and may not seek capital, either equity or debt, from the public. All limited companies that do not meet the conditions governing private firms are deemed public. Private companies may be converted into public companies or vice versa. Requirements of public and private limited companies: Capital. Minimum two subscribers holding one share of MYR 1 each except for a wholly owned subsidiary of another company. No legal reserve requirements. Contribution can be made in cash or in other form, with valuation made by an impartial party. Founders, shareholders. Minimum two founders. No residency or nationality requirements. For a private limited company, shareholders are restricted to a maximum of fifty, excluding employees and former employees of the company or its subsidiary. Board of directors. Public and private limited companies must have at least two directors that maintain their principal (or only) place of residence in Malaysia (although they need not be Malaysian citizens).

Management, labour. No requirement that labour be represented in management or on the board of directors. There are no nationality or residency requirements for management. Disclosure. Company must lodge an annual return, directors report and audited financial statements to the Companies Commission. The financial statements must be independently certified by government-approved auditors. Taxes and fees. The formation of a company involves professional fees of about MYR 2,000 for private companies and MYR 3,500 for public companies. There are no taxes on the issuance of shares, bonds or other issues but a registration fee is payable upon incorporation based on the authorised share capital. The fee ranges from MYR 1,000 to MYR 70,000 for authorised share capital not exceeding MYR 100,000 or that exceeding MYR 100 million. Types of shares. Shares must be registered and ordinary shares in a public company and its subsidiary must carry equal voting rights. Preferential shares are permitted and may carry special rights or restrictions on dividends, voting, repayment of capital and so forth. Control. Decisions are always by simple majority of capital except for alteration to the memorandum or articles of association and reduction of share capital, where a three-fourths majority (special resolution) is required. 4.2 Establishing a branch Branches may be established by making an application to the Companies Commission on a prescribed form to ensure the availability of the proposed companys name, along with an MYR 30 fee. The same fee structure that applies to companies are also applicable to a branch. However, for a branch the fees are levied based on the authorised share capital of its parent company. Thereafter, a certified copy of the foreign companys certificate of incorporation and charter, details of its directors and statutory declaration by an agent of the foreign company are required, together with the registration fees. A branch must also supply the name and address of at least one Malaysian resident who is authorised to accept notices served on the company. Branch offices are not regarded as resident in Malaysia for tax purposes. As part of the governments efforts to encourage foreign companies to incorporate local subsidiaries, certain tax benefits enjoyed by resident companies are not available to branches. Although branch operations are subject to income taxes similar to those levied on resident companies, branches are generally not eligible for tax incentives and must supply proof of income not derived from Malaysia. If a branch does decide to incorporate, it may not carry forward its existing business losses on incorporation. The tax implications associated with establishing a branch versus a subsidiary depends, in substantial part, on the tax regime imposed by the home country. Where the latter taxes the worldwide income of its residents, it is generally advisable initially to open a branch (during the loss-making period) and subsequently to incorporate a company (when the business begins to make a profit). Representative office or regional office of a foreign company performing permissible activities in Malaysia are not required to be registered with the Companies Commission. However approval must be obtained from the Malaysian Investment Development Authority which is normally valid for two years. These offices are not subject to tax in Malaysia. 4.3 Setting up a company To establish a company in Malaysia, a similar name search must be conducted for the availability of the proposed companys name, along with an MYR 30 fee to the Companies Commission. Thereafter, the following documents, together with registration fees, must be submitted to the commission within three months: (1) the memorandum of association; (2) the articles of association; (3) statutory declaration of compliance; (4) statutory declaration by a director/promoter; and (5) summary of incorporation details. As part of the requirements, a company secretary who is a member of a prescribed body or is licensed by the Companies Commission must be appointed.

5.0 Business taxation

5.1 Overview Corporations in Malaysia are subject to corporate income tax, real property gains tax, and sales and service taxes. A goods and services tax is expected to be introduced to replace the existing sales and services tax regime. The Inland Revenue Board (IRB), a division of the Ministry of Finance, is responsible for the administration of direct taxes enacted under the Income Tax Act 1967, the Petroleum (Income Tax) Act 1967, the Real Property Gains Tax Act 1976, the Promotion of Investments Act 1986, the Stamp Act 1949 and the Labuan Business Activity Tax Act 1990. 5.2 Taxable income and rates The basic corporate income tax rate is 25% while a preferential rate of 20% would apply to the first MYR 500,000 chargeable income of small- and medium-sized enterprises with paid-up capital not exceeding MYR 2.5 million on condition that it is not controlled by nor it controls a related company or another company controls the company and the related company and the related company has a paid-up capital exceeding MYR 2.5 million. Tax is levied on petroleum income at a rate of 38%, and insurance companies are taxed at 8% on investment income and capital gains of life funds, and 25% on the income of shareholders funds (including surpluses actually transferred from the life fund). Co-operative societies are taxed on a sliding scale from 0% on the first MYR 20,000 to 26% for income exceeding MYR 250,000. No local taxes are levied on corporate income but there is an excess profits tax i.e. windfall profit levy imposed on oil palm fruit producers when the monthly average price of crude palm oil exceed MYR 2,500 per metric tonne in Peninsular Malaysia and MYR 3,000 per metric tonne in Sabah and Sarawak. No alternative minimum tax, although companies undertaking Labuan trading activities may choose between paying a 3% tax based on audited net profits or a flat rate of MYR 20,000. Such company may also make an irrevocable election to be taxed under the Income Tax Act 1967. Taxable income defined Taxable corporate income includes all earnings derived from Malaysia, including gains or profits from a trade or other business, dividends, interest, rent, royalties, premiums or other current earnings. These rules apply to branches as well as to entities incorporated in Malaysia. Single tier tax system was implemented from 2008, replacing the full imputation system. Dividends paid by a resident company under this system would be exempted in the hands of shareholders and such single-tier dividends will not carry a tax credit. However, a transitional period up to 31 December 2013 is available for resident companies to utilise their existing section 108 tax credit balances to frank dividends, provided certain conditions are satisfied. Foreign-source income is not subject to tax in Malaysia, although tax is levied on worldwide income for certain activities, such as banking, insurance, and air and sea transport operations. Unless profits or gains are attributed directly to activities conducted outside Malaysia, they are assumed to be derived from Malaysia. Thus, the burden is on the company or branch to prove which part of its income is foreign-source. A company carrying on a Labuan trading activity, which includes banking, insurance, trading, management, licensing and shipping operations is taxed at 3% or may elect to pay MYR 20,000 each year. Income derived solely from the holding of investments i.e. Labuan non-trading activity, is not subject to tax. Any dividend received from such company is tax-exempt. Deductions Deductions are allowed for any revenue expenditure incurred wholly and exclusively in the production of income, including interest, royalty payments and certain taxes. However, no deduction is allowed against single-tier dividend income.

Deduction is restricted on the interest expense when borrowings are used for non-trade purposes. Similarly, deductions are restricted to 10% of aggregate income for donations to approved organisations and 19% of deductible remuneration for employers contribution to the Employees Provident Fund . No deduction is allowed for preliminary or pre-operating costs, capital expenditure or costs of flotation, registration, winding up or liquidation of a company unless specifically permitted by the Income Tax Act 1967 or Ministerial Orders such as incorporation expenses, pre-commencement recruitment and training expenses and registration of trademark and patents. Depreciation The government sets depreciation rates for various assets, with favourable rates for some items to promote their sale or use. There are three general classes of annual capital allowances for plant and machinery. Office equipment, furniture and fittings are subject to an annual depreciation allowance of 10% over eight years. The depreciation rate for general plant and machinery is set at 14% over six years. For heavy machinery and motor vehicles, the rate is 20% over four years. Certain types of plant and machinery such as computers, which have been given special annual allowances exceeding 20%, will continue at the higher rate. Small value assets with cost not exceeding MYR 1,000 each is fully depreciated within a year, subject to a maximum amount of MYR 10,000 per year. The maximum amount of MYR 10,000 does not apply to a SME company. Under the standard rates, industrial buildings (principally factories and warehouses, not office buildings) are depreciated at 13% in the first year and 3% annually thereafter on a straight-line basis regardless of whether it is constructed or purchased. The definition of industrial building also applies to a dock, jetty, wharf, hotel, airport, motor racing circuit and buildings used for research, school or educational institution, private hospitals, old folks care centre and living accommodation for employees etc.. Depending on the usage of the industrial building, the annual allowances may be at a higher rate of 10%. A reinvestment allowance of 60% is granted to resident manufacturing or agricultural companies that incur capital expenditure on qualifying plant, machinery and factory buildings for qualifying projects. This incentive is given to pioneer companies as well, subject to the forfeiture of their pioneer status or grant of investment tax allowance. There is no provision for depreciating patents, trademarks, copyrights, goodwill or leases (except mining leases). Losses Losses may be carried forward indefinitely except where there is a substantial change in the ownership of a dormant company. Losses carried forward may offset income from all business sources. Carry back losses is not allowed except for the year 2009 and 2010 where current year losses can be carried back to the immediate preceding year up to a maximum of MYR 100,000. 5.3 Capital gains taxation Malaysia does not tax capital gains from the sale of investments or capital assets other than those related to land and buildings. A real property gains tax (RPGT) applies to the sale of land in Malaysia and any interest, option or other right in or over such land. This includes gains from the sale of shares in a real property company, i.e. a controlled company (one with not more than fifty members and controlled by no more than five persons) whose holdings of real property or shares in a real property company amounts to 75% or more of its total tangible assets. Effective from 1 January 2012, chargeable gains are subject to RPGT at a flat rate of 10% if the disposal takes place within two years from the date of acquisition and 5% if the disposal takes place after two years but within five years from the date of acquisition. Any disposal made after five years holding period is exempted from RPGT. Capital losses arising from the sale of real property may be used to offset capital gains from such sales. Gains resulting from the disposal of property compulsorily acquired are exempt from the tax, as are asset transfers by resident companies under an approved restructuring scheme.

5.4 Withholding tax Dividends Malaysia does not impose withholding tax on dividends paid to non-residents. Rental A 10% withholding tax applies to income received by non-residents from the rental of movable property, which may be waived or reduced under an applicable tax treaty. Interest Interest paid to a non-resident is subject to withholding tax of 15%, which may be waived or reduced under an applicable tax treaty. However, interest paid to a non-resident by banks operating in Malaysia is exempt from tax, except for interest paid on funds required to maintain networking funds as prescribed by the central bank. Interest on approved loans, as specified in the Income Tax Act 1967, is exempt from tax. Approved loans include those made by a non-resident to the government, local authority, statutory body or to a person guaranteed by the government. Royalties, technical fees and others Royalties and technical fees paid to non-residents are subject to a 10% withholding tax, which may be waived or reduced under an applicable tax treaty. However, withholding tax is imposed on technical fees only if the services are performed onshore. A 10% withholding tax is also imposed on gains or profits falling under section 4(f) of the Income Tax Act 1967, income that is not business, employment, dividend, interest, discount, rent, royalty, premium, pension, annuity or other periodical payments. Generally refers to one-off income received by the non-resident such as commission or guarantee fees. 5.5. Foreign income and tax treaties Since Malaysia only taxes income that accrues in or is derived from the country, foreign income derived by a resident is not taxed in Malaysia (except for banking, insurance, and air and sea transport operations). Malaysia has a broad tax treaty network. The table below contains the withholding tax rates that apply to dividend, interest and royalty payments and payments of fees for technical services by Malaysian companies to non-residents under Malaysias tax treaties. Domestic rates apply if they are lower than the treaty rate.

Withholding tax rates under Malaysias tax treaties Treaty Partner Dividends
(1)

Interest

Royalties//Fees for Technical services 10//10 10//0 10//10 8//10 10//10 10//10 10//10 10//10

Albania Australia Austria Bahrain Bangladesh Belgium Brunei Canada

0 0 0 0 0 0 0 0

0/10 0/15 0/15 0/5 0/15 0/10 0/10 0/15

Withholding tax rates under Malaysias tax treaties Treaty Partner Dividends
(1)

Interest

Royalties//Fees for Technical services 10//5 10//10 10//10 10//10 10//10 10//10 10//10 10//10 10//10 0/7//7 10//10 10//10 10//10 10//10 8//10 10//10 10//10 10//10 10//10 10//10 10//10 10//10 8//10 8//8 10//10 10//10

Chile China Croatia Czech Republic Denmark Egypt Fiji Finland France Germany Hungary India Indonesia Iran Ireland Italy Japan Jordan Kazakhstan Kuwait Kyrgyz Republic Laos Lebanon Luxembourg Malta Mauritius

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

15 0/10 0/10 0/12 15 0/15 0/15 0/15 0/15 0/10 0/15 0/10 0/10 0/15 0/10 0/15 0/10 0/15 10 0/10 0/10 10 0/10 0/10 0/15 0/15

Withholding tax rates under Malaysias tax treaties Treaty Partner Dividends
(1)

Interest

Royalties//Fees for Technical services 10//10 10//10 10//10 5//5 0/8//8 10//10 10//10 10//10 10//10 10//10 10//10 8//8 10//10 10//10 10//10 8//8 10//10 8//5 5//5 0/10//10 7//5 10//10 10//10 8//8 10//10 10//10

Mongolia Morocco Myanmar Namibia Netherlands New Zealand Norway Pakistan Papua New Guinea Philippines Poland Qatar Romania Russia San Marino Saudi Arabia Seychelles Singapore South Africa South Korea Spain Sri Lanka Sudan Sweden Switzerland Syria

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0/10 0/10 0/10 0/10 0/10 0/15 0/15 0/15 0/15 0/15 0/15 0/5 0/15 0/15 10 0/5 0/10 0/10 0/10 0/15 0/10 0/10 0/10 0/10 0/10 0/10

Withholding tax rates under Malaysias tax treaties Treaty Partner Dividends
(1)

Interest

Royalties//Fees for Technical services 10//7.5 10//10 10//10 10//0 10//10 8//8 10//10 10//10 10//10

Taiwan Thailand Turkey Turkmenistan United Arab Emirates United Kingdom Uzbekistan Venezuela Vietnam
(1)

0 0 0 0 0 0 0 0 0

10 0/15 0/15 10 0/5 0/10 0/10 0/15 0/10

As noted above, Malaysia does not impose withholding tax on dividends paid to non residents.

5.6 Transactions between related parties Transfer pricing Malaysia has transfer pricing rules which were gazetted in May 2012. The rules provide for five methods for determining the arms length price for a controlled transaction between related parties. Any transaction for supply or purchase of properties/services with an associated person which is not at arms length price can be adjusted by the IRB. Failure to demonstrate arms length consideration may also result in additional taxes and penalties. However, advance pricing arrangement is available for cross border transactions. Thin capitalisation Thin capitalisation has been included in the Income Tax Act 1967 but its effective date was deferred by the authorities. No rules or guideline has been issued on the implementation. Controlled foreign companies Malaysia does not have CFC rules. Group taxation There is no provision for consolidated returns but under a group relief system, resident companies may surrender up to 70% of adjusted losses to one or more related companies. The following requirements must be met to qualify for group relief: The group companies i.e. surrendering and claimant companies have a paid-up capital of more than MYR 2.5 million in the relevant year of assessment; The group companies are related in the period in which the group relief claim is made as well as in the 12 months preceding that period; and The group companies have the same accounting year end.

Companies enjoying pioneer status, investment tax allowance, reinvestment allowance or exemption of shipping profits are not eligible for group relief.

5.7 Turnover and other indirect taxes and duties Generally sales tax applies to taxable goods, whether imported or locally produced. A 5% rate applies to fruit, certain foods, building materials, alcoholic beverages and tobacco products while a 10% rate is charged on all other types of goods not specifically exempted. Items exempted from sales tax include computers, books, newspapers and other reading materials and necessities such as certain essential food items and building materials. Manufacturers are exempted from paying sales tax on raw materials and packing materials used directly in producing taxable finished goods whereas refunds (where sales tax are paid) are available only to exporters and manufacturers whose goods are subsequently re-exported. Service tax is a consumption tax levied at the rate of 6% on the price, charge or premium of a taxable service. Taxable service includes hotel accommodation, sale of food, drinks or tobacco products at certain establishment and provision of employment services, management services, accounting, auditing, consultancy or other professional services, etc. Excise duties are levied on tobacco, beer and liquor, motor vehicles, playing cards and mahjong tiles. As for import duty, the rate ranges from 5% - 30% for most dutiable goods. Import duty on motor vehicle will depend on the cylinder capacity and ranges from 5% - 35%. 5.8 Other taxes Subject to various waivers and reduced rates, the government charges stamp duties (varying ad valorem charges or fixed rates) on certain instruments and documents. Such duties may be significant, especially upon the disposal of property and marketable securities. An entertainment duty of 25% of admission price is charged, although many performances are exempt. Other taxes include a road tax (levied on vehicles, based on the type of vehicle and the type of fuel used) and gaming taxes. Individual states levy real-property taxes at varying rates. 5.9 Tax compliance and administration The tax year (i.e. the year of assessment) for a company would be its fiscal year. Companies must pay tax in monthly instalments based on estimates of tax payable. Instalments must be paid on or before the 10th of each month. Otherwise, late or insufficient instalments may incur a 10% penalty. Underestimation of tax payable would also result in a 10% penalty if the actual tax payable exceeds the estimate by more than 30%. Companies are required to furnish a return, on the prescribed form, to the IRB within seven months from the end of their accounting periods. The form is used to report actual tax liabilities and it may result in a balance of tax payable (which must be settled by the filing deadline) or a refund from tax instalments paid. Any additional assessment raised by the IRB must be settled within thirty days from the day the notice is served.

6.0 Personal taxation

6.1 Residency Individuals are considered tax resident if they are in Malaysia for 182 days or more in a calendar year. Residence also may be established by physical presence in Malaysia for a mere day if it can be linked to a period of residence for at least 182 consecutive days in an adjoining year. Other residence tests are a minimum of 90 days physical presence in Malaysia or a resident for a specified number of years preceding or after the year in question. Individuals who do not meet the residency qualifications described above are taxed at a flat rate and would not be eligible for personal tax reliefs or tax rebates. 6.2 Taxable income and rates

The federal government is the only authority that levies income tax on individuals in Malaysia. Generally, income taxes are withheld from salaries and are subsequently settled upon the filing of income tax returns after the close of the tax year. Residents are taxed on a sliding scale from 0% on the first MYR 2,500 to 26% for income exceeding MYR 100,000. Non-residents are taxed at a flat rate of 26% on Malaysia-source income only. Determination of taxable income Resident individuals are taxed on Malaysia-source income at normal personal rates. They are entitled to various deductions and personal reliefs. Foreign-source income is exempt from income tax. Income includes gains or profits from any trade, business or profession; salary or wages; dividends, interest or discounts; and rent from property. Exemption is allowed for interest income received from banking and financial institutions and certain federal and state government bonds. Single-tier dividends are also exempted. Taxpayers must report employer-provided allowances such as those provided for housing or education. Employees may deduct only those expenses wholly incurred in performing employment duties. Personal tax reliefs include: MYR 9,000 for the taxpayer (MYR 15,000 if disabled); MYR 3,000 for a spouse (MYR 6,500 if disabled); MYR 1,000 for each unmarried child below the age of 18 (MYR 5,000 if disabled) or MYR 4,000 for each child above 18 studying at diploma level or above in Malaysia or studying at degree level or above overseas (total relief of MYR 9,000 if disabled); life-insurance premiums and provident-fund contributions (up to MYR 6,000); medical and education insurance premiums (up to MYR 3,000); payments for deferred annuity and contribution to a private retirement scheme (up to MYR 3,000); medical expenses of parents (up to MYR 5,000); medical expenses where the taxpayer, spouse or children contracts a serious disease (up to MYR 5,000); purchase of supporting equipment for disabled taxpayer, spouse, children or parent (up to MYR 5,000); approved technical, vocational or any postgraduate education fees (up to MYR 5,000); purchase of sports equipment (up to MYR 300); broadband subscription fees (up to MYR 500) and up to MYR 1,000 for purchase of books, which can be claimed i.e. deducted against the income of an individual. Additional tax relief of MYR 3,000 is available for purchase of a personal computer which can be claimed every three years. Relief is also given for interest on housing loans up to MYR 10,000 for three consecutive years, for purchase of a residential property between 10 March 2009 and 31 December 2010 provided certain conditions are met. Deduction is given for approved donations, restricted to 7% of aggregate income. Islamic religious dues may be deducted from tax payable. Wives income is assessed separately from that of their husbands. They may then claim the above personal reliefs under separate assessment. Singles or married couples with taxable income (net of personal reliefs) of less than MYR 35,000 are entitled to tax credits/rebates of MYR 400 under single/separate assessment and MYR 800 under combined assessment. 6.3 Special expatriate tax regime Foreign business personnel in Malaysia must register as taxpayers with the IRB and are subject to normal taxation if they derive income from Malaysia. An expatriates employment income is exempt from income tax where the duration of employment (not the period of residence) does not exceed 60 days in a calendar year and the employee does not qualify as a tax resident. Exemption may also be granted under the double tax treaty where the conditions are satisfied. Special tax concessions are available for foreign nationals employed in qualifying activities in Labuan or in Iskandar Development Region. Exemption is given to foreign experts in Islamic finance and those participating in the Malaysian Technical Co-operation Programme. Expatriates working in an approved operational headquarters, international procurement centre, regional distribution centre and regional office are taxed only on that portion of their chargeable income attributable to the number of days that they are in the country. 6.4 Capital taxes Although individuals are liable for real property gains tax (RPGT), they may claim a standard exemption of MYR 10,000 or 10% of the chargeable gain, whichever is higher, on each sale of any type of real property. A

citizen or a permanent resident are also entitled to a full exemption on one sale of a private residence. These exemptions apply to both residents and non-residents. Otherwise, individuals pay 10% RPGT on the chargeable gain if the disposal is made within two years from the date of acquisition and 5% if the disposal is made after two years but within five years from the date of acquisition. The same rate is applicable to all categories of taxpayer but full exemption is granted if the property is held for more than five years.

7.0 Labour environment

7.1 Employees rights and remuneration Malaysias main labour laws include the Employment Act 1955, the Trade Unions Act 1959, the Industrial Relations Act 1967, the Employees Social Security Act 1969 and the Employees Provident Fund Act 1991. Working hours Normal working hours are limited to 48-hours or six days per week at eight hours per day. A 44-hour working week is common for industrial and office employees. The maximum allowable overtime is 104 hours per month. A generally observed convention requires that all Muslim men be allowed to attend prayers on Friday afternoons (between noon and 2:45 p.m.). Overtime on working days is compensated at a minimum of one-and-a-half times the regular hourly rate. On non-regular working days, such as Sundays, overtime is paid at twice the regular rate; public holidays require an overtime rate at three times the regular wage. 7.2 Wages and benefits There is no single minimum wage in Malaysia, although the government has introduced minimum wages for th low income labourers of certain sectors. Wages earned must be paid not later than the 7 day after monthend. Pensions The Employees Provident Fund (EPF) Act 1991 provides for a compulsory contributory retirement fund that is payable to employees in full when they reach age 55. All employers and employees must contribute to the fund; the minimum mandatory employee contribution is 11% of monthly pay. An employer must contribute another 12% or 13% to each employees personal EPF holding depending on whether his monthly wage is more than MYR 5,000 or MYR 5,000 and less respectively. The contribution is deductible from the employers corporate income tax. The relief provided to employers may be extended to contributions of up to 19% of an employees monthly wage that is placed into an EPF or another government-approved savings schemes. All foreign workers/expatriates and their employers are exempt from compulsory contributions; alternatively, expatriates may elect to make contributions at 11% of their monthly wages, with employers providing MYR 5 per expatriate per month. Employer can seek tax deduction for contributions to their own pension schemes in addition to the EPF. Social insurance The Social Security Organisation administers both the Employment Injury Insurance Scheme and the Invalidity Pension Scheme for workers earning less than MYR 3,000 per month. Once a member, the contributions must continue (irrespective of earnings) and is capped at a percentage of MYR 3,000. Generally, employers contribute 1.25% of an employees wages under the Employment Injury Insurance Scheme and employees do not make contributions. The contributions required under the Invalidity Pension Scheme amounts to 1% of an employees wages and are shared equally by the employer and the employee. Other benefits Holiday and annual leave provisions vary widely among the states and industries. However, 11 paid holidays are mandatory nationwide. Employees with fewer than two years of service are entitled to 8 days paid leave each year. Employees with service of two to five years are entitled to 12 days of annual leave, and those employed for more than five

years are entitled to 16 days. In practice, most employees receive around 14 days paid vacation per year, and executives expect three weeks of annual holiday. An employee is entitled to 14 days of annual sick leave if employed for less than two years, 18 days for two to five years, and 22 days after five years. If hospitalisation is necessary, paid medical leave is extended to a total of 60 days per year. Most companies provide free medical facilities. Female employees are guaranteed 60 days of paid maternity leave (for up to five surviving children) at the greater of the employees normal rate of pay or MYR 6 per day. It is customary in Malaysia for employees to receive an annual bonus equivalent to one to three months of salary. 7.3 Termination of employment Employment contracts must include a clause stating the procedures for termination by either party. Normally, one months notice of dismissal or one months salary must be given, unless a longer period is stipulated in the agreement. The notice period may sometimes be as long as six months, or there may be provisions for lump-sum severance payments. Either party may end a contract without notice if an indemnity is paid equal to the amount of wages involved. Where notice is not provided for in the agreement, the law stipulates that four weeks notice must be given for employment of less than two years of service; six weeks for two to five years of service; and eight weeks for those exceeding five years. Under the Employment (Termination and Lay-off Benefits) Regulations 1980, employees are entitled to a redundancy benefit of at least 10 days wages for each year of service under two years, 15 days wages per year for two or more but less than five years of service, and 20 days wages per year for 5 years of service or more. 7.4 Labour-management relations Only about 6.4% of the countrys 12.5 million workers are unionised. Trade union must be registered with the Trade Union Affairs Department. Labour relations are generally harmonious and non-confrontational. 7.5 Employment of foreigners It is encouraged that firms employ bumiputras (Malays and other indigenous peoples) at all levels proportional to the local ethnic composition. The government also requires all foreign-investment firms to set up training programmes for their Malaysian staff and plan for the gradual replacement of expatriates (except those holding key posts) by Malaysians, particularly in managerial and white-collar positions. As part of the application for certain incentives, firms may be required to present a localisation schedule. A labour shortage, however, has compelled the government to be more flexible in applying these policies. The government has made it easier for companies to hire skilled foreigners. Manufacturing companies with foreign paid-up capital of US$2 million and above are given automatic approval for up to 10 expatriate posts, including 5 key posts. The key posts can be permanently filled by expatriates. Expatriates may be employed in executive posts for up to 10 years and non-executive posts up to 5 years. Approval for expatriate posts is usually handled by the Malaysian Investment Development Authority. The Multimedia Development Corporation approves applications from companies with Multimedia Super Corridor status, and the Public Service Department approves applications from government hospitals/clinics and public higher education institutions. Other approving authorities are the Central Bank and Securities Commission for banking, finance, insurance and securities industries.

8.0 Office locations

To find out how our professionals can help you in your part of the world, please contact us at our head office listed below or through the Contact Us button on http://www.deloitte.com/tax Kuala Lumpur Level 19, Uptown 1 1 Jalan SS 21/58 Damansara Uptown 47400 Petaling Jaya, Malaysia +60 (3) 7725 1888

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its networ k of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/my/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spann ing multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world -class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business ch allenges. Deloittes approximately 195,000 professionals are committed to becoming the standard of excellence. Deloitte Southeast Asia Ltd a member firm of Deloitte Touche Tohmatsu Limited comprising Deloitte practices operating in Brunei, Guam, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam was established to deliver measurable value to the particular demands of increasingly intra-regional and fast growing companies and enterprises. Comprising over 250 partners and 5,500 professionals in 22 office locations, the subsidiaries and affiliates of Deloitte Southeast Asia Ltd combine their technical expertise and deep industry knowledge to deliver consistent high quality services to companies in the region. All services are provided through the individual country practices, their subsidiaries and affiliates which are separate and independent legal entities. About Deloitte Malaysia In Malaysia, services are provided by Deloitte KassimChan and its affiliates. This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this public ation. 2012 Deloitte Touche Tohmatsu Tax Services Sdn Bhd.