How Foreign-Owned Businesses Can Operate in Malaysia

Malaysia is becoming one of Southeast Asia's most attractive destinations for foreign investors.

But starting and running a foreign-owned business here is not as simple as opening a shop and hiring a few people.

As an employer, you need to understand the legal structure, tax rules, employment law, and more. This guide will help you navigate all the basics.

What is a Foreign-Owned Business in Malaysia?

A foreign-owned business in Malaysia is a company where more than 50% of the shares are held by foreigners.

These businesses operate across various industries such as manufacturing, technology, oil and gas, education, and financial services.

Some sectors are more open than others. For example, private limited companies (Sdn Bhd) in general can be 100% foreign-owned.

However, sectors like banking, agriculture, and education often require at least 30% Malaysian ownership.

Legal Requirements for Foreign-Owned Companies

Before hiring your first employee, there are a few legal boxes you must tick:

Register with the Companies Commission of Malaysia (SSM)

Choose an entity type such as Private Limited Company (Sdn Bhd), Branch Office, or Representative Office. Each has its own legal and operational implications.

Meet paid-up capital requirements

Certain business activities, like advisory or import-export, may require minimum paid-up capital, commonly ranging from RM350,000 to RM1 million.

Apply for licenses and permits

These vary by industry and may come from federal ministries, local councils, or regulatory bodies.

Fulfill equity conditions

In regulated sectors, foreign ownership may be capped, requiring partial Malaysian ownership (e.g., 70-30 equity split).

Steps to Set Up a Foreign-Owned Business

Starting a foreign-owned business in Malaysia involves several structured steps.

These steps are not only administrative but also legal, so it’s important to understand the process in detail:

1. Choose Your Business Structure

You’ll first need to decide on the right structure for your business. The most common options for foreign investors are:

Private Limited Company (Sdn Bhd): Offers 100% foreign ownership in most industries, and is preferred for long-term operations.
Branch Office: Functions as an extension of a foreign parent company. Suitable for companies that want a short-term presence.
Representative Office: Ideal for market research and non-commercial activities. Not permitted to generate revenue.

2. Register with the Companies Commission of Malaysia (SSM)

After choosing the business structure, register your company online or at the SSM counter.

You’ll need to submit your proposed company name, details of directors and shareholders, a company constitution (if any), and pay the applicable registration fee.

Once approved, your company name will be reserved for 30 days.

3. Prepare Paid-Up Capital

Depending on your industry, the required paid-up capital can vary. For instance, RM1 million is often needed for advisory or trading businesses.

Some sectors may require more, especially if you intend to hire foreign staffs.

4. Apply for Business Licenses and Permits

Depending on your business nature, additional licenses may be required from specific government bodies.

For example, education providers must get licenses from the Ministry of Education.

5. Open a Corporate Bank Account in Malaysia

After incorporation, a bank account must be opened to manage business transactions and deposit the paid-up capital.

Most banks will require a face-to-face meeting with the directors.

6. Register for Taxation and SST

Once the company is operational, register with the Inland Revenue Board (LHDN) for a tax number.

If your annual turnover exceeds RM500,000, you must also register for the Sales and Service Tax (SST).

Employment and Hiring Guidelines for Foreign-Owned Businesses

When managing a foreign-owned company in Malaysia, you must meet local employment laws and specific hiring requirements. Here's what you need to know:

1. Hiring Local and Foreign Employees

You can hire both Malaysians and foreigners.

To hire foreign employees, your company must meet minimum paid-up capital requirements of RM500,000 to RM1 million, depending on your business sector.

2. Applying for Work Permits

Employers must apply for an Employment Pass (EP) for foreign hires. There are three categories:

Category I: Top executives and highly skilled professionals (valid up to 5 years).
Category II: Mid-level managers and specialists (valid up to 2 years).
Category III: Skilled workers (valid up to 1 year, renewable twice).

You must justify why a foreigner is needed for the role (specialized skills not easily found among locals).

3. Meeting Statutory Contribution Requirements

Once employees are hired, you must register them for:

Employees Provident Fund (EPF): Retirement savings contribution.
Social Security Organisation (SOCSO): Workplace accident and injury insurance.
Employment Insurance System (EIS): Financial support for retrenched workers.

4. Complying with Employment Law

Follow the Employment Act 1955, which covers:

Minimum wage and maximum working hours (48 hours per week).
Paid annual leave, sick leave, and maternity leave entitlements.
Overtime pay, public holidays, and fair termination procedures.

5. Avoiding Worker Misclassification

Clearly classify workers as employees or contractors. Misclassifying workers can lead to legal penalties and fines.

6. Managing Payroll

Payroll is processed monthly. Employers must deduct employee contributions (EPF, SOCSO, EIS) and pay their share.

7. Considering an Employer of Record (EoR)

If setting up an in-house HR system is challenging, you can use an EoR. An EoR hires employees on your behalf, manages compliance, and simplifies HR work.

Taxation for Foreign-Owned Companies in Malaysia

Foreign-owned businesses operating in Malaysia are subject to several tax obligations. Here's a clear breakdown:

1. Corporate Income Tax

Standard tax rate: 24% for most companies.
SME tax benefit: Companies with paid-up capital under RM2.5 million pay 17% on the first RM600,000 of taxable income.

2. Sales and Service Tax (SST)

If your company's annual revenue crosses the threshold, you must register for SST.

Sales Tax: 5% or 10%, depending on the product.
Service Tax: 6% on taxable services.

3. Withholding Tax Obligations

Payments such as royalties, interest, or technical service fees to non-residents may be subject to withholding tax.

Rates vary depending on the nature of payment and any double taxation agreements.

4. Transfer Pricing Compliance

If your business deals with related foreign affiliates, you must comply with transfer pricing rules.

Proper documentation is needed to show that transactions are at arm’s length.

5. Tax Registration

After company incorporation, you must register with the Inland Revenue Board (LHDN) for tax purposes.

6. Filing Tax Returns

Companies must submit annual tax returns to LHDN. It’s important to file on time to avoid penalties and audits.

Benefits of Setting Up a Foreign-Owned Business in Malaysia

Malaysia offers many advantages to foreign investors. Some of the main benefits include:

1. Strategic Location

Malaysia is located right in the heart of Southeast Asia. It gives easy access to ASEAN markets and trade routes.

2. Business-Friendly Policies

Government agencies like MIDA and MDEC offer incentives, grants, and support programs for foreign businesses.

3. Skilled Multilingual Workforce

Many Malaysians speak English fluently, making communication easy. You’ll also find talent skilled in finance, technology, engineering, and business management.

4. Free Trade Agreements

Malaysia has signed multiple free trade agreements. This reduces tariffs and opens business opportunities in other markets.

5. Lower Operating Costs

Office rental, utilities, and employee salaries are lower compared to neighboring countries like Singapore.

Challenges Faced by Foreign-Owned Businesses

While Malaysia is welcoming, foreign businesses may face some challenges:

Keeping up with licensing, renewals, and reporting requirements can be time-consuming.
Local companies may have stronger networks, better market knowledge, and cost advantages.
Business customs, communication styles, and expectations may differ from what you are used to. Taking time to understand Malaysian business culture is important.
Hiring foreign employees requires dealing with strict immigration rules and documentation due to issuing a work permit and visa.
Opening corporate bank accounts and getting financing may involve extra steps for foreign-owned companies.

Tips for Successful Operation of Foreign-Owned Businesses

To build a strong and sustainable business in Malaysia, here are some practical tips:

Engage with reliable local advisors such as a company secretary, legal advisor, and tax consultant who understands Malaysian regulations.
Familiarize yourself with Malaysia’s Employment Act and other labor regulations to avoid costly mistakes.
Hiring local employees can bridge cultural gaps and strengthen your company’s network and reputation.
Always renew licenses, submit tax filings on time, and keep proper records. Staying compliant keeps your business running smoothly.
Invest in relationship building. Malaysian business culture values trust and relationships. Take time to connect with partners, clients, and even government officials professionally.
Plan for long-term growth. Consider how your business can expand regionally through Malaysia’s strong trade connections.

FAQ

What sectors are restricted for 100% foreign ownership?

Sectors like education, oil and gas, banking, and agriculture often require partial Malaysian ownership.

How much capital is needed for a foreign-owned business?

This depends on your business type. Some require RM350,000, others up to RM1 million or more for licenses and work passes.

Can a foreigner be a director in Malaysia?

Yes, foreigners can be directors. But at least one director must be ordinarily residing in Malaysia.

What incentives are available for foreign investors?

Tax breaks, grants, and investment support are offered by government bodies like MIDA and MDEC.

How to hire foreign workers for a foreign-owned company?

You must apply for Employment Passes through the Immigration Department. Paid-up capital and company nature affect eligibility.

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