Malaysia's Tax Exemption

28 July 2021

Malaysia's Tax Exemption

The Malaysian Investment Development Authority (MIDA) recently released a Guideline on Intellectual Property (IP) Development Incentive. As a member of the Inclusive Framework on Base Erosion and Profit Shifting ("BEPS"), Malaysia is required to ensure that its tax incentives comply with the OECD's Forum on Harmful Tax Practices criteria ("FHTP" criteria).

The FHTP criteria required tax incentives granted to be proportionate to research and development (R&D) activities that are carried out in the country based on a formula that is known as the Modified Nexus Approach (MNA).

In this regard, Malaysia has passed laws by 31 December 2018 to remove IP income from the scope of various Malaysian tax incentives. With the exclusion of IP income from the scope of the incentives, IP income becomes fully taxable.

"The introduction of the tax exemption will encourage and promote Malaysia as a R&D centre," says Nitin Nadkarni, Senior Partner, Lee Hishammuddin Allen & Geldhill in Malaysia. "This is because the ratio of income which qualifies for the tax exemption will be proportional to the R&D that is carried out in Malaysia. Only Income derived from IP developed in Malaysia is eligible for the incentive. This tax exemption is expected to attract significant investments in contribution to the Malaysia economy as the applicants have to meet the necessary economic commitments.

He adds, "This tax exemption will attract companies to conduct R&D in Malaysia and thereby contribute to the economic development of Malaysia. Further, the tax exemption will be complied with "FHTP" criteria in keeping with Malaysia's commitment under the Inclusive Framework on BEPS. Taxpayers which were impacted by the removal of IP income from the scope of tax incentive previously can apply to the IP Development Incentive."

With this new tax exemption, there is no doubt that IP is a key consideration in day-to-day business decisions in the increasingly knowledge-driven economy.

"The Intellectual Property Corporation of Malaysia (MyIPO) which oversees and administers the Malaysian’s IP system has also constantly stressed the importance of IP development and protection," says Nadkarni.  "It is expected that the government of Malaysia will continue to promote IP Development as it leads to commercialisation of innovations and expansion of businesses which will eventually contribute to the growth of our economy. This tax exemption is one of the measures introduced to promote IP Development."


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