Brief Guide on Doing Business in Malaysia

An Expert's View about Business Environment in Malaysia

Last updated: 23 Feb 2012

Doing Business in Malaysia

Azmi & Associates: Article Submission to GlobalTrade.net For online publication: February 2012 Brief Guide on Doing Business in Malaysia Several exciting developments have taken place in the Malaysian corporate landscape, including the liberalisation of sectors, which were traditionally somewhat protected. These liberalisation initiatives are aimed at welcoming more foreign businessmen to explore the many opportunities of the Malaysian market. In its ongoing efforts to support businesses to flourish, Azmi & Associates provides some practical insight into doing business in Malaysia – from a businessman’s point of view. Setting-up: Forms of Business Entity There are moves to allow more efficient business models; for instance, since 10 March 2009, the Companies Commission of Malaysia (“CCM”) has released a draft Limited Liability Partnership (“LLP”) Bill for consultation. The Bill has yet to be passed. An LLP is a hybrid entity that is afforded the protection of limited liability and a separate legal personality while enjoying the flexibility inherent in a partnership structure. To date, business entities in Malaysia take the conventional forms: corporation, partnership, and sole proprietorship. For foreign corporations that prefer a lighter investment, there is the option of establishing a branch office or a representative office. Foreign businessmen usually prefer to adopt the following principal forms of business entity, according to their specific objectives. (i) Corporation A foreign corporation may establish a corporation in Malaysia as its wholly-owned subsidiary, though, similar to other jurisdictions, there are equity restrictions in certain industries such as those involving national security. Corporations in Malaysia must be registered with CCM under the Companies Act, 1965 (“Act”), which governs these corporations. The liability of a Malaysian corporation may be limited by shares or by guarantee. The abbreviations “Sdn. Bhd.” (“Sendirian Berhad”) after the name of a Malaysian corporation indicates that it is a private limited corporation, whereas the abbreviation “Bhd.” (“Berhad”) on its own reveals that that Malaysian corporation is a public limited corporation (which may or may not be listed on the Malaysian stock exchange, Bursa Malaysia Securities Berhad). For private corporations limited by shares, the minimum authorised share capital is RM100,000.00 (at the current exchange rate, approximately: USD30,000.00). The minimum issued and paid-up share capital is RM2.00, as there needs to be at least two shareholders at the time of incorporation; subsequently, the shareholding structure may be revised so that that corporation becomes wholly-owned. A minimum of two resident directors, regardless of citizenship, is also required. As the ordinary process is straightforward, incorporation of a private limited corporation usually takes between 3 to 7 days (assuming that all documents are in order). The certificate of incorporation is then issued to the corporation for it to commence operations. It is worthy to note that for incorporation between 1 April 2009 and 31 March 2010, CCM has reduced the registration fees as much as 10 – 15%, as part of the Malaysian Government Economic Stimulus Package. {00156577 v2} Page 1 of 5 Azmi & Associates: Article Submission to GlobalTrade.net For online publication: February 2012 (ii) Branch office A foreign corporation that does not wish to incorporate a subsidiary in Malaysia may still carry on business in Malaysia via a branch office, as long as it has registered itself as a foreign corporation, and lodged certain documents, with CCM. It is also required to have physical presence in Malaysia; a registered office that must be open during normal work-hours in Malaysia. Nevertheless, the Act specifies certain transactions that do not constitute “carrying on business”, and therefore those transactions will not subject the foreign corporation to the requirements mentioned above. Such transactions include: sale in Malaysia through an independent contractor; isolated and infrequent transactions completed within 31 days; holding of any property (foreign corporations are allowed to hold property in Malaysia, including immoveable property); and temporary importation of goods for exhibition in Malaysia. The advantage of establishing a branch office instead of incorporating a subsidiary in Malaysia, is that it is much easier to close down. A notice of cessation of business to CCM is all that is needed. In contrast, a subsidiary in Malaysia would have to undertake the complicated winding-up process. However, this advantage must be weighed against the fact that a branch office does not possess a separate legal personality in Malaysia: the foreign corporation is fully accountable for all liabilities of its branch office in Malaysia. (iii) Representative office Another option for a foreign corporation, is to establish a representative office in Malaysia. A representative office cannot conduct any commercial activity; rather, it only serves to channel business opportunities to its foreign principal. The Malaysian Industrial Development Authority (“MIDA”), an agency promoting industrial development under the Ministry of International Trade and Industry (“MITI”), provides guidelines strictly limiting the activities of a representative office to marketing, research and coordination. The derivation of income for itself, trading and warehousing, among others, are prohibited to representative offices. Registration with MIDA is required in most instances. Running the Business: Specific Sector Regulators Previously, the approval of the Foreign Investment Committee (“FIC”), under the Economic Planning Unit (“EPU”) of the Prime Minister’s Department, was necessary for proposed acquisitions of interest in Malaysian corporations or businesses, based on certain thresholds. On 30 June 2009, the FIC Guidelines on the Acquisition of Interests, Mergers and Takeovers were repealed. This does not mean that there is no longer any equity requirement imposed on acquisition of corporations by foreign entities, as the regulators of specific sectors may still stipulate such equity conditions. The new Guideline on the Acquisition of Properties issued by EPU (“Guideline”), deals with acquisition of non-residential properties valued at RM20 million and above, by way of a corporation incorporated in Malaysia but controlled by foreign interests. These foreign-controlled acquirers must comply with a few paid up capital conditions, and must comprise at least 30% ordinary shareholding by the ethnic Bumiputera. Such acquisitions may be direct or indirect, both requiring EPU approval unless exempted. {00156577 v2} Page 2 of 5 Azmi & Associates: Article Submission to GlobalTrade.net For online publication: February 2012 In addition to the above, the Guideline describes indirect acquisition as the situation where a foreign- controlled acquirer gains indirect control of non-residential property as a consequence of acquisition of shares of a local corporation, provided that such property makes up more than 50% of the total assets of that local corporation. In line with the repeal of the FIC Guidelines on the Acquisition of Interests, Mergers and Takeovers, the thresholds of foreign ownership in local corporations in the fund and unit trust management and stockbroking industries, have been raised. Besides the EPU, other industry regulators are still empowered to impose conditions (for approval, equity restrictions, etc.) in their respective sectors, as outlined below. (a) Manufacturing Corporations that undertake any manufacturing activity, having shareholders' funds of RM2.5 million or more or engaging 75 or more full-time paid employees, must apply for a manufacturing licence from MIDA. "Manufacturing activity" in this context means the making, altering, blending, ornamenting, finishing or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal; and includes the assembly of parts and ship repairing but does not include any activity normally associated with retail or wholesale trade. (b) Banking, Finance and Insurance Bank Negara Malaysia (“BNM”), being the central bank of Malaysia, is the primary regulator of the banking, finance and insurance industries, whether conventional or Islamic. Its approval may be needed for certain types of transactions regulated under BNM fiscal and monetary policies. BNM has recently been made the reviewing authority for visa applications in the financial services industry. Under the Malaysia Islamic Financial Centre (“MIFC”) initiative, foreign financial institutions are welcome to use Malaysia as a platform for their Islamic financial activities. Various incentives are available to foreign financial institutions participating in the MIFC initiative, including new licences for conducting foreign currency businesses and attractive tax incentives. (c) Securities Among other functions, the Securities Commission (“SC”) supervises stock trading, unit trust fund- management, mergers and takeovers. Some transactions in Malaysia require the approval of, or consultation with, the SC. The SC is also empowered with investigation and prosecution powers for enforcement. The SC has also been made the reviewing authority for visa applications in the securities industry. In addition to the SC, Bursa Malaysia Securities Berhad also imposes certain rules and regulations. Although the 30% Bumiputera equity requirement has been waived by the FIC, Bursa Malaysia Securities Berhad via its rules and regulations obligates corporations wishing to be listed on the Malaysian stock exchange to allot half of their 25% public shareholding spread to Bumiputera interests. {00156577 v2} Page 3 of 5 Azmi & Associates: Article Submission to GlobalTrade.net For online publication: February 2012 (d) Energy, Oil and Gas In the upstream sub-sector of oil and gas, the exclusive right for the development of natural gas and petroleum reserves belongs to the national petroleum corporation, Petroliam Nasional Berhad (“Petronas”), which also functions as the regulator. Other corporations intending to join this sub-sector will have to do so on a joint-dedicated basis through production sharing contracts with Petronas. Downstream, the Energy Commission also plays a significant role as regulator, especially in the electricity and gas supply industries. Its regulatory scope encompasses the monitoring of tariffs and the specification of technical standards. (e) Information Technology and Telecommunications The Malaysian Communications and Multimedia Commission is the key regulator in this sector, inclusive of the postal industry. Its focus includes the prevention of monopoly, and extends beyond technical specifications, to supervision of multimedia and communications content. Foreign businesses are welcomed to apply for the MSC Malaysia status. MSC Malaysia (formerly known as the Multimedia Super Corridor) is an initiative of the Malaysian Government to develop its global information and communication technology industry. MSC Malaysia-Status corporations may enjoy financial as well as non-financial incentives including tax incentives such as 100% investment tax allowance; research & development grants; unrestricted employment of local and foreign knowledge workers; and exemption from EPU’s Guideline on the Acquisition of Properties. Enforcing Contracts: Choice of Governing Law and Jurisdiction of Court Malaysian law allows freedom of contract. Contracting parties are free to mutually agree upon which law is to govern the contract. They can also decide which country’s court is to have jurisdiction to hear disputes arising out of the contract. Nevertheless, in Malaysia, the English law doctrine of forum non conveniens has been adopted, whereby a Malaysian court may refuse jurisdiction if the court is convinced by the suing party that there is another court (whether in a foreign jurisdiction or another territory in Malaysia) that should hear the dispute in the interests of all the parties. If a foreign court has rendered judgment on a dispute against a Malaysian party, the successful foreign party may resort to the Reciprocal Enforcement of Judgments Act 1958 (“REJA”) of Malaysia, which allows Malaysian courts to enforce foreign judgments that have been registered in a Malaysian court. However, this mechanism applies only to judgments given by certain courts in Brunei Darussalam, Hong Kong, India, New Zealand, Singapore, the United Kingdom and the Republic of Sri Lanka (being the reciprocating countries under REJA). As to enforcement of arbitral awards, Malaysia is a signatory of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the 1958 New York Convention), and the Arbitration Act 2005 gives effect to the main provisions of that convention. Malaysian courts do recognise, and are empowered to enforce, awards given in foreign arbitrations. A new development that is encouraging for foreign investors is the establishment of the computerised New Commercial Courts in Malaysia, on 1 September 2009, to help clear the backlog of commercial cases. The {00156577 v2} Page 4 of 5 Azmi & Associates: Article Submission to GlobalTrade.net For online publication: February 2012 New Commercial Courts will deal with all commercial cases filed and lodged from the date of establishment, but will not cater to intellectual property and Islamic banking disputes. This is only an overview of the regulatory and operational aspects of doing business in Malaysia, giving snapshots of the points that are good to know before taking the first step. Azmi & Associates stands ready to provide the legal services to help businesses prosper. Mohd Rasheed Khan Ahmad Lutfi Abdull Mutalip Senior Counsel Partner {00156577 v2} Page 5 of 5
Posted: 20 February 2012, last updated 23 February 2012

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