Attitude toward Foreign Direct Investment
Malaysia has one of the world’s most trade-dependent economies with trade reaching 161 percent of annual GDP according to the World Trade Organization. The Malaysian government values foreign investment as a driver of continued national economic development, but is hampered by restrictions in some sectors and an at-times burdensome regulatory regime. However, the government continues to liberalize and in some cases remove investment restrictions.
In 2009, Malaysia removed its former Foreign Investment Committee (FIC) investment guidelines, enabling transactions for acquisitions of interests, mergers, and takeovers of local companies by domestic or foreign parties without FIC approval. While the FIC itself still exists, it now only reviews the purchase by foreigners of commercial properties valued greater than at RM 20 million (approximately USD 6.5 million) from the bumiputera (ethnic Malays and other indigenous ethnicities in Malaysia).
Since 2009, the government has gradually liberalized foreign participation in the services sector to attract more foreign investment. Following removal of certain restrictions on foreign participation in industries ranging from computer-related consultancies, tourism, and freight transportation, the government in 2011 began to allow 100 percent foreign ownership across the following sectors: healthcare, retail, education as well as professional, environmental, and courier services. Some limits on foreign equity ownership remain in place across in telecommunications, financial services, and transportation.
Foreign investments in services, whether in sectors with no foreign equity limits or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors. A key function of this review and approval process is to determine whether proposed investments meet the government's qualifications for the various incentives in place to promote economic development goals. Nevertheless, the Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of specific investment projects. Investors in industries targeted by the Malaysian government often can negotiate favorable terms with ministries, or other bodies, regulating the specific industry. This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis. Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from the various regulatory bodies and therefore can face greater bureaucratic obstacles.
Other Investment Policy Reviews
In 2013, Organization for Economic Cooperation and Development (OECD) launched Malaysia’s most recent Investment Policy Review. Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia's Investment Development Authority (MIDA), and continued corporate governance reforms.
Malaysia also conducted a WTO Trade Policy Review in 2014, which incorporated a general overview of the country's investment policies. The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors. Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. For example, the Malaysian Productivity Commission had simplified licensing requirements at the federal, state, and local levels, thus reducing business compliance costs. Construction permit procedures were also streamlined, as were processing times for construction contracts. The 2013 National Policy on the Development and Implementation of Regulations has increased the transparency of government rulemaking and made the process more inclusive of the private sector and the general public.
Laws/Regulations on Foreign Direct Investment
The Government of Malaysia established the Malaysia Investment Development Authority (MIDA) to attract foreign investment and to serve as a focal point for legal and regulatory questions. Organized as part of the Ministry of International Trade and Industry (MITI), MIDA serves as a guide to foreign investors interested in the manufacturing sector and in many services sectors. Regional bodies providing support to investors include: Invest Kuala Lumpur, Invest Penang, Koridor Utara Malaysia (Malaysia's Northern Corridor), the East Coast Economic Region Development Council, the Iskandar Regional Development Authority (IRDA), the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation.
As noted, the Ministerial Functions Act authorizes government ministries to oversee investments under their jurisdiction. Prospective investors in the services sector will need to follow requirements set by the relevant Malaysian government ministry or agency over the sector in question.
Post is not aware of the Malaysian government's interference in judicial proceedings involving foreign investors.
The principal law governing foreign investors in the Malaysian economy is the Companies Act of 1965 (CA). Incorporation requirements under the CA are relatively simple and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (i.e., company charter); 2) a Declaration of Compliance (i.e., compliance with provisions of the Companies Act); and 3) a Statutory Declaration (i.e., no bankruptcies, no convictions). The registration and business establishment process takes less than a week to complete, according to the World Bank’s 2016 Doing Business Rankings.
Beyond these requirements, foreign investors must obtain licenses. Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM 2.5 million (approximately USD 641,000) or employs at least 75 full-time staff. The Malaysian government's guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM 55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify. Manufacturing investors seeking to expand or diversify their operations will need to apply through MIDA.
Manufacturing investors whose companies have annual revenue below RM 50 million (approximately USD 12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives. Companies in the services or other sectors that have revenue below RM 20 million (approximately USD 5.1 million) or fewer than 75 full-time employees will meet the SME definition.
http://www.mida.gov.my/home/getting-started/posts/- The Malaysian Investment Development Authority's starting point for prospective foreign investors. Select the "General Guidelines and Facilities" tab.
http://www.ssm.com.my/en - The Malaysian Companies Commission homepage for registering sole proprietorships, partnerships, and companies.
http://www.mscmalaysia.my/ - The Multimedia Development Corporation (MDeC) is responsible for governing the Multimedia Super Corridor (MSC), the initiative to attract investment in information and communications technologies.
http://www.skmm.gov.my/Sectors/Broadcasting.aspx - The Malaysian Communications and Multimedia Commission's page for requirements in the communications sector.
http://www.moh.gov.my/english.php/pages/view/160 - The Ministry of Health's FAQs on liberalization of medical services. See Question 14: “Can foreigners invest in, and operate, healthcare facilities in Malaysia?”
The Malaysian Government has codified the incentives available for investments in qualifying projects in target sectors and regions. Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.
The lists of application procedures and incentives available to investors in these sectors and regions can be found at: http://www.mida.gov.my/home/invest-in-malaysia/posts/
Limits on Foreign Control and Right to Private Ownership and Establishment
The legal framework for foreign investment in Malaysia grants foreigners the right to establish businesses and hold equity stakes across all parts of the economy. However, despite the progress of reforms to open more of the economy to a greater share of foreign investment, limits on foreign ownership remain in place across many sectors.
Malaysia began allowing 100 percent foreign equity participation in Applications Service Providers (ASP) in April 2012. However, for Network Facilities Providers (NFP) and Network Service Provider (NSP) licenses, a limit of 70 percent foreign participation remains in effect. In certain instances, Malaysia has allowed a greater share of foreign ownership, but the manner in which such exceptions are administered is non-transparent. Restrictions are still in force on foreign ownership allowed in Telekom Malaysia. The limitation on the aggregate foreign share is 30 percent or 5 percent for individual investors.
Oil and Gas
Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign participation tends to take the form of production sharing contracts (PSCs). PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders. Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake.. PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.
Malaysia's ten-year Financial Sector Blueprint envisages further opening to foreign institutions and investors but does not contain specific market-opening commitments or timelines. For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent. However, the central bank, Bank Negara Malaysia (BNM), would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry. The latest Blueprint, 2011-2020, helped to codify the case-by-case approach. Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia.” Prudential criteria include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country. In determining the “best interests of Malaysia,” BNM will consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities.
BNM currently allows foreign banks to open up to four new branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas). The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank. BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back office activities in Malaysia.
In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market. However, the Malaysian Government remains publicly committed to continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs. The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects. As part of the Office of the Prime Minister, UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.
Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity's equity. The National Development Policy confers preferential treatment to the bumiputera, which are entitled to at least 30 percent of the privatized entity's equity.
Privatization is done through public bidding. However, the lack of transparency has led to criticism that the government's decisions tend to favor individuals and businesses with close ties to high-ranking officials.
Screening of FDI
The Malaysian government has authority to review and approve all foreign and domestic investments. The documents mentioned in the section of this Investment Climate Statement on Law/Regulations of Foreign Direct Investment, as well as the investor's business plans, financial statements, and staffing projections are subject to the government's review. Based on the review, the government decides whether or not to grant the licenses required for the business to engage in its intended activity, whether in the provision of goods or services. The review process also serves as a means for the government to assess whether the proposed investment meets the criteria for the various incentives available in target sectors and regions. Although U.S. businesses have occasionally raised concerns about delays in the government's review process, none has characterized the process as a barrier.
In April 2010, the parliament of Malaysia approved two bills, the Competition Commission Act 2010 and the Competition Act 2010. The Acts took effect in January 2012. The Competition Act prohibits cartels and abuses of a dominant market position, but does not create any pre-transaction review of mergers or acquisitions. Violations are punishable by fines and imprisonment. Malaysia's Competition Commission has responsibility for determining whether a company's conduct constitutes an abuse of dominant market position or otherwise distorts or restricts competition. The Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, the Prime Minister’s Economic Planning Unit and representatives from academia and the private sector.
In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions. In the largest case to date, the Commission imposed a fine of RM 10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market. The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.