Malaysia lies in the heart of South East Asia, close to the equator. It occupies two distinct regions - Peninsular West Malaysia and East Malaysia, covering areas of 131,587 and 198,847 square km respectively.

Malaysia has a population of approximately 23.7 million with a diversity of races and colourful cultures. The population is made up of Malays (58%), Chinese (27%), Indians (8%) and others (7%) including indigenous people and Eurasians. Malaysia has a very young population with about 96% below 65 years of age. Literacy rate of the population above 15 years of age is 83.5%.

Bahasa Malaysia or Malay language is the national and official language of the country. English is widely used in commerce and industry.

Islam is the official religion but freedom of worship for other religious groups is guaranteed by the constitution.

Malaysia welcomes foreign investments, particularly in the manufacturing sector, and does not discriminate against investors from any country. To encourage foreign investments, Malaysia offers many incentives and other advantages to foreign investors and has entered into double taxation agreements with more than 40 countries. Malaysia has investment guarantee agreements with most major industrialised countries. These agreements generally guarantee that, except for public purposes, Malaysia will not expropriate or nationalise property without prompt and adequate compensation.

Tax incentives are provided under the Promotion of Investment Act 1986 and the Income Tax Act 1967. The main incentives are as follows :-

Pioneer status

Investment tax allowance

Reinvestment allowance

Industrial adjustment allowance

Double deduction of expenses (given in respect of certain expenses if the conditions imposed are satisfied)

Approved agricultural projects incentives

Research and development incentives

Industrial building allowance

In bound tour operators incentives

Incentive for approved overseas investments

Incentives for overseas construction projects

Operational Headquarters Incentives

Labuan International Offshore Finance Centre

The Federal Territory of Labuan was launched as an International Offshore Financial Centre (IOFC) in 1990 to further enhance the attractiveness of Malaysia as an investment centre. The IOFC will complement the onshore financial system in Kuala Lumpur.

Activities which are promoted and accorded preferential tax treatment in Labuan include the following :

Offshore banking operations

Trust and fund management

Offshore insurance and offshore insurance related business

Offshore investment holding companies

For an individual who is not a Malaysian citizen exercising an employment in Labuan with an offshore company in a managerial capacity, 50% of his income from such employment will be exempted from tax up to the year of assessment 2004.

Malaysia has a very liberal exchange control system which enables business to deal freely in foreign exchange with very little or no restriction except with Israel, Serbia and Mortenegro against which special restrictions apply.

Payments within Malaysia must be made in Ringgit (RM), but payments outside Malaysia may be made in any foreign currency except in the currency of Israel, Serbia and Montenegro.

Non-residents are free to make direct and portfolio investment in Malaysia. They may make remittances abroad, including the repatriation of capital profits and dividends, fees, royalties and proceeds from the sale of assets in Malaysia, subject only to the completion of a simple statistical form for remittances of more than RM10,000 or its equivalent in foreign currency in each case.

Non-resident controlled companies (NRCCs) may borrow up to RM 10 million excluding short term trade financing, forward exchange contracts and all types of guarantees, from all sources in Malaysia provided that not less than 60% of such borrowings are made from a domestic source. Permission from the Controller of Foreign Exchange is required for borrowings in excess of RM 10 million and such approval will be given based on the merits of the NRCCs.

The restriction of NRCCs in respect of domestic borrowings is to ensure that it brings in a relatively significant amount of funds of its own to finance its project in Malaysia as a long-term proposition and not merely as a venture for quick profits without any semblance of permanence.

Permission is given readily for all foreign loans raised on reasonable terms to finance productive activity in Malaysia, especially projects which generate sufficient income in foreign exchange to service the foreign loan.

Bank Negara Malaysia is the central bank and is responsible for supervising the banking system to promote monetary stability and to develop a sound financial structure. It also issues the Malaysian currency, acts as banker and financial adviser to the government, administers foreign exchange control regulations and is the lender of last resort to the banking system.

In Malaysia, a business may be carried on in any one of the following forms:-

by an individual operating a sole proprietorship
(above option not available to foreign investors);

by two or more (but not more than twenty) persons in partnership
(above also not available to foreigners unless in very specific professional capacity e.g solicitors etc.)

by a locally incorporated company or by a foreign company registered under the provisions of the Companies Act 1965

All sole proprietorships and partnerships must be registered with the Companies Commission of Malaysia. Only Malaysians who are residents in Malaysia or foreigners who are permanent residents in Malaysia may register a sole proprietorship or a partnership.

Companies in Malaysia are governed by the Companies Act, which provides for three types of companies:

a company limited by shares

a company limited by guarantee

an unlimited company

Every foreign company shall, within one month after it establishes a place of business or commences to carry on business within Malaysia, lodge with the Companies Commission of Malaysia (CCM) for registration, notice of the situation of its registered office in Malaysia in the prescribed form.

The appointed local agent of the foreign company is answerable for the performance of all acts required to be done by the foreign company under the Companies Act. Any change in agents must be reported to the CCM.

A foreign company may also apply to the Ministry of International Trade and Industry (MITI) to set up a representative office. A representative office has no legal status nor can it be engaged in any profit-making or trading activities. It serves only as a promotional and liaison office of the foreign company and its activities are restricted to promotion, market research, liaison and co-ordination of activities on behalf of its head office.

Directors must be natural persons. A company must have at least two directors whose principal or place of residence is in Malaysia. The number of directors is not limited by statute, but companies usually specify a maximum number of directors in their Articles of Association. Directors' meetings may be held in or outside Malaysia. The duties and responsibility of directors are set out in the Companies Act and the Articles of Association. An undischarged bankrupt cannot act as a director.

Under the Companies Act, a company must appoint a company secretary who must be a natural person and a member of a professional body approved under the Companies Act, or a person licensed by CCM.

A company must have a registered office in Malaysia and keep at that office all books, registers and documents required to be kept by the Companies Act.

Every company must appoint an approved auditor or a firm of approved auditors to report to the shareholders on the accounts of the Company.

Every company must hold an annual general meeting in each calendar year, not more than fifteen months after the previous annual general meeting. A newly incorporated company must hold its first annual general meeting within eighteen months of its date of incorporation.

The Company must lodge an annual return with the CCM within one month after the date of every annual general meeting. Unless the company is an exempt private company, the audited accounts and directors' report must be lodged with the annual return.

Accounts of companies incorporated in Malaysia are required to be kept in a manner that will sufficiently explain its transactions and faciliate audit. Under the Companies Act, transactions must be recorded within sixty days of completion and be kept in Malaysia. The records must be retained for at least seven years. In respect of operations outside Malaysia, records relating to operations outside Malaysia, may be kept by the Company at a place outside Malaysia provided that all such statements sent to and returns with respect to the business dealt with are sent to and kept at a place in Malaysia.

Companies are required to present audited financial statements to shareholders annually. There is no specific date of which the financial statements must be drawn, but many companies choose 31st December to coincide with the tax year.

Where a company is a subsidiary of another corporation incorporated in Malaysia, its accounting year end must be co-terminous with that of the holding company.

Public companies listed in the Kuala Lumpur Stock Exchange (KLSE) have additional disclosure requirements in the annual report over and above those required by the Companies Act.

Financial reporting in Malaysia is governed by both public sector legislation and private sector regulatory bodies.

Public sector legislation principally consists of statutes promulgated by the Parliament. Compliance with the provisions of these statutes is legally enforceable. The statutes that have a significant impact on financial reporting in Malaysia are as follows :-

the Companies Act, 1965,

the Income Tax Act, 1967,

the Securities Commission Act, 1993, and

the Financial Reporting Act, 1997

Private sector regulatory bodies comprise professional bodies, statutory bodies and authoritative bodies. These private sector bodies do not have legal power to enforce compliance. However, professional sanctions and public reprimand are often strong deterrents against deviations from accepted practices. The principal private sources of regulation on financial reporting in Malaysia are:

the Kuala Lumpur Stock Exchange (KLSE) Listing Requirements, and

the accounting pronouncements issued by the Malaysian Institute of Accountants (MIA).

The extent of influence of each of the regulatory bodies and Acts depends on the forms or types of companies:

The requirements of the Companies Act are applicable only to companies incorporated under the Companies Act

The Requirements of the KLSE Listing Manual are applicable only to companies listed on the KLSE

The Approved Accounting Standards of the Financial Reporting Act are applicable to all reporting entities, regardless of whether they are incorporated or listed

The requirements of the Income Tax are applicable to every business organisation and individual with assessable income

The Financial Reporting Act, 1997 provides that the Accounting Pronouncements issued by the MASB and the Approved Accounting Standards are to be regarded as opinions on best practice in financial reporting in Malaysia. These pronouncements are modelled primarily on Auditing Guidelines issued by the International Federation of Accountants.

A capital gain on disposal of a chargeable asset is subject to Real Property Gain Tax. Chargeable assets include the following:

Real properties situated in Malaysia

Shares held in a real property company (RPC)

A RPC refers to a controlled company which owns real property or shares or both, the market value of which is more than 75% of the value of its tangible assets.

A "controlled company" means a company having not more than fifty members and controlled by not more than five persons.

The rates of Real Property Gains Tax range from 5% to 30% depending on the period during which the chargeable assets have been held before disposal.

Stamp duty is levied on documents as provided under the Stamp Act 1949.

Indirect taxes include:

Custom duties on import and export of goods

Sales and service taxes on goods and services

Estate duty in Malaysia was abolished since 1st November, 1991.

Malaysia adopts the imputation system of taxing corporate income. The income tax paid by a company on its profits is utilised to frank dividends paid to shareholders.

Income accruing in or derived from Malaysia is subject to income tax.

A company is resident in Malaysia for tax purpose if its management and control are exercised in Malaysia. Generally, a company is considered resident in Malaysia if the meetings of its board of directors are held in Malaysia, even if the companies are not incorporated in Malaysia.

The rate of income tax of companies whether resident or not is at 28%. For companies carrying on petroleum operations, the rate of income tax is 38%.

A foreign branch is also taxed at the rate of 28% on its income derived from Malaysia

For tax purpose, an individual is treated as a resident if he is physically present in Malaysia in a particular calendar year for 182 days or more. However, if his period of stay is less, he may still be resident if certain conditions are satisfied.

For residents, the rate of tax is levied on a graduated scale on the chargeable income after deduction of reliefs, with the maximum rate being 27%. Foreign income received in Malaysia by a resident individual is also subject to Malaysian income tax.

For non-residents, the rate of tax is 27% on the gross income. No reliefs are available to a non-resident.

For employed individuals, payments of tax are made from monthly salary deductions.

A wife's income from all sources are separately assessed from that of her husband unless she elects for her income to be combined with that of her husband.

Income from an employment exercised in Malaysia for a period not exceeding sixty days in a calendar year is tax exempt provided the employee is not resident in Malaysia for tax purposes for the basis year concerned. This provision does not apply to professional entertainers and non-resident directors.

Withholding tax is required to be withheld and remitted to the Inland Revenue within thirty days after payment or crediting payment to a non-resident person at the rates shown as follows :-

Classification	Rate
Interest	15%
Royalties	10%
Remuneration of a public entertainer	15%
Special classes of income under Section 4A of the Malaysian Income Tax Act 1967	10%
Non-resident contractor, consultant or professional in respect of the service portion of contract payment. This however is not a final tax but an advance payment to the Revenue until his final tax is computed	20%

International tax agreements have been entered into with the following countries: Albania, Argentina, Australia, Austria, Bangladesh, Bahrain, Belgium, Canada, China, Czech Republic, Denmark, Egypt, Finland, Fiji, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Jordan, Korea, Mauritius, Malta, Mongolia, Myanmar, Namibia, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Romania, Rusia, Saudia Arabia, Papua New Guinea, Singapore, Sri Lanka, Sudan, Sweden, Switzerland, Thailand, Turkey, United Arab Emirates, United Kingdom, *United States of America, Uzbekistan, Vietnam, Yugoslavia, Zimbabwe.

* (on shipping and airline profits only).

Malaysia's important resource lies in its youthful labour force which is diligent, disciplined, educated and readily trainable.

Though labour cost in Malaysia is low relative to the industrialised countries, labour productivity and quality standards are high. There is no national minimum wage law applicable to the manufacturing sector in Malaysia, Basic wage rates vary according to locations and industrial sectors.

It is the government's policy to promote a cordial employer-employee relationship and industrial peace based on social justice, equity and good conscience so as to bring about a generally contented and productive labour force.

It is the government's policy to see that Malaysians are eventually trained and employed at all levels of employment. Notwithstanding this, foreign companies are allowed to bring the required personnel in areas where there is a shortage of trained Malaysians to do jobs. In addition to this, foreign companies are also allowed certain key posts to be permanently filled by foreigners.

Companies must fulfill certain conditions set by the Malaysian Government for the employment of expatriate staff. For additional information on these requirements, please see Setting Up a Company in Malaysia.

Companies should make every effort to train more Malaysians so that the employment pattern at all levels of the organisation will reflect the multi-racial composition of the country.