Foreign Company Setups in Malaysia
In this post, we look at the various types of foreign company setups available in Malaysia and what is best applicable to you as a foreign registered company/owner/ investor.
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What is a Foreign Company?
Defined by the Companies Act 2016, a foreign company is:
(1) A company, corporation, society, association or other body incorporated outside Malaysia;
(2) An unincorporated society, association or other body which under the law of its place of origin may sue or be sued, or hold property in the name of the secretary or other officer of the body or association duly appointed for that purpose and which does not have its head office or principal office of business in Malaysia.
What are the foreign company setups in Malaysia?
Subsidiary vs Branch Office
If you are a foreign business owner who is planning on expanding their business to Malaysia, you would need to know what type of company would be applicable. Typically, you could choose either to register a new company in Malaysia (register Sdn Bhd) or open a branch office.
Opening up a branch and registering a subsidiary company are two good options for foreign companies that want to establish their presence in the Malaysian market in 2021. Both options allow commercial activities to immediately commence once officially registered.
Characteristics of a Branch vs a Subsidiary
A branch is dependent on the parent company abroad; will report to it and will perform the same business activities whereas, a subsidiary is independent of the parent company abroad; acts as a separate legal entity.
A branch is not a separate legal structure in Malaysia but it has to be registered, whereas a subsidiary is incorporated as a new legal structure in Malaysia; and has to follow the usual steps for company formation.
The accounting and management of a branch will be managed either in connection with the foreign company or separately, whereas the management, reporting and accounting are completely separate from the parent company.
*The parent company abroad has a complete ownership interest in its Malaysian branch, whereas if established as a subsidiary, the foreign company will have limited ownership interest in the Malaysian subsidiary (or to the extent that its ownership interest)
The branch is simply an extension of the parent company abroad. It must have the same name and perform the same business activities and the parent company is completely liable for the debts and obligations of its Malaysian branch. A branch office must officially be incorporated with Suruhanjaya Syarikat Malaysia (SSM) before commencing business operations within Malaysia. A Branch Office also requires the appointment of at least one agent who is ordinarily resident. It MUST have the same name as its’ parent entity. The control and management must be vested with the parent company, a branch office is considered a non-resident entity in Malaysia, and therefore will not be regarded as resident in Malaysia for tax purposes and will not be eligible for any tax exemptions and incentives available to local companies. Most banks in Malaysia, as well as other financial institutions, will operate via a branch that will serve as a local agency for the larger bank abroad.
A subsidiary company is a separate legal entity from a foreign company and it can be incorporated as a local Malaysian company (Sdn Bhd). This means that the subsidiary is not dependent on its foreign counterpart and can engage in its own name in business activities in Malaysia. This company will need to observe all of the local registration, taxation, and reporting requirements. The subsidiary will have a Board of Directors in Malaysia and the individuals who will serve this role can be appointed by the parent company abroad.
What is a Regional Office / Representative Office?
If you intend to conduct more surveys or to do research to assess Malaysia’s business environment or develop more business relations with local industries, you may choose to first set up a regional/representative office before proceeding to open a branch.
Establishing a Regional/Representative Office allows a foreign entity to further understand the prospects of doing business in Malaysia before channelling more resources to invest in a more permanent structure.
Such type of office is prohibited from undertaking any commercial activities. It only represents the foreign head office in performing certain designated functions, which include gathering information on investment opportunities to develop trade relations, promoting the export of Malaysian goods and products and conducting any relevant R&D activities. Its operation is completely funded through sources outside Malaysia.
A Regional/Representative Office is not incorporated under the Companies Act. Instead, the application to set up one is subject to approval by the Malaysian Investment Development Authority (MIDA), and its eligibility criteria include a minimum of RM300,000 per annum for operational expenditure. The initially approved duration is usually two years, after which any extension will be subject to submitted justifications and further assessment by the Malaysian authority.