Establishing a Branch versus a Subsidiary Company in Malaysia by a Foreign Company
Updated: Jul 24, 2022
Registration of branch office or subsidiary company in Malaysia l What are the most common forms of business entity used in Malaysia?
Setting up a business
A foreign company may conduct its business in Malaysia by either:
(a) incorporating a subsidiary (an incorporated company limited by shares); or
(b) registering a branch.
The choice of business vehicle depends on the nature of the business and investment made.
Among foreign investors, a subsidiary in the form of a company limited by shares is the most popular. The foreign company is the shareholder of the incorporated subsidiary company. Its liability is limited to the unpaid portion of the nominal value of the shares held, safeguarding the interests of all parties (including the foreign parent company).
A branch is viewed as an extension of the foreign company. An action against the branch is an action against the foreign company. The rules that govern the organisation and structure of a branch are taken from the country in which the foreign company originates.
Branch of a foreign company
In Malaysia, both a branch and a subsidiary are generally subject to the same tax filing and payment obligations. Branches generally are taxed in the same way as subsidiaries. Tax rates on branch profits of a company are the same as corporate income tax rates.
Branches of foreign companies in Malaysia generally are treated as non-residents of Malaysia for tax purposes. As part of the government’s efforts to encourage foreign companies to incorporate subsidiaries, certain tax benefits are available to resident companies but not to branches. Although branch operations are subject to income taxes similar to those levied on resident companies, branches generally are not eligible for tax incentives and must supply proof of income not derived from Malaysia. If a branch does decide to incorporate, it may not carry forward its existing business losses on incorporation.
As branches of foreign companies in Malaysia generally are treated as non-residents unless it can be established that their management and control are exercised in Malaysia, tax on their income from payments under a project contract for work rendered in Malaysia may be withheld by the payer at a rate of 10% (on account of the tax payable by the non-resident contractor) plus 3% (on account of the tax payable by non-resident contractor’s employees), which is creditable against the income tax payable. Non-residents also generally are not eligible for investment incentives and exemptions.
Foreign companies (similar to Malaysian companies) are taxed on income accruing in or derived from Malaysia. If the foreign company is trading within Malaysia, the business profit will be taxable, and if trading with Malaysia, the profit will be non-taxable.
If a double taxation agreement with the home country of the foreign company is in force, the taxation of business profits derived by the foreign company is limited to the profits that are attributable to its permanent establishment situation in Malaysia.
With respect to income such as royalties, interest or service fees that is not attributable to a business carried on in Malaysia, the tax liability of the non-resident will be settled by way of withholding tax deducted by the paying entity. For example, a withholding tax rate of 10% is imposed on amounts received by a non-resident person is imposed on amounts received by a non-resident person of any advice, assistance or services rendered in Malaysia (not limited to services of technical or management in nature), or the provision of services relating to the installation or operation of any apparatus or plant.
For non-resident contractors that perform services in Malaysia for an extended duration of time, a withholding tax of 13% may apply.
Malaysia does not impose withholding tax on the remittance of branch profits. Therefore, the profits of a branch may be freely repatriated back to its foreign head office without attracting further tax liabilities in Malaysia.
However, where profits are repatriated in the form of (among other things) royalties, interest or payments for management fees, Malaysian withholding tax may apply.
If you would like to know more, please contact Bestar.