International Turnkey Contracting in ASEAN: EPC-Projects in Malaysia

published on 16 March 2022 | reading time approx. 6 minutes

The importance of turnkey or EPC-projects (short for: Engineering, Procure­ment and Construction) has increased significantly in the Southeast Asia region – this also applies to Malaysia. Various factors play an important role in the realisation. In the following article, we take a closer look at tax, investment and manpower considerations in Malaysia.

• Tax Considerations »

• Investment Considerations »

• Labour law Considerations »

Tax Considerations

When is a permanent establishment (PE) generally established for on-site works? Does a double taxation agreement (DTA) between Malaysia and Germany affect this aspect?

Generally, a permanent establishment is triggered where the foreign company establishes a fixed place of busi­ness in Malaysia through which they carry, wholly or in part, their business operations. The term permanent establishment especially includes a place of management, a branch, an office, a factory, a workshop and a mine, an oil or gas well, a quarry or any other place for the extraction of natural resources.

Under the DTA, a building site, a construction, installation or assembly project only constitutes a permanent establishment if it lasts for more than nine months.

Is it a common approach in Malaysia to split EPC-contracts in on- and offshore parts to mitigate tax risks?

Yes, it is a common practice to split the EPC contracts based on the supply of goods/services onshore or offshore. This is not only a tool to mitigate tax risks, but also to address other non-tax considerations such as limiting the liability for the contractor and reducing the cost of complying with local licensing regulations.

Are there any specific taxes to be observed for EPC-contracts in Malaysia?

There is no specific tax regime for EPC contracts in Malaysia. Income Tax would be the most important tax for consideration, followed by Sales and Services Tax (depending on the type and extent of the supply of goods/services). Withholding Tax should also be considered.

Investment Considerations

Are there specific investment conditions or permits/licences required for EPC-works in Malaysia?

Yes, companies that are involved or want to carry out and complete any construction, installations, extensions, repairs, maintenance, transfers, modifications, alterations, renovations or demolitions projects in Malaysia are required to apply for a Contractor License with the Construction Industry Development Board (CIDB).

 
There are different types of CIDB Contractor Licenses depending on the company form. The different licenses have, among others, an impact on the capital requirements for companies that intend to participate in public tenders.

The different CIDB Contractor Licenses are listed below:

Local Contractor

Companies incorporated in Malaysia with at least 70 percent local equity shareholding. However, there are certain exceptions for foreign equity shareholding:

• Foreign equity must not exceed 30 percent of the equity shareholding of the company;
• Foreign equity from another ASEAN country must not exceed 51 percent of the equity shareholding of the company;
• Foreign equity under Free Trade Agreements is regulated as follows:

The Local Contractor license will expire two years after the payment of the license fee for the first approval, and the applicant may renew the license for one to three years, subject to the license renewal requirements.

Foreign Contractor

A company incorporated in Malaysia or outside Malaysia with more than 30 percent foreign (individual or corporate) equity shareholding. The licence of a Foreign Contractor will expire  two years after the completion of the project (defect liability period);

• International Contractor: A Local Contractor which is registered with the CIDB, and will or has carried out construction work outside of Malaysia. The expiration date of an International Contractor license will be the same as for the Local Contractor license.
• Joint-Venture or Consortium Contractor: A Joint Venture of two or more companies which are incorporated outside of Malaysia. The expiry date of a Joint-Venture or Consortium Contractor license will be after two years from the completion of the project (defect liability period).

Would a mere tax registration of a PE be sufficient or is a certain investment vehicle required in Malaysia?  

A mere tax registration is usually not sufficient as a foreign company which intends to carry on business in Malaysia must register under the Companies Act 2016 (“CA”). The CA defines “carrying on business in Malaysia” based on a negative list. Activities listed in this list would not constitute business carried on.

As turnkey projects are neither expressly mentioned nor implied in any of the exceptions, the foreign company that intends to provide EPC works should register with the Companies Commission of Malaysia as a Registered Foreign Branch Office or establish a subsidiary Company Limited.

Can the PE get own bank accounts and handle local currency payments as well as FOREX transactions for the project?

In general, a PE might be able to open a bank account in Malaysia due to the particular requirements of certain banks. Based on our experience, certain banks would require at least a justification for the account opening of a foreign company which is not registered with the Companies Commission of Malaysia, as well as one Malaysian citizen as director who is also residing in Malaysia.

Labour Law Considerations

Which immigration requirements commonly apply for foreign staff temporarily deployed to work on-site in Malaysia?

There are various types of employment passes available for foreign employees to work in Malaysia. For short term employment, foreign employees may apply for the Professional Visit Pass (“PVP”) if they meet a satisfying number of requirements.

PVPs are usually issued to foreign employees with accepted professional qualifications or specialist skills. Companies intending to send a foreign employee for training purposes or expertise transfer are encouraged to use the PVP.

The PVP is suitable for a short term period, not exceeding 12 months, of working in Malaysia. The foreign employee is required to be outside of Malaysia at the time of application. The PVP involves some restrictions, e.g. holders of a PVP are not entitled to apply for a dependent pass for their family members, the foreign employee may only apply for the PVP once in their lifetime. The position has to be a non-paid one, meaning the foreign employee is remunerated in their home country. The foreign employee is only permitted to work for the company named in the PVP.

Can work permits, if required, be applied for by an overseas company or the foreign individuals directly or is the involvement of a local entity required?

Employment passes must be applied for through a local entity. The local entity would be required to be regis­tered with the Expatriate Service Division (ESD) of the Immigration Department of Malaysia. For the local entity to be registered with the ESD, the following criteria must be satisfied:

1. The local company must be registered at one of the following:
   • The Companies Commission of Malaysia (SSM) under Companies Act 1965; OR
   • The Registry of Societies Malaysia (ROS) under the Organization Act 1966; or
   • Firms incorporated under specific acts, e.g. Law firms and Accounting firms; or
   • Organizations supported by Ministries/Government Agencies; or
   • International organizations certified by the Ministry of Foreign Affairs.

2. The local entity must satisfy the paid-up capital requirements which vary based on the equity holding.

Are there taxes or social security contributions applicable for foreign staff temporarily working on-site in Malaysia? Under which conditions are foreigners required to pay income tax?

Individuals, whether resident or non-resident (for tax purposes), are taxed on income accruing in or derived from Malaysia. Individuals are generally considered tax resident if they are in Malaysia for 182 days or more in a calendar year.

Employees are taxed on employment income for work performed in Malaysia, regardless where the payment originates. Employment income includes salary, allowances, perquisites, benefits-in-kind, tax reimbursements, and rent-free accommodation provided by the employer.

In Malaysia, the employing company needs to deduct monthly tax payments from each employees remunera­tion, when the employee is working and receiving income from Malaysia. The tax payments are based on an estimated amount calculated from the monthly remuneration received, benefits provided and any tax reliefs or exemptions.

Furthermore, social security would need to be paid, as long as the foreign employee is employed and working in Malaysia. Foreign individuals can also opt to contribute in the Employee Provident Fund and apply for with­drawal once they are leaving Malaysia. This fund works similar to a pension fund for individuals in Malaysia.