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