When starting or expanding a business, there are many things to consider. One important decision is whether to manufacture products in-house or outsource production.
If you decide to manufacture products, you will need to apply for and receive a manufacturing license from the government.
What is a manufacturing license?
A manufacturing license is a legal requirement for a company to engage in manufacturing activities in Malaysia, as stipulated by the Industrial Coordination Act (ICA) 1975.
Upon obtaining a manufacturing license, the entrepreneur must meet one of the following criteria.
They must have either a paid-up capital/shareholder’s fund equal to or greater than RM2.5 million or a workforce of at least 75 people.
If these criteria aren't met, you can request an exemption by writing to the relevant authority. The manufacturing license is valid for a period of five years and must be renewed thereafter.
The Industrial Co-ordination Act 1975 (ICA) Guidelines
The Industrial Coordination Act of 1975 (ICA) governs Malaysia's industrial sector.
Companies that are or plan to be active in the manufacturing business must comply with several regulations mandated by the Industrial Coordination Act of 1975.
The compliance criteria are implemented to make it easier for the appropriate authorities to regulate the manufacturing sector effectively.
Additionally, it ensures that businesses only produce goods supporting a country's social and economic goals.
Further, it promotes the industrial sector's orderly growth and minimises practices like managing hazardous waste, pollution, and other environmental challenges that might damage society.
The ICA defines manufacturing activity as creating, modifying, mixing, ornamenting, completing, or otherwise changing any product or substance to use, sell, transport, deliver, or dispose of.
Parts assembly and ship repair are also considered manufacturing operations, although those connected to retail or wholesale trade are not.
The production and processing of raw natural rubber of all types, including latex, skim, sheets, scrap, technically-specified rubbers, non-standard and modified rubber, are exempt from the ICA.
This also applies to any other unvulcanised form of natural rubber prepared by any patented or technically specified procedure. Additionally, the milling of paddy into rice is also exempt.
What are the requirements for obtaining a manufacturing license?
To secure a manufacturing license in Malaysia, businesses must meet strict requirements.
These include providing detailed financial and operational information, aligning with national goals, and fulfilling criteria for capital investment and employment.
Regulatory Authority
Malaysia's international trade industry competitiveness is promoted and strategically planned for by the Ministry of International Trade and Industry (MITI).
The Malaysian Investment Development Authority (MIDA) is the primary organisation responsible for supervising, advertising, and coordinating the growth of the manufacturing sector in the nation.
It operates under the authority of MITI.
MIDA is entrusted with assessing applications for various licences, including manufacturing ones, and ensuring that all applicable laws, rules, and regulations are followed.
The Industrial Coordination Act of 1975 outlines the conditions to be met to engage in any manufacturing activity.
According to the Industrial Coordination Act 1975, anybody wishing to engage in industrial operations in Malaysia must apply for a licence.
Requirements
The Guidelines from MIDA define “shareholders’ money” and “full-time paid workers” as follows:
- “Shareholders’ funds” are the aggregate amount of a company’s paid-up capital, reserves, balance of share premium account and balance of profit and loss appropriation account, where:
- Paid-up capital shall be in respect of preference shares and ordinary shares and not include any amount in respect of bonus shares to the extent they were issued out of capital reserve created by the revaluation of fixed assets.
- Reserves shall be reserves other than any capital reserve created by revaluation of fixed assets and provisions for depreciation, renewals or replacements and diminution in value of assets.
- “Full-time paid employees” as all persons usually working in the establishment for at least six hours a day and at least 20 days a month for 12 months during the year and who receive a salary.
In addition to the Industrial Co-ordination Act 1975, MIDA has introduced the following criteria:
- Companies with shareholders’ funds of RM2,500,000 and above or engaging 75 or more full-time paid employees;
- Projects must have Capital Investment Per Employee (CIPE) of at least RM140,000.00;
- The total full-time workforce of the company must comprise at least 80% Malaysians. Employment of foreign workers, including outsourced workers, is subjected to current policies;
- The total number of managerial, technical and supervisory levels (MTS) staff with a degree/diploma/certificate is at least 25% of the company’s full-time employment or having a product’s value-added of at least 40%; and
- The project must be consistent with the national economic and social objectives and promote the orderly development of manufacturing activities in Malaysia.
Exemption from Manufacturing License
Companies under the Industrial Coordination (Exemption) (Amendment) Order of 1986 that do not meet the mentioned requirements can apply to MIDA for a confirmation letter.
This is done by submitting an ICA 10 form, which removes the need for manufacturing licence approval. The ICA 10 form applies to businesses involved in manufacturing.
However, it is only applicable to those that do not meet the criteria of having shareholders' funds exceeding RM2,500,000 or 75 or more full-time workers.
The function of the Exemption letter is the same as the Manufacturing License. Document needed for the application of Manufacturing License / Exemption Letter
- Valid Business License from the Local Authority (Majlis Perbandaran)
- SSM Company Profile
- Latest Audited Report / Management Account
- Company Profile
- List of Machinery and Function
- List of Raw Material, Quantity and Name of Supplier
- List of Products, Quantity and Name of Customer
- The list of Manpower that divided into Management, Technical, Clerical, Admin and Factory Worker
- Factory Layout Plan
How to apply for a manufacturing license in Malaysia?
A manufacturing license is required for any business that wishes to produce goods in Malaysia, so it's essential to understand the process of how to apply for one.
This section will provide guidance on the process of applying for and obtaining a manufacturing license in Malaysia.
Applications
Anyone planning to engage in manufacturing must apply for a manufacturing licence.
A single application may be made under Section 4 of the Industrial Coordination Act of 1975 for one or more items made at one or more manufacturing locations.
However, a separate licence must be granted for each manufacturing location.
The proposal will only be approved if it supports the orderly development of manufacturing operations in Malaysia and is compatible with the nation's economic and social objectives.
The applicant is responsible for ensuring that any data provided in support of the application is true, correct, and accurate.
A manufacturing licence application filed through the conventional track will usually require four weeks to be approved by MIDA.
However, an application for the same submitted using MIDA e-Manufacturing Licence or e-ML will typically take two days.
MIDA e-Manufacturing Licence (e-ML)
The MIDA e-Manufacturing Licence system simplifies applying for manufacturing licences. Companies can apply online for:
- New Manufacturing Licences
- Expansion or Diversification Projects: For manufacturers growing or diversifying operations.
- Confirmation Letters: For businesses exempt from licences.
This system makes applications faster and easier to manage.
Interim Approval Letter
Before issuing the manufacturing licence, MIDA issues a letter of temporary permission. The interim permission letter outlines the paperwork submitted to MIDA for issuing the manufacturing licence.
According to MIDA's Client Charter, the applicant will get the interim permission letter four weeks after providing all necessary information.
When sent, the applicant must give MIDA the needed paperwork listed in the interim approval letter, along with the interim approval letter, for MIDA to issue the manufacturing licence certificate.
Price for License
An annual license fee of RM2,400.00 is required. The license, issued on JKDM Form No.3, becomes effective from the first day of the month. Renewal is necessary every one or two years.
To avoid any interruption in authorisation, it is important to submit a renewal application one month prior to the expiration of the current license.
Benefits of Having a Manufacturing License in Malaysia
A manufacturing licence entitles the owner to several incentives and advantages in Malaysia.
In addition to Reinvestment Allowance and other perks, Pioneer Status and Investment Tax Allowance are the main tax incentives for businesses operating in the manufacturing industry.
Pioneer Status
A manufacturing business that receives Pioneer Status benefits from a five-year temporary exemption from paying income tax.
With the exemption period starting on its production day, when its output level exceeds 30% of its capacity, it is taxed on 30% of its statutory revenue.
Unused capital allowances from the pioneer era may be carried forward and subtracted from the company's post-pioneer revenue.
For seven consecutive years, accumulated losses from the pioneer era may be carried forward and subtracted from the company's post-pioneer revenue.
A Tax Exemption from 70% to 100% of Statutory Income For 5 to 10 Years is available to companies with "Pioneer Status".
Depending on the kinds of promoted products/activities, a company that receives Pioneer Status may benefit from varying levels of tax exemption.
Companies that engage in an elevated activity or create a heightened good may qualify for either Pioneer Status or an Investment Tax Allowance.
This applies regardless of whether they operate in the manufacturing, agriculture, hotel and tourist, or any other industrial or commercial sector.
Investment Tax Allowance (ITA)
Like Pioneer Status, ITA will confer varying degrees of exemption on a company depending on the kinds of advanced goods/activities it engages in.
A business may apply for ITA as an alternative to Pioneer Status.
A company granted ITA under the Promotion of Investments Act, 1986, for manufacturing services and the service sector is entitled to an allowance of 60%-70% on its qualifying capital expenditure.
This includes factory, plant, machinery, or other equipment used for the approved project, incurred within five to ten years from the date the first qualifying capital expenditure is incurred.
The manufacturing company can offset this allowance against 70% of its statutory income for each assessment year.
This means the ITA is granted 60% of the qualifying capital expenditures incurred over five years.
It is used against 70% of the statutory income, while the remaining 30% is taxed at the applicable CIT rate.
Any unused allocation may be carried over to succeeding years until it is used up ultimately. The corporation tax rate, in effect, will be applied to the remaining 30% of its statutory revenue.
Reinvestment Allowance (RA)
RA is offered as a financial incentive to Malaysian resident manufacturing and certain agricultural businesses.
It supports those investing in growth, automation, modernisation, or expansion into complementary goods within the manufacturing sector.
However, the requirement that these businesses have existed for at least 36 months governs this provision.
Others
Holders of manufacturing licences are eligible for various government incentives.
These include exemptions from import duties for raw materials and machinery under the Customs Duties (Exemption) Order 2017.
They also include exemptions under the Sales Tax (Persons Exempt from Payment of Tax) Order 2018, granted at the Minister of Finance's discretion.
Subject to the relevant restrictions, holders of manufacturing licences are eligible for all of the abovementioned incentives.
To receive these benefits, MIDA would ultimately require manufacturing licence holders to show their manufacturing licence.
Consequences of Doing Any Manufacturing Activity Without a License
Anyone who engages in manufacturing activities without a manufacturing licence issued under the Industrial Co-ordination Act of 1975 is guilty of an offence.
They may face a fine of up to RM2,000 or a jail sentence of up to six months. There is also an additional penalty of up to RM1,000 for each day that the default persists.
MIDA imposes stringent compliance requirements on the manufacturing sector's laws, rules, and regulations.
All individuals involved in manufacturing activities must be aware of and follow all applicable laws, rules, and regulations.
This includes applying for a manufacturing licence or the ICA 10 Confirmation Letter.
MIDA continuously monitors, promotes, encourages, and coordinates the development of the manufacturing industry in Malaysia.
