Malaysia Free Trade Zones
Malaysia Free Trade Zones, which are a class of special economic zone, can be broadly divided into two types of Free Zones – the Free Industrial Zones (FIZ) and Free Commercial Zones (FCZ). Generally, manufacturing activities are conducted in a FIZ while trading activities are conducted in a FCZ.
What is Free Zone in Malaysia?
- A Free Zone in Malaysia is an area that has been declared to be one by the government under the Free Zones Act 1990. The Free Zone will serve as a designated area for businesses to carry out commercial and industrial activities under the supervision of the Ministry of Finance.
- Businesses that set up within them are able to enjoy multiple tax benefits such as exemption from custom duties and excise duties for most goods and services.
- According to the World Free Zones Organization, there are approximately 27 FTZs throughout Malaysia. Tetra Consultants recommends clients who are engaging in international commerce to adopt the available FTZs.
Malaysia Free Industrial Zones (FIZ)
- The Malaysia Free Industrial Zone (FIZ) is primarily for businesses that manufacture goods for exports.
- A company that wishes to set up in a FIZ in Malaysia must export at least 80% of its output and raw materials unless it has received approval from the Ministry of International Trade and Industry to reduce its export requirement to 60%.
- Benefits of setting up in a FIZ includes duty-free imports of specific raw materials and equipment, as well as exemption from sales tax, excise tax and GST for these items.
- Generally, machinery and raw materials that are not directly used in the manufacturing process will not qualify for exemption of taxes.
- Since Malaysia FIZs are treated as areas outside the country, any goods transported out of the FIZ and into other regions of Malaysia will be considered as imports into the country and are subjected to the relevant customs duty and sales tax in Malaysia.
- Some of the more popular FIZs in Malaysia includes the Bayan Lepas Free Industrial Zone and Pasir Gudang Free Industrial Zone.
Bayan Lepas Free Industrial Zone
- Located in Penang, the Bayan Lepas FIZ is known as the island’s main industrial hub and is the first FIZ to be created in Malaysia. The Bayan Lepas FIZ is a popular business location for technological firms and high-tech manufacturing firms.
- The Bayan Lepas FIZ is connected to Georgetown, the capital city of the Malaysian state, Penang, via the Bayan Lepas Expressway and sits right next to the Penang International Airport.
- Commonly known as the “Silicon Valley of the East”, the Bayan Lepas FIZ houses many reputable tech firms such as Intel, AMD, Osram, Toshiba, Bosch, Hitachi and Clarion.
- The Bayan Lepas FIZ is also the primary labour market in Penang. Companies that set up in the FIZ can draw from the pool of skilled and semi-skilled labour force in the island.
Pasir Gudang Free Industrial Zone
- Located in the city state of Johor, the key industries in the Pasir Gudang FIZ include transportation and logistics, shipbuilding, petrochemicals and other heavy industries.
- The Pasir Gudang port in Johor, also known as the Johor Port, is an integrated multi-purpose port and contains bulk facilities that provides cargo and container services. The port can handle cargo capacity of up to 1.2 million TEUs and houses the world’s largest palm oil storage facility.
- Business that set up in the Pasir Gudang FIZ can enjoy exemption from custom duties for their warehouses. They will also only be required to pay custom duties if the cargo exported from the port is meant for domestic consumption.
Malaysia Free Commercial Zones (FCZ)
- Like FIZs, FCZs in Malaysia are governed and regulated by the Free Zones Act 1990 and Free Zones Regulations 1991, respectively.
- FCZs are created with the purpose of promoting business and trading activities in Malaysia through entrepot trade and pro-business policies.
- Most FCZs in Malaysia are located near ports to facilitate the transport of goods and products.
- Similar to FIZs, FCZs are exempted from custom duties, sales tax and service tax for all imports that are re-exported or re-packaged for sale to other consumers.
- Businesses that set up in FCZs typically enjoy the same benefits as those that set up in FIZs. However, the nature of business activities carried out in a FCZ differs from those carried out in a FIZs. While FIZ focuses on the manufacturing of goods and other industrial activities, FCZ focuses on the trading and transportation of goods to other locations.
- Some of the more popular FCZ in Malaysia includes the Port of Tanjung Pelepas Free Zone, Port Klang Free Zone and the Digital Free Trade Zone.
Port of Tanjung Pelepas (PTP) Free Zone
- Located near the busiest international shipping lanes and possessing natural features that allow vessels to anchor easily, the Port of Tanjung Pelepas facilitates the transportation and distribution of cargo goods with neighbouring countries and regions. The Port of Tanjung Pelepas Free Zone is also accessible to three international airports by road.
- In addition, the Free Zone is well-connected to surrounding countries and Malaysian states. Specifically, it is joined to Singapore by major expressways and linked to Southern Thailand by a rail terminal.
- Malaysian Industrial Development Authority (MIDA) has introduced tax benefits and investment incentives for foreign companies that operate in the manufacturing and logistics industry in the Free Zone. It also offers warehouses and facilities for the redistribution and repackaging of goods. As such, it is an attractive location to set up regional distribution centres and manufacturing companies.
Port Klang Free Zone
- The Port Klang Free Zone is considered both a FCZ and FIZ that provides state-of-the-art facilities for the distribution of goods and products.
- Ranked the world’s 12th largest port in 2019, Port Klang serves as a crucial hub for the transport of goods and materials via sea and land transport in the Free Zone.
- The Free Zone also provides tax incentives and financial benefits to business owners as well as supporting infrastructure such as leased office blocks, light industrial units and prepared industrial land for the construction of warehouses and factories.
Digital Free Trade Zone (DFTZ)
- A new initiative by the Malaysia Digital Economy Corporation (MDEC), the purpose of the Digital Free Trade Zone is to facilitate international trade through digitalisation and provide e-commerce opportunities to domestic SMEs in global markets.
- Local SMEs in the DFTZ can participate in programmes to upgrade the skills of their workers in the field of e-commerce and enjoy various support facilities provided by the authorities.
- The primary goal of the Digital Free Trade Zone is to help SMEs export their goods to global markets and build Malaysian brand in international markets.
- Established in partnership with Jack Ma, the former Executive Chairman of the Alibaba Group, the Free Trade Zone will connect Malaysia’s SMEs to Alibaba-inspired e-commerce platforms with the purpose of supporting greater exchange between Malaysia and other Belt and Road Initiative (BRI) countries.
- The Free Zone has attracted numerous investments from Chinese private companies.
Advantages of Malaysia Free Trade Zones
Facilitation of export activities
- As many FTZs are located near ports, airports and expressways, it is easy to transport goods and raw materials from the areas to other countries and vice versa.
- There are minimal customs control in FTZs to facilitate the export of goods by Multinational Corporations (MNCs). Exemption from import duties for all raw materials and equipment used directly in the manufacturing process will also help to reduce costs for export activities in the Zone.
Access to skilled labour
- Since many MNCs are located in a Free Zone in Malaysia, there will be a transfer of managerial or technical skills to Malaysian employees when MNCs hire them.
- Many MNCs are also willing to invest in job training programmes to upgrade the skills of their employees.
- Training programmes are further enhanced by facilities in the Free Zone. For example, the Penang Skills Development Centre (PSDC) located in the Bayan Lepas FIZ helps to support businesses in the Free Zone by providing industry-led skills training to local workers. The PSDC is affiliated to renowned universities in Malaysia, Australia, Germany and the United Kingdom and has more than 20 years of experience in corporate training.
Provision of support infrastructure
- Many FTZs in Malaysia have facilitated the growth of specific industries such as the electronic and electrical industry for FIZs and the logistics industry for FCZs. The influx of foreign direct investment from international companies such as Intel, Sony and AMD have facilitated the development of supporting infrastructure in the Free Zone.
- Most Free Zones have a well-integrated transport and communication network to support business activities within the Zone.
- They also offer warehousing, distribution and other storage facilities to support export and import activities.
Disadvantages of Malaysia Free Trade Zones
- There is no federal authority or policy that oversees the development and operation of Free Zones in Malaysia. Instead, most Free Zones are controlled at the state level instead of the federal level. Companies that wish to set up in a Free Zone in Malaysia must register with domestic agencies.
- There is also little information and statistics about the business activities conducted in each Free Zone.
- However, the Industry Development Authority does provide support to facilitate the set up of a company in a Free Zone in Malaysia.
Licensed Manufacturing Warehouses
- Business owners that are unable to set up a company in a FTZ can consider setting up Licensed Manufacturing Warehouses (LMWs).
- Licensed by the Royal Malaysian Customs, the LMW, also known as a Manufacturing Bonded Warehouse, was introduced in states where it was not feasible or practical to set up a Free Trade Zone. The Warehouse primarily caters to export-oriented industries.
- LMWs will enjoy the same benefits as factories that operate in a FIZ in Malaysia. This includes customs duty exemption to all raw materials used directly in the manufacturing process of approved exports.
- To be eligible to apply for a LMW company, the company must export at least 80% of its output and have raw materials or components that are mostly imported.
How to proceed with registering a company in Malaysia Free Trade Zones?
Contact us to find out more about how to register a company in a Free Trade Zone in Malaysia. Our team of experts will revert within the next 24 hours.
What are the types of Free Trade Zones in Malaysia?
- There are two major types, namely the Free Industrial Zone and the Free Commercial Zone. Free Industrial Zones focus on industrial and manufacturing activities while Free Commercial Zones focus on the transport and storage of goods and raw materials. Both Free Zones tend to enjoy similar benefits but will differ in terms of the type of support infrastructure and facilities provided.
What are the advantages of setting up in a Malaysia Free Trade Zone?
- Companies that set up in a Free Zone in Malaysia can lease warehouses and factories at a lower cost, gain access to a skilled pool of labour and enjoy tax benefits. Generally, companies in Free Zones are exempted from import duties for all raw materials and equipment used directly in the manufacturing process. They are also able to conduct trading activities with less customs document requirements.
What are the popular Free Trade Zones in Malaysia?
- The most popular Free Trade Zones in Malaysia are the Bayan Lepas Free Industrial Zone for high-tech firms; the Pasir Gudang Free Industrial Zone for shipbuilding and heavy industry activities; the Port of Tanjung Pelepas (PTP) Free Zone and the Port Klang Free Zone for port and shipping activities; and the Digital Free Trade Zone (DFTZ) for e-commerce companies.
How to set up a business in a Malaysia Free Trade Zone?
- After registering your company with the Suruhanjaya Syarikat Malaysia (SSM), you can proceed to register your company in a Free Trade Zone with the local authority.
- Tetra Consultants provides you with a fast and simple way to set up your company in a Free Zone in Malaysia through our package which includes Malaysia company registration with the SSM; provision of local resident director, company secretary and registered address; corporate bank account opening; and fulfilling annual accounting and tax obligations. Based on your company’s business activities, Tetra Consultants will also research and recommend you the Free Zone to set up your company in.
What is a Licensed Manufacturing Warehouse (LMW)?
- A LMW is an alternative to setting up a company in a Free Trade Zone. LMWs enjoy the same tax benefits as factories that operate in a Free Trade Zone in Malaysia. This includes customs duty exemption to all raw materials used directly in the manufacturing process of approved exports. The conditions to register a LMW are also the same as that needed to set up a company in a Free Industrial Zone.
Can a company in a Free Trade Zone be wholly foreign-owned?
- Yes, a Malaysian company can be wholly foreign-owned. However, it will be subjected to the same requirement of a regular limited liability company. This means that the company will still have to employ a director who resides in Malaysia.
How many free trade zones are there in Malaysia?
- According to the World Free Zones Organization, there are approximately 27 free zones throughout Malaysia.
What countries have free trade zones?
- There are many countries around the world that have free trade zones. Some of these include Malta, China, Lithuania, Germany and Malaysia.
What is the performance of Malaysia Free Trade Zone?
- They have good performance, with trade in the nation steadily increasing since the set up of the first FIZ in 1972. In 2019, the nation experienced the 22nd year of continuous trade boom, and a 11% increase in the previous year’s national income from trade.