Malaysia Digital (MD) Tax Incentive Application in Malaysia -

Malaysia Digital (MD) Tax Incentive Application in Malaysia

What is Malaysia Digital (MD) Tax Incentive.

Malaysia Digital Status (MD) New Investment Incentive1 aims to promote new investment activities in Malaysia and is offered to eligible companies that propose to undertake the qualifying activity under the tax incentive scheme. Under this New Investment Incentive, an eligible company may choose to enjoy either the reduced tax rate or investment tax allowance on income derived from the qualifying activity.

Eligibility criteria

is incorporated under the Companies Act 2016/Companies Act 1965 and resident in Malaysia;
has a minimum paid up capital of RM50,000.00;
has been awarded MD Status;
is proposing to undertake the qualifying activity in Malaysia;
has not issued any sales invoice for the qualifying activity in Malaysia prior to the date of submission of the tax incentive application, or has sixty per cent direct or indirect Malaysian equity ownership and has not issued any sales invoice for the qualifying activity in Malaysia more than twelve months prior to the date of submission of the tax incentive application; and
is not granted any tax incentive by the Government of Malaysia in relation to the qualifying activity.

MD Activities

No	Promoted Tech Enablers	Descriptions
1	Artificial Intelligence (AI) or Big Data Analytics (BDA)	Artificial intelligence leverages computers and machines to mimic the problem-solving and decision-making capabilities of the human mind. Deep learning and machine learning are sub-fields of artificial intelligence, and deep learning is a subfield of machine learning. AI application – Speech recognition, customer service, computer vision, recommendation engines, and fraud detection Generative AI describes algorithms that can be used to create new content, including text, audio, images, videos and simulations. It falls under the broad category of machine learning. Big data analytics is the use of advanced analytic techniques against very large, diverse big data sets that include structured, semi-structured and unstructured data, from different sources, and in different sizes from terabytes to zettabytes.
2	Internet of Things (IOT)	The Internet of things (IoT) describes physical objects (or groups of such objects) with sensors, processing ability, software, and other technologies that connect and exchange data with other devices and systems over the Internet or other communications networks.
3	Cybersecurity	Cybersecurity is the practice of protecting critical systems and sensitive information from digital attacks. Also known as information technology (IT) security, cybersecurity measures are designed to combat threats against networked systems and applications, whether those threats originate from inside or outside of an organization.
4	Cloud	“The cloud” refers to servers that are accessed over the Internet, and the software and databases that run on those servers. Cloud servers are located in data centres all over the world. By using cloud computing, users and companies do not have to manage physical servers themselves or run software applications on their own machines.
5	Blockchain	A blockchain is a distributed database or ledger that is shared among the nodes of a computer network that facilitates the process of recording transactions and tracking assets. As a database, a blockchain stores information electronically in digital format. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
6	Drone Technology	A drone is an unmanned aircraft. Drones are more formally known as unmanned aerial vehicles (UAVs) or unmanned aircraft systems. Essentially, a drone is a flying robot that can be remotely controlled or fly autonomously using softwarecontrolled flight plans in its embedded systems, that work in conjunction with onboard sensors and a global positioning system (GPS). Drone technology refers to the technologies to fly drones utilizing software-controlled flight programs that are embedded within the drones’ systems.
7	Creative Media Technology including Extended Reality (XR) or mixed reality (MR)	Activities and technologies involved in the creation, delivery and enhancement of digital content, such as animation, games, visual effects and others. These include the creative content development services through the use of design, simulation, extended reality (XR) and other related technologies.Extended Reality (XR) and Mixed Reality (MR) is an umbrella term used to encompass the convergence of either Augmented Reality (AR), Virtual Reality(VR) or both, as the mixed total solutions to develop these applications, technologies or experiences. Virtual reality (VR) services cover technologies and services that support the creation of fully immersive user experiences with the goal towards replacing physical reality with a digital environment. VR technologies would include, but are not necessarily limited to, programming software, the development of technologies for specialty hardware and includes technologies that support or augment stereoscopic displays, spatial audio, and motion-tracking sensors to simulate the virtual experience. Augmented reality (AR) services encompass the development of virtual elements onto real-world environments via smartphones or heads-up displays (HUDs). AR include software development that would include, but are not limited to, the extraction of data from visual representations of the physical world to overlay and superimpose computer generated sensory inputs, use of technologies to incorporate sound, video, graphics, or other virtual content.
8	Integrated Circuit (IC) design with embedded software	The integrated circuit (IC) is the heart of many generations of modern electronics innovations and the current push for digitalization. IC design is one of the most advanced and one of the most complex engineering tasks in modern world. The goal of IC design is to create a circuit which have a desired functionality. For example, an IC which can decode the incoming weather messages and notify the users. The IC design contains two distinct processes:1. Logic Design which includes the combination of circuit elements to implement desired functionality using Computer Aided Design (CAD) or Electronic Design Automation (EDA) tools. 2. Physical design which includes creation of those circuit elements on semiconductor substrate using the geometrically distinguished regions and their interconnection. Embedded software is a piece of software that is embedded in hardware or non-PC devices used for the overall operation of the device. The main difference between embedded software and application software is that the former is usually tied to a specific device, serving as the Operating System (OS) itself, with restrictions tied to that device’s specifications, so updates and additions are strictly controlled, whereas application software provides the functionality in a computer and runs on top of an actual full OS, so it has fewer restrictions in terms of resources.
9	Robotics or Automation	Robotics is the intersection of science, engineering and technology that produces software called robots, that substitute for (or replicate) human actions. Automation is the use of self-operating computer software and other technologies to perform tasks that are usually done by people. This process is designed to automatically follow a predetermined sequence of operations or respond to encoded instructions. The development of the software may utilize the standardized methodology or approach such as DevOps or Agile approach in which software developers and IT operations work together to produce software and infrastructure services rapidly, frequently and reliably by standardizing and automating processes
10	Advance Network Connectivity or Telecommunication Technology	Communications designed for high capacity (100s Gbps or Terabit scale) optical networking with technology such as Software Defined Networks (SDN) for submarine and terrestrial applications.

Non Qualifying Promoted Activities

The following activities do not fall under the Malaysia Digital Activities:
(a) trading;
(b) manufacturing activities;
(c) provision of telecommunication services;
(d) digital banking services;
(e) global business services or knowledge process outsourcing which is:
(i) non-technical;
(ii) low value call centre;
(iii) data entry; or
(iv) recruitment process outsourcing; or
(f) provision of services in the supply chain such as buying and selling or provision of services,
directly or indirectly, to the industry of cigarettes, tobacco, alcohol and gambling.

MD Tax Incentive – Reduced Tax Rate

MD Tax Incentive	Non-IP Income		IP Income
Tax Rate	10%	5%	0%
Exemption period Year Assessment (YA)	10 YA	10 YA	10 YA
Sustainable Economic Development	Not Applicable	To meet minimum 3 conditions related to sustainable economic development such as relevant initiatives in education, social and environment at the end of each YA as stated in the approval letter.	Not Applicable
Economic Development	Not Require	Other condition(s) related to economic development commitment by the company.	Not Require
Modified Nexus Approach	Not Applicable		To comply with modified nexus approach
Full Time Employee	To employ an adequate number of full-time employees (FTE) in Malaysia to carry on the qualifying activity throughout the YA.
Minimum Monthly Basic Salary	To ensure the FTE comprises adequate number of knowledge workers with a minimum monthly basic salary of RM5,000.00 throughout the YA.
Minimum Annual Operating Expenditure	To incur an adequate amount of annual operating expenditure in Malaysia to carry on the qualifying activity by the end of each YA.
Qualifying Activity	To undertake the qualifying activity in Malaysia throughout the YA.
MD Status	To remain an MD Status company and comply with all the conditions under MD Status at all times
Self-Declaration Form (SDF)	To submit to MDEC annually a self-declaration form (SDF) on compliance of conditions within 7 months from the end of each year of assessment, and the information submitted in the SDF must first be verified by an independent external auditor appointed by the company at its own costs.

MD Tax Incentive – Investment Tax Allowance (ITA)

ITA Period	5 Consecutive Years
ITA Rate	60% or 100% of qualifying capital expenditure (QCE), against up to 100% statutory income
Minimum Conditions	(1) To incur an adequate amount of qualifying capital expenditure.
	(2) To employ an adequate number of full-time employees (FTE) in Malaysia to carry on the qualifying activity.
	(3) To undertake the qualifying activity in Malaysia at all times.
	(4) To remain an MD Status company and comply with all the conditions under MD Status at all times.
	(5) Other condition(s) related to economic development commitment by the company.
Additional Conditions	(6) To meet minimum 3 conditions related to sustainable economic development such as relevant initiatives in education, social and environment, each in year 4 and year 5 of the ITA Period, as stated in the approval letter.
	(7) Other condition(s) related to economic development commitment by the company.

ITA Period	Compliance with Minimum Conditions		Compliance with Additional Conditions
	First ITA Period	Second ITA Period
30% of QCE incurred in First ITA Period	Yes	N/A	N/A
60% of QCE incurred in First and Second ITA Period	Yes	Yes	No
100% of QCE incurred in First and Second ITA Period	Yes	Yes	Yes

Source: MDEC