Quick answer: The MD tax incentive offers either a reduced tax rate of 10%, or 5% with additional conditions, for 10 years, or an investment tax allowance of 60% or 100% of qualifying capital expenditure for 5 years. The two are mutually exclusive and you cannot switch after approval. The reduced rate suits people-heavy companies, and the allowance suits capital-heavy ones.
- You choose either the reduced rate or the allowance, not both.
- You cannot switch after approval.
- Reduced rate: 10% or 5%, for 10 consecutive years of assessment.
- Allowance: 60% or 100% of qualifying capital expenditure, for 5 years.
- Applications close on 31 December 2027.
The Two Options Compared
Reduced tax rate
What you get
- 10% on non-IP income, or 5% with additional conditions.
- 0% on qualifying IP income.
- For 10 consecutive years of assessment.
Minimum conditions
- An adequate number of full-time employees in Malaysia.
- Knowledge workers earning at least RM5,000 monthly basic salary.
- Adequate annual operating expenditure in Malaysia.
- Carry out the activity throughout each year.
- Self-declaration within 7 months after each year, verified by an external auditor.
Best suited to
- Companies whose value is people and income, such as software and services.
Investment tax allowance
What you get
- 60% or 100% of qualifying capital expenditure.
- Set off against up to 100% of statutory income.
- For 5 consecutive years.
Minimum conditions
- An adequate amount of qualifying capital expenditure.
- An adequate number of full-time employees in Malaysia.
- Carry out the activity in Malaysia at all times.
- Additional conditions in Years 4 and 5 for the full 100%.
Best suited to
- Companies investing heavily in equipment or infrastructure.
Choosing between the two? We will model both for your plan.
An Illustration
The figures below are an illustration to show how an allowance works, not a forecast or advice.
Illustration. A company spends RM1,000,000 of qualifying capital expenditure. At 60%, the allowance is RM600,000. That amount is set off against the company's statutory income from the qualifying activity. The same company may instead choose the reduced rate. It cannot have both, and it cannot switch after approval.
Key Dates and Rules
| Item | Detail |
|---|---|
| Application window | On or after 19 April 2024 and not later than 31 December 2027 |
| Who approves | National Committee on Investments, after MDEC evaluation |
| Reduced rate commencement year | Request a determination within 24 months of approval in principle |
| Adding activities (reduced rate) | Apply no later than 18 months before the incentive period expires |
| Non-compliance (reduced rate) | The prevailing corporate tax rate applies for the affected year |
| Non-compliance (allowance) | No allowance may be claimed |
How to Decide
- Pick the reduced rate if your income will be high and your capital spending low.
- Pick the allowance if you will invest heavily in qualifying capital expenditure.
- Ask MDEC what adequate means in your approval letter before you commit.
- Model both against your three-year plan with your tax adviser.
- Remember the choice cannot be changed after approval.
Frequently Asked Questions
Quick answers on the two MD tax incentives.
What tax incentives does the MD Tax Incentive offer?
Two: a reduced tax rate on income from the qualifying activity, or an investment tax allowance on qualifying capital expenditure. They are mutually exclusive.
What is the reduced tax rate?
A rate of 10% on non-intellectual property income, or 5% if additional conditions are met, for 10 consecutive years of assessment. Qualifying intellectual property income can be taxed at 0%.
What is the investment tax allowance?
An allowance of 60% or 100% of qualifying capital expenditure, which can be set off against up to 100% of statutory income, for 5 consecutive years.
Can I switch between the two after approval?
No. MDEC's guidelines say the two are mutually exclusive and switching after approval is not allowed.
Which is better for a software company with few assets?
A company with little qualifying capital expenditure usually has little to claim under the allowance, so the reduced rate often fits better. Confirm with your tax adviser for your own numbers.
When does the investment tax allowance apply at the full 100%?
It is staged. 30% of qualifying capital expenditure applies in the first period if minimum conditions are met within 36 months of approval in principle, and up to 100% applies if additional conditions are also met.
What conditions apply to the reduced rate?
An adequate number of full-time employees in Malaysia, knowledge workers with at least RM5,000 monthly basic salary, adequate annual operating expenditure, and carrying out the activity throughout each year of assessment.
What does adequate mean?
The guidelines do not state numbers. The levels are set in your approval letter, so ask for them before you commit to a hiring or spending plan.
What happens if I miss the annual self-declaration?
Missing the deadline means no reduced rate for that year of assessment. For the reduced rate, the self-declaration is due within seven months after the year of assessment ends.
What is the 5% rate for?
The 5% rate requires additional conditions, including three sustainable-development conditions. Check the exact conditions in the approval letter.
About This Guide
This guide was prepared by Neutral Consulting PLT, a Kuala Lumpur firm of chartered accounting and advisory professionals with 10 years in practice. We help foreign and local companies set up, stay compliant and hire talent in Malaysia. Every figure and rule here was checked against the official sources listed below in November 2026.
Sources
Official sources
- MDEC, Guidelines on Malaysia Digital Tax Incentive, New Investment (revised July 2025)
- MDEC, Malaysia Digital Tax Incentive
- MDEC, Guidelines on Malaysia Digital Status
This page is general information, not legal advice. Agencies change their requirements, so confirm the current rules with MDEC, or with us, before you act. Checked November 2026.
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