Malaysia comes up with Guideline on IP Development Incentive

Recently, the Malaysian Investment Development Authority (MIDA) released the Guideline on Intellectual Property Development incentive intending to restructure the tax incentives. Ensuring that the tax incentives must comply with the OECD’s Forum on Harmful Tax Practices criteria (“FHTP” criteria), as Malaysia is a member of Inclusive Framework on Base Erosion and Profit Shifting, the guideline is a step forward in the direction. The criteria require that there should be proportionate tax incentives as per the research and development activities in the country. This proportionate tax system is based on the formula of the Modified Nexus Approach (MNA). It is believed that the tax exemption will help in promoting a stronger R&D center in Malaysia and encouraging more development in the research area. With this, the tax exemption will be proportionate to the R&D carried out and therefore making a proportionate ratio of income. Only those derived IP income in Malaysia is eligible for the incentive. This expects that the investment in Malaysia will increase too much extent owing to IP income incentives only in Malaysia which will therefore increase the economy and meeting commitments for economic development.

^{[Image Source: Malaysia]}

The companies getting incentives will be attracted to conduct R&D only in Malaysia and contribute to the development. Any taxpayers over IP income can apply to the IP development incentives. Undoubtedly, putting IP in the mainstream and providing the benefits can be increasingly helpful for the businesses and economy. The Malaysian IP system is being administered by the Intellectual Property Cooperation of Malaysia. With this incentive, it is believed that the commercialization of IP will be encouraged.

Excerpts from the Guideline

Full Income tax exemption on qualifying intellectual property (IP) income for a period of up to ten (10) years. The tax exemption is subject to the guidelines on Modified Nexus Approach to ensure that only income derived from IP developed in Malaysia is eligible for the incentive.

Eligible Applicants – New/Existing companies that own the rights of the qualifying intellectual properties (IPs) and are receiving income from the qualifying IP activities related to the promoted activities/list prescribed under the Promotion of Investments Act, 1986 and Income Tax Act, 1967.

Types of qualifying IP assets under this incentive are as follows:

(a) Patent or utility innovation under the Patents Act, 1983 [Act 291] or the equivalent law of any country or territory.

(b) Copyrighted software under the Copyright Act 1987.

(c) Family qualifying IPs (two or more qualifying IPRs that are interlinked in such a way that it is not possible to identify):

• which part of any expenditure incurred in the R&D resulting in the creation of those rights is incurred solely in the creation of a particular right; or
• which part of any income derived using those rights is derived solely from using a particular right

Eligibility Criteria

1. The company must be incorporated under the Companies Act, 2016, and resident in Malaysia.
2. Companies must be conducting R&D activities in Malaysia, where such R&D activities lead to the development, improvement, modification, or creation of the Qualifying IP Asset.
3. The IP must be registered/filed with MyIPO or any equivalent body outside of Malaysia. The IP must be related to the activities as prescribed under the promoted list/activity of the Promotion of Investments Act, 1986 and Income Tax Act, 1967.
4. The company must have at least 30% science and technical staff (S&T) having a degree or diploma with a minimum of 5 years experience from related fields.
5. The company must incur an adequate amount of operating expenditure annually to support the company in conducting its business operation in Malaysia. The operating expenditure should include local services for insurance, legal, banking, ICT, and transportation; if those services could be sourced from local/domestic service providers. However, this amount shall not include the cost of goods sold/cost of sales and expenses that are not directly involved in the company’s proposed activities.

The above excerpts are taken from the official guideline. For more information please visit- https://www.mida.gov.my/wp-content/uploads/2021/06/GD_IP_08062021.pdf

Author: Saransh Chaturvedi an associate at IP & Legal Filings, in case of any queries please contact/write back to us at support@ipandlegalfilings.com.