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New Incentive Framework for Manufacturing Sector in Malaysia

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New Incentive Framework for Manufacturing Sector in Malaysia

The Government of Malaysia has introduced the New Incentive Framework (“NIF”) as part of a comprehensive reform of Malaysia’s investment incentive regime. The framework represents a shift towards a more targeted and outcome-based approach, guided primarily by two cornerstone national strategies: The National Investment Aspirations (“NIA”) and the New Industrial Master Plan (“NIMP”) 2030. These initiatives aim to ensure that incentives granted to investors generate measurable economic benefits and support Malaysia’s long-term industrial development objectives.

Under the NIF, all applications will be processed by the Malaysian Investment Development Authority (“MIDA”) starting from 1 March 2026 for the manufacturing sector, with the service sector expected to follow in the second quarter of 2026, with the actual date to be announced separately.

The NIF also represents a significant structural change from Malaysia’s previous investment incentive framework under the Promotion of Investments Act 1986. Under the earlier regime, eligibility for incentives and the applicable incentive quantum were largely determined based on statutory promoted lists of activities and products prescribed under the legislation. By contrast, the NIF removes the promoted-list mechanism adopts a tiered, outcome-based assessment model, where the eligibility and level of incentives are determined by an investment’s performance against national strategic outcomes. These outcomes are assessed through the NIA Scorecard, which evaluates the broader economic impact of proposed investments.

Eligible Applicants

New or existing companies incorporated under the Companies Act 2016 and resident in Malaysia undertaking new investment in manufacturing are eligible to apply for the incentive.

New company		Existing company
Companies incorporated under the Companies Act 2016 and resident in Malaysia.		Companies incorporated under the Companies Act 2016 and resident in Malaysia.
Newly incorporated or has yet to commence any commercial operations.		Company which has already operating in Malaysia.
Either does not have any related entity in Malaysia prior to the submission of application or if a related entity exists, the related entity is carrying on a different project in Malaysia.		Carrying on a different project in Malaysia

Undertaking activities within the subsectors below:
Electrical and Electronics (E&E)	Chemical and Chemical products		Pharmaceuticals
Medical devices	Aerospace		Machinery and Equipment (M&E)
Automotive	Petroleum Products and Petrochemicals		Oleochemicals and their derivatives
Food Production and Processing	Wood, Paper and Furniture		Textile, Apparel and Footwear
Strategic minerals-based products	Rubber-based Products		Metal

Companies producing biotechnology-based products or recycled products may apply under relevant manufacturing subsectors as above.

Companies undertaking manufacturing activities shall meet specific shall meet the following general criteria and sector-specific requirements (if applicable).

Type	Details	Applicable sub-sectors
General criteria	Manufacturing License (“ML”) · Not applicable for integrated circuit (IC) design and testing activities.	Companies are required to apply or having the ML prior to the incentive application and the ML must remain valid throughout the incentive period.
Key Sector-Specific Requirement	Capital Investment per Employees (“CIPE”) of RM140,000. · CIPE is measured by capital investment (fixed assets investments including rental payment of 10 years for land and building) divided by the total number of full-time employees	The CIPE of RM140,000 to be compiled by the following sectors, namely:
		Petrochemicals products		Oleochemicals and their derivatives
		Food production and processing		Wood / paper and furniture
		Textiles, apparel and footwear		Strategic minerals-based products
		Rubber-based products		Metal
	Adoption of Automation / IR4.0 or smart application or system in the manufacturing process	Requirement for adoption of automation / IR4.0 or smart application / system in the manufacturing process for sub-sectors of:
		Petrochemicals products		Oleochemicals and their derivatives
		Food production and processing		Wood / paper and furniture
		Textiles, apparel and footwear		Rubber-based products
		Metal
	Sustainable Practices	Mandating sustainable practices in relation to: · Waste management · Sustainable raw materials · Water consumption · Energy consumption
		Petrochemicals products		Oleochemicals and their derivatives
		Wood / paper and furniture		Textiles, apparel and footwear
		Strategic minerals-based products		Rubber-based products
		Metal
	Workforce requirement	A minimum of 80% of the workforce must be Malaysian citizens for the following sub-sectors:
		Wood / paper and furniture	Textiles, apparel and footwear
		Strategic minerals-based products	Rubber-based products
		Metal
	Design and development expenditure must constitute at least 1% of the company’s annual gross sales	Wood & furniture

The following products / activities are not eligible for incentives under the NIF.

No.	Type of products / activity	Sub-sectors
1.	Mixing and blending activity	Chemical and chemical products
2.	Fill and finish activity	Pharmaceuticals
3.	Glove products and passenger vehicles tyre	Rubber-based products
4.	Upstream segment i.e. mining and quarry	Strategic mineral-based products
5.	All type of papers The exclusion for paper is not applicable for security paper and company is not allowed to import waste raw materials.	Paper
6.	All petroleum products The exclusion for petroleum products is not applicable for: · Production of petroleum products located at the Refinery and Petrochemical Integrated Development Project (RAPID) Complex · Integrated projects which also involve the production of petrochemicals products. Both categories can be considered for incentive.	Petroleum products
7.	Liquor and alcoholic beverages	Food production and processing
8.	e-Cigarette & vape products	Electrical and electronic
9.	Weapons and ammunition	Metal

Types of tax incentives

Under the NIF, eligible companies may apply for one of two mutually exclusive tax incentives, based on the investment’s performance against national strategic outcomes as measured through the NIA scorecard:

Special Tax Rate (“STR”)

The STR allows a company’s taxable income for the specified period will be taxed at a reduced corporate income tax rate. Accumulated losses incurred during the STR period can be carried forward for seven consecutive years and be deducted from the company’s post-incentive income.

Investment Tax Allowance (“ITA”)

The ITA is a capital expenditure-based incentive that enables a company to offset a percentage of its qualifying capital expenditure incurred within a specified period against its statutory income. Any unutilised allowance can be carried forward to subsequent years until fully utilised.

Companies are eligible to apply incentives based on the following categories, subject to fulfilling the requirement specified for the incentives.

Categories of Incentives	Special Tax Rate	Investment Tax Allowance
Incentives for New Investment	STR of between 0% to 10% for a period of up to 15 years.	ITA of up to 100% for a period of up to 15 years. The allowance can be used to offset between 70% to 100% of statutory income.
Incentives for Less Developed Areas	STR of between 0% to 15% for a period of up to 15 years.
Incentives for Small Companies	STR of between 3% to 12% for a period of up to 15 years.

The incentive will be granted based on the company’s commitment and assessment using the NIA scorecard.

Tax Incentive Mechanism

The new NIF is based on a tiering approach and an outcome-based mechanism to grant tax incentives and is evaluated using a NIA Scorecard.

NIA Scorecard

The NIA scorecard serves as a core evaluation tool to measure the quality of an investment and its potential contribution to the Malaysia economy. It consists of several performance indicators categorised into 6 strategic pillars:

Strategic pillars	Description
Increasing economic complexity	· Product Complexity (Index) based on the Harvard Growth Lab’s Atlas of Economic Complexity. · Percentage of research and development expenditure to sales revenue. · Level of adoption of advanced technology. · Integration of 4 Industrial Revolution technology.
Creating high-value job opportunities	· Percentage of high-skilled workers with diploma, degree and above, or with technical certificates. · Annual median salary per worker · Percentage of workers with basic income of RM10,000 and above (excluding allowance and overtime) · Percentage of Malaysian citizen workers at the Managerial, Technical and Supervisory (MTS) level relative to total MTS employment
Extending domestic linkages	· Percentage of local input (i.e. raw materials or components) used in the manufacturing process per year · Percentage of training expenditure out of total salary · Collaboration with local academia and industry · Number of vendors engaged in the Vendor Development Programme · Establish a regional and / or global treasury and / or finance centre conducting cash pooling activities in Malaysia.
Developing new and existing industrial clusters	· The product is either patented or in the process of being patented · The product is within the targeted sectors under the NIA or core sectors under the NIMP 2030. · Commercialisation of research and development finding from public / private institute of higher learning or public research institutes
Improve inclusivity	· Provision of opportunity for non-employees through internship or apprenticeship programmes or employment of fresh graduate with less than 3-year full-time work experience. · Percentage of women in top management positions · Percentage of workers who is part of the vulnerable group (senior citizen, disabled person, ex-convict, ex-drug dependent) · Percentage of workers who are Malaysian citizens
Enhancing environmental, social and governance (ESG) practices.	· Sustainable materials / services · Sustainable waste management · Sustainable water consumption · Sustainable energy consumption

During the application process, a score is computed for each indicator which is then used to determine the overall level of investment quality for the project. Ultimately, the quantum of the tax incentive is based on this final quality score, ensuring that higher-impact projects receive greater support.

Tiering Approach

The results of the NIA Scorecard form the basis of the tiering approach, which links the quality of a project to the level of incentives granted. Higher-scoring projects are eligible for a better quantum of incentive package, where the approval is conditional based on the company’s proposed commitment to ensure delivering the desired outcome.

Under this approach, the company may receive two distinct levels or “tiers” as illustrated below:

Type of incentive	Tier	Tax relief	Requirement
Special Tax Rate	Tier 1	5% corporate tax rate for 5 years	Company is required to comply with all minimum conditions as well as additional conditions as outlined in the principle approval letter.
Special Tax Rate	Tier 2	10% corporate tax rate for 5 years	Company is required to comply with all minimum conditions outlined in the principle approval letter.
Investment Tax Allowance	Tier 1	Allowance of 100% based on the qualifying capital expenditure incurred for a period of 5 years. The allowance can be offset against 100% statutory income for each year of assessment.	Company is required to comply with all minimum conditions as well as additional conditions as outlined in the principal approval letter.
Investment Tax Allowance	Tier 2	Allowance of 60% based on the qualifying capital expenditure incurred for a period of 5 years. The allowance can be offset against 70% statutory income for each year of assessment.	Company is required to comply with all minimum conditions outlined in the principal approval letter.

Both Tier 1 and Tier 2 conditions are derived from the initial pre-qualifiers and the company’s proposed commitments under the NIA indicators, ensuring that the quantum of tax relief aligns with the company’s actual performance and contribution.

Participation in GloBE

Malaysia has implemented the Global Minimum Tax in line with the global tax reform initiative under the OECD/G20 Inclusive Framework on Base Erosion Profit Shifting. Under the Global Anti-Base Erosion Rules, multinational enterprise groups with consolidated global revenue of at least 750 million Euros are subject to a minimum effective tax rate (“ETR”) of 15% in each jurisdiction.

Where the ETR in Malaysia falls below the 15% threshold, a top-up tax may be imposed to bring the ETR up to the minimum level. This top-up tax is collected through the Domestic Top-Up Tax mechanism under Part XI of the Income Tax Act, 1967, which came into effect on 1 January 2025.

Prospective applicants that fall within the scope of the global minimum tax should therefore consider the potential impact on their ETR when evaluating tax incentives under the NIF.

For further information, please visit the official website of the Inland Revenue Board of Malaysia at https://www.hasil.gov.my/en

KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.

Disclaimer

All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

If you wish to obtain more information or assistance, please visit the official website of Kaizen CPA Limited at www.kaizencpa.com or contact us through the following and talk to our professionals:
Email: info@kaizencpa.com
Tel: +852 2341 1444
Mobile : +852 5616 4140, +86 152 1943 4614
WhatsApp/ Line/ WeChat: +852 5616 4140
Skype: kaizencpa

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New Incentive Framework for Manufacturing Sector in Malaysia

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