Subsidiary vs. Branch in Malaysia
Updated on Tuesday 11th May 2021
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Foreign investors in Malaysia can carry out business operations in the country through a branch or a subsidiary or a representative office. The first two types of businesses are preferred because they have a larger business scope. The differences between the subsidiary and the branch in Malaysia lie mainly in the foreign company’s liability. The branch is not a separate legal entity in the country, thus, the foreign company will merely perform its activities through an extension of its head office abroad. Conversely, the subsidiary is a fully locally incorporated legal entity, with legal rights as well as liabilities, that can enter into agreements and debts just like any other legal entity in Malaysia. The experts at our law firm in Malaysia can help you with detailed information about the registration and taxation principles for each type of company you can incorporate in the country.
Foreign company registration in Malaysia in 2021
All companies in Malaysia must be registered with the Companies Commission of Malaysia. Foreign companies are defined as those types of legal entities that are incorporated outside of the country. These foreign corporations may conduct business activities in Malaysia provided that they register the foreign company in the country or if they incorporate a new, local company.
In order to be registered in Malaysia, foreign companies must provide a copy of their Articles of Association, proof of registration in the country of origin, a special registration form, and proof of appointment/power of attorney for the individual or individuals who will act on behalf of the company in Malaysia. Additional documents may be needed, especially in the case of subsidiaries that need to have their name approved in the country.
Our lawyers in Malaysia can help you draw up and submit the needed documentation as well as provide you with information about any needed translations for documents that are not in English or Malay.
Differences between a Malaysian branch and a subsidiary
The branch and the subsidiary are both two good options for foreign companies that want to establish their presence in the Malaysian market in 2021. The choice may depend on the parent company’s available capital as well as the nature of the business. Our team of attorneys in Malaysia highlights the main differences between a branch and a subsidiary in the table below:
|Independence||Dependent on the parent company abroad; will report to it and will perform the same business activities||Independent from the parent company abroad; acts as a separate legal entity|
|Local Structure||Not a separate legal structure in Malaysia; has to be registered nevertheless||Incorporated as a new legal structure in Malaysia; has to follow the usual steps for company formation|
|Accounting management||Will manage its accounts either in connection with the foreign company or separately||Manages the accounting and reporting completely separate from the foreign parent company|
|Ownership||The parent company abroad has a complete ownership interest in its Malaysian branch||The foreign company has limited ownership interest in the Malaysian subsidiary|
Liability is one of the most important concerns when choosing to set up a legal structure in Malaysia. For this purpose, the branch is simply an extension of the parent company abroad. It must have the same name and perform the same business activities and the parent company is completely liable for the debts and obligations of its Malaysian branch. The incorporation costs, as well as the maintenance costs, are lower in this case. Most banks in Malaysia, as well as other financial institutions, will operate via a branch that will serve as a local agency for the larger bank abroad.
The subsidiary is a separate legal entity from the foreign company and it can be incorporated as a local Malaysian company. This means that the subsidiary is not dependent on its foreign counterpart and can engage in its own name in business activities in Malaysia. This company will need to observe all of the local registration, taxation, and reporting requirements. The subsidiary will have a Board of Directors in Malaysia and the individuals who will serve this role can be appointed by the parent company abroad.
Branch and subsidiary taxation in Malaysia
Both the branch and the subsidiary are subject to observing the local laws for the taxation of profits. There is no separate branch tax rate, these two types of establishments are taxed at the corporate income tax rate of 24% and the basis for taxation is territorial, except for certain types of income, such as that from banking and insurance activities, transport by air or sea.
Double taxation relief is possible in Malaysia through a broad network of treated that allow for a single point of taxation when a foreign legal entity derives income from both Malaysia and another jurisdiction. For example, a branch in Malaysia will be protected from being taxed on its profits made in the country both by the Malaysian tax authorities and the tax authorities in the country where the head office of the parent company is located.
The tax year in Malaysia for subsidiaries and branches is the same as the fiscal year and the tax is paid in installments, before the 15th of each month. A return is submitted within seven months from the end of the accounting period. The Inland Revenue Board (IRB) is the Malaysian authority handling the tax submissions and matters. One of our lawyers can give you more detailed information about the Tax Act and the taxation principles according to the chosen type of company. VAT applies to the provision of certain types of goods and services.
Foreign corporations that wish to enter the Malaysian market should carefully consider and weigh in the advantages of both the branch and the subsidiary. For simpler business activities and those that need to be the same as in the case of the parent company, the branch is the common and advantageous choice. However, for companies that wish to enter into more complex business activities, be involved in distributive trade, and not bear liability for their Malaysian counterpart, the subsidiary is the legal entity that will allow for these advantages.
The video below also highlights the main differences between the branch and the subsidiary:
The set-up process, the time, and the costs will differ according to the chosen type of business form, as well as the types of activities and the reporting requirements. We advise investors to seek proper counseling prior to entering the Malaysian market.
For more information about foreign investments in the country please contact the experts at our law firm in Malaysia. Our team can offer assistance for opening branches and subsidiaries in Malaysia, following the 2021 procedures.