Shalini R. Chandrarajah, Associate Partner, Ernst & Young Tax Consultants Sdn Bhd
AS Malaysia prepares for its upcoming Budget 2026 announcement, businesses across various sectors are eagerly anticipating additional initiatives aimed at enhancing the nation’s investment climate and fostering economic growth.
Malaysia, as an investment destination, boasts a wealth of advantages, including a well-skilled and multilingual workforce, affordable resources and a safe environment complemented by world-class infrastructure.
However, the availability of incentives remains a crucial factor influencing investors’ decisions regarding initial investments and the continued expansion of their businesses.
In the first half of 2025, the Malaysian Investment Development Authority (Mida) approved a remarkable RM190.3bil in investments across various sectors, with foreign direct investment accounting for RM106.8bil (56.1%).
One of the ways to keep this momentum going and allow the country to attract even more investments going forward is to continue to enhance the tax incentive framework.
According to Mida’s statistics from January to June 2025, Singapore and China emerged as the top foreign investors in Malaysia, both in terms of the number of approved applicants and the size of investments.
Over the past year, Malaysia has had to adapt to various challenges in attracting capital and take steps to maintain its competitiveness within the South-East Asian region, amid geopolitical events such as continued conflicts, the United States and China trade war and tariff negotiations affecting exports to the United States.
Further, Malaysia has had to consider refinements to its incentive framework in light of the implementation of the Global Minimum Tax (GMT) in Malaysia from 2025, which effectively subjects large multinational groups to an effective tax rate (ETR) of at least 15% on a jurisdictional basis, diluting the benefits of traditional incentives.
Hence, Budget 2025’s proposal for a “New Investment Incentive Framework” to attract high-value investments was timely and welcome.
Details of this framework are expected to be released in the third quarter of this year, with the expectation of targeted and flexible incentives relevant to the current business landscape being announced.
Investment proposals will be evaluated using a National Investment Aspiration scorecard, which will consider criteria such as the creation of high-value jobs and environmentally friendly practices, including effective carbon emissions reduction.
Typically, tax incentive packages in Malaysia take the form of income tax exemptions or relief on capital expenditures incurred by companies engaged in promoted products or activities.
The forthcoming tax incentive framework is anticipated to simplify the process for investors and provide additional clarity on the commitments necessary to access tax incentives and grants.
It is hoped that a longer period of incentives is also considered to encourage continued reinvestment and expansion.
Grants
Currently, grants in Malaysia are limited and generally subsidise digital, training and research and development (R&D) activities.
However, the qualifying criteria and available amounts lack transparency, often leaving companies uncertain about their eligibility.
In addition to a general improvement in the way in which grants are made available, investors would also welcome details of the Strategic Investment Tax Credit, announced last last year’s budget in response to the GMT, as this incentive would not significantly reduce ETR for impacted groups and would continue to be an efficient incentive despite the minimum tax requirement.
Digital and data centres
Malaysia is being promoted as a digital hub, attracting numerous investors interested in establishing data centres.
However, the surge in data centre development has strained the power grid and water resources. In response, Mida and the Malaysia Digital Economy Corp introduced refined guidelines for the Digital Ecosystem Acceleration tax incentive and sustainable development of data centres.
Investors are now required to consider energy efficiency, renewable energy use and efficient water consumption in their designs when applying for incentives.
A data centre framework is expected to be released by year-end, which will be the foremost guideline on the data centre sustainability requirements.
In January this year, tax incentives for the Johor-Singapore Special Economic Zone (JS-SEZ) were announced, strategically timed to attract companies seeking to expand in Malaysia due to rising costs in Singapore, while maintaining linkages with Singapore.
The JS-SEZ offers the most attractive incentives in Malaysia, with corporate tax incentives of up to 15 years and special individual tax rates.
This collaboration between the governments of the two countries aims to enhance cross-border connectivity, facilitate the movement of people and strengthen the business ecosystem in Johor and Singapore.
Johor offers proximity to Singapore, an educated workforce, competitive wages and established industrial parks, making it an attractive investment destination.
Investors continue to seek certainty and simplicity, with calls for a one-stop regulatory authority to streamline the investment process across states, federal ministries and government agencies.
The JS-SEZ model represents a step forward, showcasing collaboration between the Malaysia and Singapore governments, Mida, the Johor state government and the various municipalities.
For ease of doing business, this model should be emulated in the other four economic corridors and could be further streamlined to a central body at the national level in due course.
Improvements to existing tax incentives and incentive approval process will boost multinational companies that often utilise Malaysia as a manufacturing hub, while Singapore may serve as their R&D base or as a principal hub.
More can be done to make Malaysia a “one stop shop” for investors across the value chain.
To enhance R&D incentives in Malaysia, improvements in definitions, qualifying conditions and approval processes are necessary. Offering better incentives for employing skilled workers in R&D roles, such as double deductions on salaries, could significantly boost the sector.
For the global services hub, while the initial period of the incentive in Malaysia is attractive, the five-year extension period is less so, as only value-added revenue figures are exempted.
Mature global services hubs typically may not have grand expansion plans, but they hire skilled workers, make capital investments and repatriate funds into Malaysia from service charges to related companies.
Thus, such hubs have the potential to bring significant spinoff benefits to Malaysia and the incentive packages could be improved in such that they remain competitive in the region.
To create job opportunities for university and technical and vocational graduates, the government could consider offering additional deductions to companies creating a specific number of jobs in any sector.
Currently shared service activities which are not digital centric are not accorded incentives, hence providing an additional deduction of salaries for large scale employment of skilled employees can boost employment of university graduates.
Additionally, providing grants for training programmes would not only upskill the existing workforce but also assist business to have the right skill sets in the areas of digitalisation and artificial intelligence.
Finally, the administration of incentives can continue to be improved, in areas such as the approval process and assessment of compliance with conditions to the incentive.
Capturing required information upfront in the Invest Malaysia portal and providing clarity on compliance requirements would streamline the investment journey.
Being consistent in annual compliance requests is essential to avoid delays and maintain accurate reporting.
Timelines for providing approvals and closing outstanding matters should also be looked into.
Active engagements with investors are encouraged for this purpose. One area which investors hope will be addressed in the new incentive regime is the process for claiming the Investment Tax Allowance incentive, where currently investors may only be able to claim the incentive and seek tax refunds through a revision of tax returns after key conditions have been met, which could be several years after the incentivised project has commenced.
As Malaysia prepares for the Budget 2026 announcement, the government can take additional steps to improve the business environment, attract foreign investment and nurture local talent, using targeted incentives, support mechanisms and timely release of details of announced proposals.
With the continuous improvement of our investment policies, Malaysia can continue its path to a prosperous and sustainable future.
Shalini R. Chandrarajah, is associate partner, Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.
