Malaysia Private Company vs Branch Office vs Representative Office
When expanding business operations in Malaysia, companies often face the decision of choosing the most suitable structure for their activities. The primary options for foreign investors in Malaysia are establishing a private company, a branch office, or a representative office. Each has distinct characteristics, advantages, and regulatory requirements. This article explores these three options to help businesses make informed decisions.
- Private Company
(1)
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A private company in Malaysia is a separate legal entity from its owners. It is incorporated with the Companies Commission of Malaysia (CCM) under the Companies Act 2016 (CA 2016) and can be wholly owned by local or foreign investors.
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(2)
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Key Features:
- Legal Entity: A private company is a distinct legal entity with its own legal personality, separate from its shareholders and directors.
- Liability: Shareholders?liability is limited to the amount unpaid on their shares.
- Management: Managed by directors who are appointed by shareholders.
- Shares: Shares can be transferred but are not available to the general public.
- Taxation: Subject to Malaysian corporate tax rates imposed by the Inland Revenue Board of Malaysia (IRB).
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(3)
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Advantages:
- Limited Liability: Shareholders are protected from personal liability for company debts beyond their share capital.
- Operational Flexibility: A private company can engage in a wide range of business activities and can have multiple business operations.
- Tax Benefits: Eligible for various tax incentives and benefits.
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(4)
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Disadvantages:
- Regulatory Requirements: Must comply with various regulatory requirements, including annual return, annual financial statements and statutory records, which can be time-consuming and costly.
- Limited Share Transferability: Shares in a private limited company are not freely transferable. This can restrict the ability to sell or transfer ownership, making it less flexible for shareholders who wish to exit or bring in new investors.
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- Branch Office
(1)
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A branch office is an extension of a foreign company, operating under the name of the parent company. It is registered with the CCM under the CA 2016.
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(2)
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Key Features:
- Legal Entity: Not a separate legal entity; it operates as an extension of the foreign parent company.
- Liability: The foreign parent company assumes liability for the branch office’s operations and debts.
- Management: Managed by representatives appointed by the parent company.
- Purpose: Primarily used for conducting the business activities similar to those of its parent company.
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(3)
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Advantages:
- Operational Control: Allows the foreign company to maintain control over operations and strategy.
- Simplified Reporting: Often simpler in terms of financial reporting compared to a private company.
- Market Entry: Provides a relatively straightforward way to enter the Malaysian market.
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(4)
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Disadvantages:
- Limited Scope: Branch offices cannot engage in certain types of business activities that are restricted to local entities, like wholesale, retail and trade businesses.
- Liability: The parent company is fully liable for the branch’s obligations and debts.
- Taxation: Subject to Malaysian tax regulations, including taxation of income generated in Malaysia.
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- Representative Office
(1)
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A representative office is a non-commercial presence established by a foreign company to carry out non-trading activities in Malaysia. It is registered with the Malaysian Investment Development Authority (MIDA).
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(2)
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Key Features:
- Legal Entity: Not a separate legal entity and cannot engage in direct business or commercial transactions.
- Liability: The foreign parent company assumes full responsibility for the representative office’s activities.
- Purpose: Used for market research, promotion, and liaison activities.
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(3)
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Advantages:
- Market Insights: Useful for gaining market insights and establishing business relationships.
- Compliance: Less stringent regulatory requirements compared to private companies or branch offices.
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(4)
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Disadvantages:
- Limited Activities: Cannot engage in direct business activities or generate revenue. It is restricted to non-commercial functions such as market research and business development.
- Limited Duration: The approval for a representative office is typically granted for a fixed term, such as up to three years. The office must reapply or transition to a different business structure if it wishes to continue operations beyond this period.
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The following table provides the comparisons of the abovesaid three common setup options for foreign investors:
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Characteristic
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Private Company
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Branch Office
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Representative Office
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Entity Name
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Need not be the same as parent company
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Must be the same as parent company
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Must be the same as parent company
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Allowed Activities
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Can conduct all business activities
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Must be the same as the parent company. Cannot conduct wholesale and retail trade business.
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Can only conduct market research or coordinating activities. No commercial activities are allowed
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Suitable For
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For local or foreign companies that wish to expand their operations in Malaysia
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For foreign companies that wish to expand their operations in Malaysia for short term basis
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For foreign companies that wish to set up temporary vehicle in Malaysia to conduct research and act as liaison office and other activities which will not result directly in actual commercial transactions
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Ownership
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Can be 100% foreign or locally owned
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100% owned by the head office
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No ownership
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Separate Legal Entity
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Yes
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No
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No
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Cap on Number of Members
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Yes, maximum 50
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Not applicable
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Not applicable
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Minimum Setting up Requirement
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Minimum one individual or corporate shareholder and one resident director
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Must have at least one Malaysia resident agent
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The proposed operational expenditure must be at least RM300,000 per annum.
Should be financed by funds emanating from sources outside Malaysia
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Limited Liability
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Yes
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No, liabilities extend to parent company
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No, liabilities extend to parent company
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Need for Audited Accounts
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Yes if the company does not meet audit exemption criteria
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Yes
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No
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Filing of Accounts with CCM and IRB
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Yes
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Yes. Must file branch office’s as well as parent company’s audit reports
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No
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Tax Treatment
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Taxed as Malaysia resident entity, local tax incentives available
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Generally treated as non-resident entity and not eligible for tax incentives
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Not applicable
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Choosing between a private company, branch office, or representative office in Malaysia depends on the objectives, nature of activities, and the long-term goals of the business. In a nutshell, private Company is ideal for businesses looking to establish a local presence with full operational capabilities and liability protection. Branch office is suitable for foreign companies seeking to operate in Malaysia while maintaining close control over their business activities. Representative Office is best for companies wanting to explore the market and establish connections without engaging in direct business operations.
Understanding these options and their implications will help in making an informed decision that aligns with your business strategy and regulatory requirements.
Kaizen, 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 professionals in Kaizen for further clarification.
See also:
Malaysia Company Incorporation Basic Package
Malaysia Company Incorporation (and Nominee Director) Package
Procedure and Fee for Registration of Limited Liability Partnership in Malaysia
Procedure and Fee for Registration of Branch Office in Malaysia
Procedure and Fee for Registration of Representative Office/Regional Office in Malaysia |
