Tax Exemption for Intellectual Property Income

These past few years Malaysia faced quite uncertain economic and social changes as a result of the ongoing pandemic. Many companies have closed-down or downsized due to the drop in sales as the country went through phase after phase of Movement Control Orders. As we have yet to fully see the light at the end of the tunnel, it is worth learning how companies can save in order to keep their businesses afloat. This article will explain the available Tax Incentive for Intellectual Property Development with reference to the “Guideline on Incentive for Intellectual Property (IP) Development”  published by the Malaysian Investment Development Authority (MIDA).

Objectives of the Incentive

The incentive aims to “…to encourage researchers to exploit intellectual property through the licensing of patented knowledge, to encourage enterprises to invest in research and knowledge creation and to support the exploitation of intellectual property.”[1]Further endorsing post research and development (R&D) economic activities which will create more jobs and new products/services for the economy.

The Incentive

The guideline provides that qualifying intellectual property (IP) income will receive full income tax exemption for a period of up to 10 years.

In order to ensure that only income derived from IP developed in Malaysia is eligible for the incentive, the exemption will be subject to the guidelines on Modified Nexus Approach (MNA) which is a formula adopted by the Forum on Harmful Tax Practices (FHTP) to calculate qualifying income based on actual R&D expenditure incurred by companies.

• Modified Nexus Approach

The nexus approach is based on the substantial activity requirement which essentially requires that there must be a direct nexus between the income receiving benefits and the activity contributing to that income. As such, only income arising from IP where the actual R&D activity is undertaken by the business itself can benefit from the exemption.

Eligible Applicants

New or existing companies that own the rights of the qualifying IP and are receiving income from the qualifying IP activities related to the promoted activities/list prescribed under the Promotion of Investments Act 1986 (PIA) and Income Tax Act 1967 (ITA) will be eligible to apply.

It should be noted however that companies currently enjoying incentives under Section 34A or Section 34B of the ITA will not be eligible for this incentive.

Qualifying Intellectual Property Assets

• Patent or Utility Innovation
• Copyrighted software
• Family of qualifying IPs

Qualifying Intellectual Property Income

• Royalty
• Licensing Fees

Criteria for Eligibility

• The company must be incorporated under the Companies Act 2016 and residing in Malaysia.
• The R&D activities must be conducted in Malaysia, where such R&D activities lead to the development, improvement, modification or creation of the Qualifying IP Asset.
• The IP must be filed/registered with MyIPO or any equivalent body outside of Malaysia, and must be related to the activities as prescribed under the promoted list/activity of the PIA and ITA.
• The company must have at least 30% science and technical staff (S&T) having degree or diploma with a minimum experience of 5 years from related fields.
• The company must incur adequate amount of operating expenditure annually to support the company in conducting its business operation in Malaysia. Such expenditures 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.

Qualifying R&D Expenditure

• Eligible R&D expenditure for MNA calculation will be in line with the types of eligible expenditure under Section 34A of of the ITA.
• Cost-sharing agreements expenditure will be permitted provided that the cost of payable R&D is clearly stated in the agreement.
• Qualifying expenditure can be backdated up to 3 years from the date the IP was registered/filed.

Effective Date of Incentive/ Exemption Period

• The date the IP was filed will be the starting date of the exemption period of the incentive.
• With regards to subsequent IP filings, the exemption period will be granted within the period approved for the first IP.

Effective Date of Application

Applications received by MIDA from the 1^st of January 2020 until the 31^st of December 2022 are eligible to be considered for the incentive.

Conclusion

One of the main contributors to the growth of an economy is R&D. As more products are brought to the market, more businesses are formed leading to more jobs for the masses. Since the outbreak of the pandemic there have been an increase in the unemployment rate, many have lost their basic income and are struggling to get by. The incentive has become more relevant now as it seeks to improve the economy by encouraging companies that are involved with R&D activities to continuously progress in their efforts, and in doing so they may be eligible to enjoy 100% income tax exemption from the income earned from their IP.

It should be noted that R&D and IP go hand in hand. The importance of IP in the growth or in the case for Malaysia, the rebuilding of the economy, should not be undermined. IP plays a significant role in R&D as without IP protection, researchers/inventors would be discouraged to commercialize their products as it will be easy for competitors to distribute identical products as their own. IP rights such as Patents provide monopoly rights to the owners of the Patents, such rights give the owners control over the market in relation to their products for a period of 20 years by which the owners could license the rights to other companies and earn licensing fees which as discussed may be eligible for income tax exemption.

[1] Page 1 of the “Guideline on Incentive for Intellectual Property (IP) Development”