Seeting Up a Representative Office in Malaysia

Setting Up a Malaysian RO

Setting up a Representative Office (RO) in Malaysia is a common strategy for foreign companies looking to explore the Malaysian market, conduct market research, and establish a presence without engaging in direct commercial activities. Here's a comprehensive guide:

1. What is a Representative Office (RO)?

A Representative Office (RO) in Malaysia is a non-trading entity established by a foreign company to perform specific non-commercial functions on behalf of its head office. It is not a separate legal entity and cannot generate income, sign business contracts, or engage in any form of commercial activity in Malaysia. Its operations are entirely funded by the parent company from outside Malaysia.

2. Key Characteristics & Purpose:

• Non-Commercial: Strictly prohibited from undertaking any commercial activities, including trading, business, or other income-generating operations.

• Market Exploration: Ideal for foreign companies to study the Malaysian market, gather information on investment opportunities, and conduct feasibility studies.

• Liaison & Coordination: Can act as a coordination center for the parent company's affiliates, subsidiaries, and agents in the region (for a Regional Office, which is a similar but broader concept).

• Limited Duration: Typically approved for a minimum of two (2) years, with possible extensions up to five (5) years, depending on the merits of the case.

• No Capital Requirement: There is no minimum capital requirement for setting up an RO.

• No Corporate Tax: ROs are not subject to corporate tax as they do not generate income in Malaysia. However, expatriate staff are subject to individual income tax.

3. Allowed Activities:

A Representative Office in Malaysia can undertake the following activities:

• Gathering and analyzing important information or undertaking feasibility studies on investment and business opportunities.

• Planning or coordination of business activities.

• Identifying sources of raw materials, components, or other industrial products.

• Undertaking research and product development (R&D).

• Acting as a coordination center for the corporation's affiliates, subsidiaries, and agents in the region (for a Regional Office).

• Other activities that will not result directly in actual commercial transactions.

4. Prohibited Activities:

Representative Offices are strictly prohibited from:

• Engaging in any trading, business, or any form of commercial activity (including import/export).

• Leasing warehousing facilities.

• Signing business contracts on behalf of the foreign corporation or providing services for a fee.

• Participating in the daily management of any of its subsidiaries, affiliates, or branches in Malaysia.

5. Advantages of Setting Up an RO:

• Low Commitment Market Entry: Offers a low-risk and low-cost way to explore the Malaysian market without committing significant financial resources.

• Ease of Compliance: Generally less stringent regulatory requirements compared to setting up a private limited company or a branch office.

• Work Visas: Facilitates obtaining work visas (Employment Passes) for expatriate personnel to carry out non-commercial activities, typically valid for 2 to 5 years.

• No Corporate Tax: ROs are not subject to corporate income tax as they are not considered a taxable entity.

• Cost-Effective: Lower setup and operational costs compared to establishing a fully-fledged company.

• Can Hire Local Employees: Allowed to hire local employees as support staff.

• Convertible: An RO can be converted into a fully-fledged company (e.g., Sdn Bhd) in the future if the foreign company decides to expand its commercial activities.

6. Disadvantages of Setting Up an RO:

• Activity Restrictions: Limited to non-commercial activities, preventing direct revenue generation.

• No Contract Signing: Cannot sign business contracts or provide services for a fee.

• Limited Expatriate Quota: There is usually a limitation on the number of expatriates, typically capped at 3 to 5 staff members.

• Annual Expenditure Requirement: A proposed operational expenditure of at least RM300,000 per annum is generally required.

• Parent Company Liability: As it's not a separate legal entity, the foreign parent company assumes full liability for the RO's activities and debts.

7. Minimum Operational Expenditure (Required by MIDA):

You should be aware of the minimum operational expenditure required.

• MIDA requires a proposed operational expenditure of at least RM300,000 per annum for a Representative Office. This is not a fee paid to MIDA, but rather a commitment to how much the RO will spend annually on its operations (e.g., rent, salaries, utilities, travel, market research). This expenditure must be financed by funds emanating from sources outside of Malaysia (i.e., from the parent company).

Other Potential Costs:

• Office Rental: Cost of renting actual office space. This can vary drastically based on location and size.

• Staff Salaries: Salaries for local employees (if any) and expatriate staff. Expatriates typically need to be paid a minimum basic salary (e.g., RM 5,000 per month).

• Utilities & Internet: Standard operational costs.

• Insurance: Business insurance.

• Travel & Accommodation: For expatriate staff or parent company representatives.

• Tax Compliance (for Expatriates): While the RO itself isn't taxed, expatriate employees are subject to individual income tax in Malaysia, and you may incur fees for tax advisory and filing services.

Summary of Costs and Considerations:

The total cost can vary greatly. For a basic setup with one or two expatriates and typical professional services, you could be looking at:

• Ongoing Annual Costs (Operational Expenditure + any recurring professional fees): RM 300,000+ (the minimum operational expenditure) plus recurring fees for registered office, annual compliance, and any ongoing immigration support.

8. Taxation:

• Representative Office: As mentioned, an RO is not subject to corporate income tax in Malaysia because it is not allowed to generate income.

• Expatriate Staff: Expatriate staff working for an RO in Malaysia are subject to individual income tax in Malaysia, depending on their individual circumstances and tax residency status.

9. Registration Process & Requirements:

The establishment of a Representative Office in Malaysia requires prior approval from the Malaysian Investment Development Authority (MIDA). For banking, financial, and tourism services, applications are submitted to Bank Negara Malaysia and the Ministry of Tourism, Arts and Culture Malaysia, respectively.

General Process:

1. Application Submission: Submit a completed application form to MIDA (or relevant authority).

2. Document Preparation: Gather and prepare all necessary documents (often translated into English and notarized).

3. Approval: Await approval from MIDA, which typically takes about 1-2 months.

4. Visa Application (if applicable): Once RO approval is granted, proceed with employment pass applications for expatriate staff, which can take an additional 2-3 months.

Required Documents:

• Parent Company Documents:

  • Copy of the parent company's Certificate of Incorporation or Registration in their home country.

  • Audited Financial Statements of the parent company for the past two (2) years.

  • Company profile and description of business activities.

  • Latest annual report of the parent company.

• Application Specific Documents:

  • Completed MIDA application form, including the purpose of establishment, proposed activities, benefits to Malaysia, estimated cash flow, and human resources arrangements.

  • Proposed budget and duration of operations in Malaysia, with an estimated annual expenditure of around RM300,000.

  • Office tenancy agreement for the business operations address in Malaysia (can be submitted after approval).

• Expatriate Documents (if applicable):

  • List of personnel requiring a working visa.

  • Copy of passport for each expatriate applicant (all pages, notarized).

  • Resume/CV of each expatriate.

  • Copies of educational certificates (notarized and translated if necessary).

  • Copies of past employment testimonials/appointment letters.

  • Passport-sized recent photo.

10. Fees

When considering the fees for setting up a Representative Office (RO) in Malaysia, it's important to distinguish between government application fees and professional service fees.

Here's a breakdown of the typical fees and costs:

1. Government Application Fees (MIDA Fees - Effective 6th November 2023 onwards):

The Malaysian Investment Development Authority (MIDA) introduced new evaluation and issuance fees for RO/Regional Office (RO/RO) applications. These are official fees payable directly to MIDA.

• New application of RE/RO status: RM5,000.00

• Extension of RE/RO Status: RM10,000.00

• MIDA Support Letter for Expatriate (if required): RM1,000.00

• Digital Certificate (validity 2 years): RM1,000.00 (This replaced the previous RM300 fee).

• Annual Compliance Report/Assessment (ACR/ACA/CAF-PH/CAF-IILS): RM2,000.00

Important Notes on MIDA Fees:

• These fees are generally non-refundable, even if your application is not approved.

• Payments are typically made through MIDA's secure online payment system (MIDA Payment Channel).

2. Professional Service Fees:

This is a significant component of the overall cost and can vary widely depending on the firm's reputation, experience, and the scope of services provided.

• Initial Consultation & Feasibility Assessment: Some firms may offer a free initial consultation, while others might charge a nominal fee for a detailed assessment of your eligibility and the best market entry strategy.

• RO Application & Registration: This typically covers:

  • Preparation and review of all application documents.

  • Liaison with MIDA (or Bank Negara Malaysia/Ministry of Tourism for specific sectors).

  • Submission of the application.

  • Follow-ups and responding to MIDA's queries.

  • Estimated Range: This can range from USD 1,500 to USD 5,000+ (or equivalent in MYR), depending on the complexity of your case and the firm's pricing structure. Some firms might quote a fixed fee for the entire process.

• Expatriate Employment Pass Application: If you plan to send expatriate staff to Malaysia, this is a separate service.

  • Guidance on requirements and quota.

  • Preparation and submission of employment pass applications to the Immigration Department.

  • Assistance with Dependant Pass applications.

  • Estimated Range: This can vary significantly per expatriate, often ranging from USD 800 to USD 2,000+ per pass.

• Registered Office Address: While an RO doesn't need to be incorporated under the Companies Act, it still needs a physical address. Many firms offer this service.

  • Estimated Annual Fee: Around RM 600 - RM 1,500+ per annum.

• Ad-hoc Services: For any additional advice or specific tasks not covered in the initial package, firms will typically charge an hourly rate.

  • Estimated Hourly Rates: Can range from RM 250 to RM 1,500+ depending on the seniority of the professional.

• Disbursements: These are out-of-pocket expenses incurred by the firm on your behalf, such as translation fees, notarization fees, courier charges, and government processing fees (like the MIDA fees mentioned above, which would be paid to the firm and then passed on to MIDA).

Summary of Costs and Considerations:

The total cost can vary greatly. For a basic setup with one or two expatriates and typical professional services, you could be looking at:

• Initial Setup (Government Fees + Professional Fees): RM 10,000 - RM 25,000+.

How Bestar can Help

Setting up a Representative Office (RO) in Malaysia involves navigating various regulations, preparing specific documents, and liaising with government authorities. This is where Bestar becomes invaluable. We can offer comprehensive support, ensuring a smooth and compliant setup process.

Here's how Bestar can help:

1. Expert Guidance and Advisory:

• Eligibility Assessment: We will assess your parent company's profile and proposed activities to determine if setting up an RO is the most suitable option for your objectives in Malaysia, or if another entity like a private limited company (Sdn Bhd) or a branch office might be more appropriate.

• Permitted Activities Clarification: We will provide clear guidance on the permissible and prohibited activities for an RO, ensuring your operations align with MIDA's (Malaysian Investment Development Authority) regulations. This is crucial to avoid any future compliance issues.

• Strategic Advice: We can offer strategic advice on market entry, including insights into the Malaysian business environment, potential opportunities, and challenges.

  
  

2. Document Preparation and Review:

• Checklist Provision: We will provide a detailed checklist of all required documents, including those from the parent company (certificate of incorporation, audited financial statements, company profile, etc.) and those specific to the RO application (proposed budget, activities, etc.).

• Document Vetting: We will review all your documents to ensure they are accurate, complete, and properly formatted, including ensuring necessary translations and notarizations are done correctly.

• Drafting Support: We can assist in drafting key documents like the application form, detailed description of proposed activities, and any other statements required by MIDA.

3. Application Submission and Liaison with Authorities:

• MIDA Application: We will prepare and submit the complete RO application to MIDA (or Bank Negara Malaysia for financial services, or Ministry of Tourism for tourism services) on your behalf.

• Follow-up and Communication: We will act as your liaison with the relevant government agencies, handling all communications, inquiries, and follow-ups to expedite the approval process. This is particularly helpful for foreign companies unfamiliar with local administrative procedures.

• Addressing Queries: If MIDA has any queries or requests for additional information, the consultant/legal firm will help you respond promptly and effectively.

4. Expatriate Employment Pass Application:

• Work Visa Guidance: We will advise on the requirements for obtaining Employment Passes for your expatriate staff, including the expatriate quota, eligible positions (managerial and technical), and necessary supporting documents (passports, CVs, educational certificates).

• Application Management: We will prepare and submit the Employment Pass applications to the Immigration Department after the RO approval, and manage the entire visa application process.

• Dependant Pass Applications: We can also assist with dependent pass applications for spouses and children of expatriate staff.

5. Post-Establishment Support:

• Office Setup Guidance: While not directly setting up your physical office, we can provide guidance on legal requirements for office space and registration.

• Banking Assistance: We can offer advice on opening a corporate bank account in Malaysia, which can sometimes be complex for foreign entities.

• Compliance and Reporting: We can advise on ongoing compliance requirements for an RO, including any reporting obligations to MIDA or other authorities.

• Taxation Advisory: While an RO is not subject to corporate tax, we can advise on individual income tax for expatriate staff and any other relevant tax matters.

• Conversion Assistance: If, in the future, you decide to convert your RO into a commercial entity (e.g., Sdn Bhd), we can facilitate this conversion process.

6. Legal Compliance and Risk Mitigation:

• Legal Framework Understanding: We possess in-depth knowledge of Malaysian company law, investment regulations, and immigration laws, ensuring your setup is fully compliant.

• Risk Identification: We can identify potential legal risks or compliance pitfalls and help you mitigate them.

• Contractual Review (Limited): While an RO cannot sign commercial contracts, Bestar can advise on any preliminary agreements or MOUs that might be necessary for the RO's non-commercial activities, ensuring they don't overstep the RO's mandate.

In essence, Bestar acts as your local expert and guide, streamlining the complex process of setting up an RO in Malaysia, minimizing potential delays, and ensuring compliance with all local regulations. Our expertise saves you time, resources, and provides peace of mind.