Part 01 · MD Tax Incentive Overview
Malaysia Digital Tax Incentives at a Glance
Before turning to the New Investment Incentive and the Expansion Incentive, it helps to see what the MD tax incentive is, which technology activities it covers, how the application process works, and the rules both incentives share.
— Policy Background
What the MD Tax Incentive Is
Malaysia Digital (MD) tax incentives are tax incentives that the Malaysian government provides to companies that have been awarded MD Status. They are outcome-based and use a tiered assessment approach. A company that carries out R&D, commercialised solutions or services using the government-promoted technology-enabling areas may apply.
The incentive sits under the MD Status Bill of Guarantees and is designed to align with the international standards of the Organisation for Economic Co-operation and Development (OECD). Applications are assessed by MDEC and submitted to the National Investment Committee (NCI) for consideration; once approved, the Malaysian Investment Development Authority (MIDA) issues the approval letter.
01
Encouraging High-growth, High-value Investment
Through tiered conditions, resources are directed to digital investments with high growth potential and high added value.
02
Nurturing New Economic Clusters
Supports companies in building new economic clusters and expanding links with local industry networks.
03
Balancing Growth with ESG
Sustainability initiatives in education, society and the environment are built into the conditions for the higher tier of incentive.
What “tiered” means: Approval does not mean enjoying the highest tier throughout. A company must meet the conditions set out in the approval letter every year (or stage by stage): meeting only the minimum conditions earns the lower tier of incentive; meeting the additional conditions as well earns the higher tier; and a company that fails even the minimum conditions receives no incentive for that period.
— Two Incentives
Two Incentives: New Investment and Expansion
The MD tax incentive comes in two types, the New Investment Incentive and the Expansion Incentive, which suit companies at different stages. Under both, a company chooses between a “Reduced Tax Rate” and an “Investment Tax Allowance”:
Item
New Investment Incentive
Expansion Incentive
Eligible companies
Companies that plan to carry out a new qualifying activity in Malaysia and hold MD Status.
Companies that hold MD or MSC Malaysia Status, have completed their existing incentive and plan a new activity to broaden their capabilities.
Minimum paid-up capital
RM50,000
RM250,000
Operating history
None
At least 36 months in operation
Reduced Tax Rate (RTR)
10% or 5% on non-IP income; 0% on qualifying IP income; 10 consecutive years of assessment.
15% on both non-IP and IP income; 5 consecutive years of assessment.
Investment Tax Allowance (ITA)
60% or 100% of qualifying capital expenditure (QCE), set against up to 100% of statutory income; 5 consecutive years.
30% or 60% of qualifying capital expenditure (QCE), set against up to 100% of statutory income; 5 consecutive years.
Official application fee
RM1,080 (including SST)
RM2,160 (including SST), covering the addition of activities
※The eligibility details and the conditions for the rates and allowances of each incentive are set out in the sections of Part 02 below. The figures in the table are the ceiling of each tier; the approval letter prevails.
— Qualifying Activities
Qualifying and Excluded Activities
A qualifying activity must be a new activity (enhancing or upgrading an existing product or service is not a new activity), and must be R&D, a commercialised solution or the provision of a service using the following ten government-promoted technology-enabling areas:
01
AI & Big Data Analytics
Includes machine learning, deep learning, generative AI and advanced analysis of large-scale data.
02
Internet of Things
Physical devices with sensors and processing capability that connect to a network to exchange data, and their systems.
03
Cybersecurity
Measures and services that protect critical systems and sensitive information from digital attacks.
04
Cloud
Servers, software and database services accessed through the internet.
05
Blockchain
Distributed ledger technology used to record transactions and track assets.
06
Drone Technology
Drone technology that operates flight programmes controlled by software.
07
Creative Media Technology (including XR/MR)
Animation, games, visual effects, and extended reality (XR) and mixed reality (MR).
08
Integrated Circuit (IC) Design with Embedded Software
Logic and physical design of ICs, and embedded software tied to specific devices.
09
Robotics or Automation
Software and technology that replace or replicate manual operations, such as robotic process automation.
10
Advanced Connectivity or Telecommunications Technology
For example software-defined networking (SDN) and high-capacity optical networks, for both subsea and terrestrial use.
The following activities are not MD activities and fall outside the incentive:
Manufacturing activities;
Provision of telecommunications services;
Digital banking services;
Non-technical global business services or knowledge process outsourcing, including low-value call centres, data entry and recruitment process outsourcing;
Supply chain services (such as buying, selling or providing services) provided directly or indirectly to the tobacco, alcohol and gambling industries.
— Choosing the Form
Two Forms: Reduced Tax Rate or Investment Tax Allowance
Under both the New Investment Incentive and the Expansion Incentive, a company must choose one of the following two forms. The two are mutually exclusive: once approved, a company cannot switch from one to the other.
Item
Reduced Tax Rate (RTR)
Investment Tax Allowance (ITA)
Form of incentive
During the incentive period, income from the qualifying activity is taxed at a lower rate.
A set percentage of qualifying capital expenditure (QCE) is set against the statutory income of the qualifying activity.
Legal basis
Section 65B of the Income Tax Act 1967.
Section 127(3)(b) of the Income Tax Act 1967.
Commencement
The company must apply to MDEC within 24 months of the approval-in-principle letter to fix the first year of assessment.
The commencement date is the date of the company’s first qualifying capital expenditure, counted from the day after the application is submitted.
Compliance verification
Within 7 months after the end of each year of assessment, submit a Self-Declaration Form (SDF) verified by an independent external auditor.
Verified in stages against the conditions in the approval letter, with a compliance declaration submitted; the additional conditions must each be met in the 4th and 5th years of the allowance period.
Consequence of non-compliance
The relevant tax year is taxed at the prevailing corporate income tax rate.
The allowance for that period cannot be claimed.
— Timeline & NIF
Application Window and the Transition to the NIF
According to MDEC’s announcement of 12 February 2026, existing MD tax incentives remain unchanged until 31 December 2027; approved incentives will continue to be honoured on their approved terms, and new applications under the current framework can still be submitted up to that date. The New Incentive Framework will then progressively replace the current mechanism:
From 19 April 2024
MDEC began accepting tax incentive applications under the current guidelines.
1 March 2026
The New Incentive Framework (NIF) is rolled out first in the manufacturing sector; the services sector is expected to follow in the second quarter of 2026.
31 December 2027
The last day on which existing MD tax incentives remain unchanged, and the closing date for new applications under the current framework.
1 January 2028 (target)
The NIF is expected to apply to new MD tax incentive applications, covering new investment and expansion activities; incentives will then be assessed on the National Investment Aspirations (NIA) Scorecard and may be granted as a Special Tax Rate (STR) or an Investment Tax Allowance (ITA).
※MDEC has said that the specific eligibility and application arrangements for MD companies under the NIF will be announced closer to the 2028 implementation timeline.
— Definitions
Key Definitions
The conditions of both incentives are built on the following concepts:
Full-time employee (FTE)
A person who has a service contract with the company, works at least 6 hours a day, at least 20 days a month and all 12 months of the year, and is paid directly by the company. This includes travelling sales, engineering, maintenance and repair personnel who are paid and managed by the company. Personnel outsourced by a third party and not on the company’s payroll are not the company’s employees.
Knowledge worker
A person who holds a higher-education qualification (in any field); or holds an ICT, engineering or technology diploma or professional certification together with at least 2 years of relevant experience in a high-technology-intensive field; or performs professional, administrative, managerial and technical work in IT-enabled services (such as information systems, finance, accounting, business administration, engineering, healthcare and law). It also includes knowledge-worker expatriates that an MD company needs and who are scarce in Malaysia, and employees who produce value-added creative works through creative talent.
Basic salary
Same as the definition of “wages” in Section 2 of the Employment Act 1955.
Operating expenditure
Expenses the company incurs in carrying out the qualifying activity, based on the amounts in the audited financial statements (excluding interest, depreciation and expenses not directly related to generating income). Examples include transport, banking, insurance, legal and ICT services; staff remuneration (wages, salaries, bonuses, social security contributions and so on); rent and utilities; and sales and marketing.
Qualifying capital expenditure (QCE)
Capital expenditure the company incurs on multimedia and peripheral equipment (software and hardware), machinery, plant or buildings used exclusively to carry out the qualifying activity.
— General Rules
Compliance Rules Common to Both Incentives
Separate accounts: An approved qualifying activity must be treated as a separate source of business income of the company, with separate accounts kept for that activity’s income; where there is intellectual property (IP) income, qualifying IP income must also be recorded separately from non-IP income.
Annual verification: The company must meet all the applicable conditions set out in the approval letter to enjoy the incentive. Under the reduced tax rate, a year in which the conditions are not met is taxed at the prevailing corporate income tax rate; under the investment tax allowance, the allowance cannot be claimed if the conditions are not met.
Maintaining MD Status: The company must maintain MD (or MSC Malaysia) Status throughout the incentive period and comply with all the conditions attached to that status.
Voluntary withdrawal: After approval, a company may apply to withdraw from the incentive, except where the company has failed to meet any of the minimum conditions.
Guidelines may be revised: The Government of Malaysia reserves the right to revise the guidelines at any time without prior notice to companies.
Part 02 · New Investment Incentive
New Investment Incentive (NII)
The New Investment Incentive is for companies that plan to carry out a new qualifying activity in Malaysia and already hold MD Status. A company may choose between a lower tax rate and an investment tax allowance.
— What is NII
What the New Investment Incentive Is
The New Investment Incentive is designed to promote new investment activity in Malaysia and is offered to companies that plan to carry out a qualifying activity. For the income arising from the qualifying activity, a company can choose either a reduced tax rate or an investment tax allowance.
5%–10%
Non-IP income
Reduced Tax Rate
10 consecutive years of assessment. 10% when the minimum conditions are met; 5% when the additional conditions are met as well.
0%
Qualifying IP income
IP Income
10 consecutive years of assessment; the Modified Nexus Approach must be complied with.
60%–100%
Allowance on qualifying capital expenditure
Investment Tax Allowance
5 consecutive years, set against up to 100% of statutory income.
— Eligibility
Eligibility
Company: Incorporated under the Companies Act 2016 or the Companies Act 1965, and a Malaysian tax resident;
Paid-up capital: Minimum paid-up capital of RM50,000;
MD Status: Awarded MD Status;
Activity in Malaysia: Plans to carry out the qualifying activity in Malaysia;
Sales invoices: No sales invoice has been issued in Malaysia for the qualifying activity before the application is submitted; or the company has 60% direct or indirect Malaysian equity and has not issued any sales invoice for the activity more than 12 months before the application is submitted;
No other incentive: The company has not received any Malaysian government tax incentive for that qualifying activity.
Other points to note:
A qualifying activity means one or more new activities that meet the “MD activity” criteria; enhancing or upgrading an existing product or service is not a new activity.
A company is not eligible to apply for the New Investment Incentive for an activity if a related company has already received a tax incentive for the same qualifying activity, or has issued sales invoices for that activity before the company submits its application.
— Reduced Tax Rate
Reduced Tax Rate (RTR)
The reduced tax rate applies for 10 consecutive years of assessment (YA). Which rate applies in each year of assessment depends on which conditions the company meets that year:
Type of income
Rate
Conditions to be met
Non-IP income
10%
Minimum conditions (1) to (7)
Non-IP income
5%
Minimum conditions (1) to (7), plus additional conditions (9) and (10)
Qualifying IP income
0%
Minimum conditions (1) to (8), including compliance with the Modified Nexus Approach
Minimum conditions
(1) Employ a sufficient number of full-time employees (FTEs) in Malaysia throughout the year to carry out the qualifying activity;
(2) The FTEs throughout the year must include a sufficient number of knowledge workers with a basic monthly salary of not less than RM5,000;
(3) Incur a sufficient amount of annual operating expenditure in Malaysia before the end of each year of assessment (assessed on that year alone, not cumulative with earlier years);
(4) Carry out the qualifying activity in Malaysia throughout the year;
(5) Maintain MD Status at all times and comply with all the conditions attached to MD Status;
(6) Within 7 months after the end of each year of assessment, submit a Self-Declaration Form (SDF) to MDEC, with the information first verified by an independent external auditor appointed by the company at its own cost;
(7) Other conditions relating to the company’s economic development commitments;
(8) For IP income only: comply with the Modified Nexus Approach.
Additional conditions (apply only to the 5% rate on non-IP income)
(9) At the end of each year of assessment, meet at least 3 conditions relating to sustainable economic development, such as initiatives in education, society and the environment, as specified in the approval letter;
(10) Other conditions relating to the company’s economic development commitments.
The SDF deadline is critical: If a company fails to submit its Self-Declaration Form within the prescribed time, it is not entitled to the reduced tax rate for that year of assessment.
Scope of IP income (0%)
Qualifying IP: Patents or utility innovations (under Malaysia’s Patents Act 1983 or equivalent foreign law); computer programmes registered as copyrighted works under the voluntary notification provisions, and their derivative or adapted works; and “families” of interrelated IP that cannot be separated for calculation. The company must own the IP and have registered it, or applied to register it, with the Intellectual Property Corporation of Malaysia (MyIPO) or an equivalent overseas body, and the IP must relate to the qualifying activity.
Qualifying IP income: Limited to royalties and licence fees; proceeds from the sale of IP are not qualifying IP income.
Proportion eligible: The reduced tax rate applies only to the percentage of qualifying IP income calculated under the Modified Nexus Approach formula. The formula and the details of qualifying R&D expenditure are governed by the relevant subsidiary legislation; the categories of R&D expenditure are consistent with Section 34A of the Income Tax Act 1967, with a three-year transitional period for tracking expenditure.
Restriction: A company that currently enjoys incentives under Section 34A/34B is not eligible for the reduced tax rate on qualifying IP income.
Adding activities later
A company that has been approved for the reduced tax rate may, during the incentive period, apply to add a new activity to its approved incentive, subject to three requirements: the company has not issued any sales invoice in Malaysia for that activity before submitting the application; the application is submitted at least 18 months before the incentive period expires; and the incentive period for the added activity falls within the existing incentive period, running from the year of assessment in which the application is approved to the expiry of the existing incentive period. The added activity must separately satisfy the minimum conditions above.
— Investment Tax Allowance
Investment Tax Allowance (ITA)
The investment tax allowance runs for 5 consecutive years, set at 60% or 100% of qualifying capital expenditure (QCE) against up to 100% of the statutory income of the qualifying activity. The conditions are as follows:
Minimum conditions
(1) Incur a sufficient amount of qualifying capital expenditure;
(2) Employ a sufficient number of full-time employees in Malaysia to carry out the qualifying activity;
(3) Carry out the qualifying activity in Malaysia at all times;
(4) Maintain MD Status at all times and comply with all the conditions attached to MD Status;
(5) Other conditions relating to the company’s economic development commitments.
Additional conditions
(6) In each of the 4th and 5th years of the allowance period, meet at least 3 conditions relating to sustainable economic development, such as initiatives in education, society and the environment, as specified in the approval letter;
(7) Other conditions relating to the company’s economic development commitments.
The allowance is recognised in stages. The first allowance period runs from the commencement date to the date the company submits its declaration of compliance with the minimum conditions; the second allowance period runs from the day after the first allowance period ends to the end of the 5-year allowance period:
Cumulative allowance granted
Stage 1
minimum conditions
Stage 2
minimum conditions
Additional
conditions
30% of QCE (first allowance period QCE only)
✓
—
—
60% of QCE (first and second allowance period QCE)
✓
✓
✗
100% of QCE (first and second allowance period QCE)
✓
✓
✓
Within 36 months of the approval-in-principle letter, meeting minimum conditions (1) to (5) earns 30% of the QCE of the first allowance period.
Continuing to meet the minimum conditions until the allowance period expires brings the cumulative allowance for the first allowance period to 60% of QCE (a further 30% on top of the 30% already granted), and the second allowance period earns 60% of QCE.
Also meeting additional conditions (6) and (7) brings the cumulative allowance for the first allowance period to 100% of QCE (a further 70% on top of the 30% already granted), and the second allowance period earns 100% of QCE.
Commencement date: The commencement date of the allowance period is the date of the company’s first qualifying capital expenditure, counted from the day after the tax incentive application is submitted.
— Pillar Two
The NII and the Global Minimum Tax
For multinational groups, choosing the New Investment Incentive also calls for an assessment of the impact of the global minimum tax (GloBE / Pillar Two):
Global minimum tax
The Global Anti-Base Erosion (GloBE) rules set a global minimum effective tax rate (ETR) of 15%. Where a group’s effective tax rate in a jurisdiction is below 15%, a top-up tax may be charged.
Implementation in Malaysia
Collected through the Domestic Top-up Tax (DTT) mechanism under Part XI of the Income Tax Act 1967.
Companies affected
Multinational groups with annual consolidated group revenue of EUR 750 million or more.
Effect on the choice of incentive
If a group’s effective tax rate in Malaysia falls below 15% because of lower rates such as 0% or 5%, it may have to pay top-up tax, and the real benefit of the incentive will be reduced. We recommend comparing the reduced tax rate with the investment tax allowance under the global minimum tax.
— Choosing
What to Assess Before You Choose
The reduced tax rate and the investment tax allowance are alternatives, and the choice cannot be changed once approved, so we recommend weighing the following:
Profit timing: The tax saving from a reduced rate comes from taxable profit. Where a project makes losses or low profits early on, a low rate benefits little; a project that becomes profitable earlier is better placed to use the full 10-year incentive period.
Capital intensity: For capital-heavy projects such as hardware, equipment and data centres, compare with the investment tax allowance to see whether setting capital expenditure against statutory income is more favourable.
IP structure: If income comes from licensing or royalties, assess whether the Modified Nexus Approach can be met in order to qualify for the 0% rate on IP income.
Talent and spending: The company must keep up its levels of full-time employees, knowledge workers (basic monthly salary of not less than RM5,000) and annual operating expenditure, so recruitment and budgets need to be planned in advance.
The group’s position under the global minimum tax: Large multinational groups should include top-up tax in their calculations.
Timing of the application: Applying before the first sales invoice is issued is the safest course; also keep in mind the closing date for applications under the current framework (31 December 2027).
※Disclaimer: This page is compiled from the Guidelines on Malaysia Digital (MD) Tax Incentive (New Investment Incentive) issued by the Malaysia Digital Economy Corporation (MDEC) (issued 26 April 2024, revised 9 July 2025), MDEC’s announcement on the New Incentive Framework (NIF) of 12 February 2026, and information published on MDEC’s official website. It is for general reference only and does not constitute legal, tax or investment advice. The policy content, conditions, application deadlines and approval practices of the MD tax incentive may be adjusted by the Malaysian government and the relevant authorities. Whether a company is approved, the form of incentive granted, the tax rate or allowance percentage, the incentive period and the conditions to be met are all subject to the approval letter issued by MDEC, the National Investment Committee (NCI) and the Malaysian Investment Development Authority (MIDA) and to the relevant legislation. Please consult an adviser before applying for any specific project.
