Malaysia Digital Status: Tax Incentives

In today’s fast-evolving global economy, digital transformation is no longer a choice but a necessity. As businesses across sectors increasingly integrate technology into their daily operations, governments around the world are recognizing the need to support and nurture a thriving digital ecosystem. In Malaysia, this push has taken shape through a national strategic initiative known as Malaysia Digital.

Launched as a successor to the Multimedia Super Corridor (“MSC”), Malaysia Digital aims to future-proof the nation’s economy by fostering innovation, attracting investment, and accelerating digital adoption. Grounded in the principles of flexibility, agility, and relevance, the initiative reflects a forward-looking approach to building a sustainable, inclusive, and globally competitive digital economy.

At the heart of the initiative lie three strategic priorities designed to catalyze nationwide transformation:

Drive digital adoption among aspiring young entrepreneurs, companies and the Rakyat.
Grow local tech companies to become “Malaysian Champions”, thriving globally.
Attract high value digital investments.

To quote Bill Gates:-

“The advance of technology is based on making it fit in so that you don’t really even notice it, so it’s part of everyday life.”

Malaysia Digital reflects this philosophy — envisioning a future where technology seamlessly integrates into daily life and business. With the right strategic focus and sustained support, Malaysia is poised to not only embrace this digital future but to lead in it.

In this article, we will explore the details Malaysia Digital status and the tax incentives that have been provided to these companies.

Malaysia Digital (MD) Status

The Malaysia Digital Economy Corporation (MDEC)—the lead government agency for digital economy initiatives—grants MD Status to companies undertaking approved digital activities that support the country’s transformation agenda.

As of 31 March 2024, 5,331 companies have been awarded MD Status, with more than 73% being local enterprises .

So, how does a company qualify to obtain MD Status?

1. Eligibility Criteria

To qualify for MD Status, a company must:

Be incorporated under the Companies Act 2016 and a Malaysian tax resident.
Have a minimum paid-up capital of RM1,000.
Employ at least two (2) full-time employees engaged in approved activities, each earning an average monthly salary of RM5,000.
Incur annual operating expenditure of at least RM50,000.
Carry out one or more approved Malaysia Digital activities.

2. Malaysia Digital Activities

The following are the Malaysia Digital approved activities:

Big Data Analytics (BDA)
Artificial Intelligence (AI)
Financial Technology (Fintech)
Internet of Things (IoT)
Cybersecurity (Technology/Software/Design and Support)
Data Centre and Cloud
Blockchain
Creative Media Technology
Sharing Economy Platform
User Interface and User Experience (UI/UX)
Integrated Circuit (IC) Design and Embedded Software
3D Printing (Technology/Software/Design and Support)
Robotics (Technology/Software/Design)
Autonomous Technologies
Systems/Network Architecture Design and Support
Global Business Services or Knowledge Process Outsourcing
Virtual, Augmented And / Or Extended Reality
Drone Technology
Advance Telecommunication Technology; Or
Other Emerging Technologies deemed significant for the digital ecosystem subject to approval by the Approval Committee

3. MD Status Benefits

Companies granted MD Status can enjoy a range of benefits under the Bills of Guarantee (BoG) introduced by MDEC. The BoG includes the following benefits:

Competitive & ready infrastructure and services for business available at designated locations
Foreign knowledge worker quota & passes
Freedom of ownership by exempting from local ownership requirements
Flexibility to source capital and funds globally
Tax incentives (refer below for more information)
Multimedia / ICT equipment import duty and sales tax exemption
IP protection and Cyberlaws
No Internet censorship
Key infrastructure contracts by Government
High powered implementation agency
Access to local and international market and ecosystem
Business matching & partnership
Grant and funding facilitation
Participation in MD catalytic programmes

MD Status Tax Incentive

On 31 May 2024, MDEC launched the Malaysia Digital Tax Incentives, which is an outcome-based tax incentive offered to MD Status companies undertaking qualifying tech activities such as:

Artificial Intelligence (AI) and/or Big Data Analytics (BDA
Internet of Things (IoT)
Cybersecurity
Cloud
Blockchain
Drone Technology
Creative Media Technology including Extended Reality (XR) and/or Mixed Reality (MR)
Integrated Circuit (IC) Design with Embedded Software
Robotics and/or Automation
Advanced Network Connectivity and/or Telecommunication Technology.

Further, the Malaysia Digital Tax Incentives are further divided into two (2) categories, i.e. New Investment Incentive and Expansion Incentive.

New Investment Incentive
Expansion Incentive

The Malaysia Digital New Investment Incentive is introduced to promote new investments in Malaysia and is offered in the form of a reduced tax rate or investment tax allowance which we will explore in more detail below.

a) Eligibility Criteria

In order to be eligible for the Malaysia Digital New Investment Incentive, a company must meet the following criteria:

The company must be incorporated under the Companies Act 2016 and is a resident in Malaysia;
Paid up capital of at least RM50,000;
Has made an application for the award of MD Status;
Undertaking one of the qualifying activities in Malaysia (as mentioned above);
Has not issued any sales invoice for the qualifying activity in Malaysia prior to the date the tax incentive application is received, or has sixty per cent (60%) direct or indirect Malaysian equity ownership and has not issued any sales invoice for the qualifying activity in Malaysia more than twelve (12) months prior to the date the tax incentive application is received; and
Is not granted any tax incentive by the Government of Malaysia in relation to the qualifying activity.

b) Option 1 – Reduced Tax Rate

The first form of tax incentive offered is a reduced tax rate for a period of ten (10) consecutive years of assessment (“YAs”). The scope and conditions for the reduced tax rate incentive are detailed in the table below.

	Non-IP Income		IP Income
Tax Rate	10%	5%	0%
YAs	Ten (10) consecutive YAs
Conditions	(1) To employ an adequate number of full-time employees (“FTE”) in Malaysia to carry on the qualifying activity throughout the YA.
	(2) To ensure the FTE comprises adequate number of knowledge workers with a minimum average monthly basic salary of RM5,000.00 throughout the YA.
	(3) To incur an adequate amount of annual operating expenditure in Malaysia to carry on the qualifying activity by the end of each YA.
	(4) To undertake the qualifying activity in Malaysia throughout the YA.
	(5) To remain an MD Status company and comply with all the conditions under MD Status at all times.
	(6) To submit to MDEC annually a self-declaration form (“SDF”) on compliance of conditions within seven (7) months from the end of each year of assessment, and the information submitted in the SDF must first be verified by an independent external auditor appointed by the company at its own costs.
	(7) Any other conditions as stated in the approval letter.
	Not applicable		(8) To comply with modified nexus approach based on a prescribed formula.
Additional Conditions	Not applicable	(9) To meet minimum three (3) conditions related to sustainable economic development such as relevant initiatives in education, social and environment at the end of each YA as stated in the approval letter.	Not applicable
	(10) Any other conditions stated in the approval letter.

For the purposes of determining the commencement YA for the reduced tax rate, the company is required to submit a request for the determination of the commencement YA to MDEC no later than twenty-four (24) months from the date of principle approval of tax incentive.

c) Option 2 – Investment Tax Allowance

The second form of tax incentive offered is an investment tax allowance (“ITA”) which is offered for a period of five (5) consecutive YAs. The scope and conditions for the investment tax allowance incentive are detailed in the table below.

Rate of ITA	60% of qualifying capital expenditure, against up to 100% statutory income	100% of qualifying capital expenditure, against up to 100% statutory income
Period of ITA	Five (5) consecutive YAs
Conditions (to be complied within 3 years from principle approval date)	(1) To incur an adequate amount of qualifying capital expenditure.
	(2) To employ an adequate number of full-time employees (FTE) in Malaysia to carry on the qualifying activity.
	(3) To undertake the qualifying activity in Malaysia at all times.
	(4) To remain an MD Status company and comply with all the conditions under MD Status at all times.
	(5) Any other conditions stated in the approval letter.
Additional Conditions (to be complied by expiry of ITA Period)	Not applicable	(6) To meet minimum three (3) conditions related to sustainable economic development such as relevant initiatives in education, social and environment, each in year 4 and year 5 of the ITA Period, as stated in the approval letter.

The commencement date of the ITA incentive shall be the date on which the first qualifying capital expenditure is incurred by the company after the date the tax incentive application is received and not earlier than MD status approval date.

The Malaysia Digital Expansion Incentive is introduced to encourage companies to undertake new activities or investment. This incentive targets the existing MD status and MSC status companies that have completed their initial incentives and are looking to undertake new approved activities or have not been granted any incentives and are looking to undertake new approved activities.

The Expansion Incentive is also offered in the form of a reduced tax rate or investment tax allowance which we will explore in more detail below.

a) Eligibility Criteria

In order to be eligible for the Malaysia Digital New Investment Incentive, a company must meet the following criteria:

The company must be incorporated under the Companies Act 2016 and is a resident in Malaysia;
Paid up capital of at least RM250,000;
Has been in operation for at least thirty-six (36) months;
Is currently an MD or MSC status company;
In the case where the company has been granted tax incentive for existing activity under the MD or MSC Malaysia Status financial incentive schemes, the company has met all conditions under the tax incentive or has surrendered the tax incentive;
Undertaking one of the qualifying activities in Malaysia (as mentioned above);
Has not issued any sales invoice for the qualifying activity in Malaysia prior to the date the tax incentive application is received; and
Is not granted any tax incentive by the Government of Malaysia in relation to the qualifying activity.

b) Option 1 – Reduced Tax Rate

	IP Income	Non-IP Income
Tax Rate	15%
YAs	Five (5) consecutive YAs
Conditions	(1) To maintain the number of existing full-time employees (FTE) throughout the YA.
	(2) To employ an adequate number of new FTE in Malaysia to carry on the Approved Qualifying Activity.
	(3) To ensure the new FTE comprises adequate number of knowledge workers with minimum average monthly basic salary of RM5,000.00 to carry on the Approved Qualifying Activity in Malaysia throughout the YA.
	(4) To incur an adequate amount of annual operating expenditure in Malaysia to carry on the Approved Qualifying Activity by the end of each YA.
	(5) To meet minimum two (2) conditions related to sustainable economic development such as relevant initiatives in education, social and environment at the end of each YA as stated in the approval letter.
	(6) To undertake the Approved Qualifying Activity in Malaysia throughout the YA.
	(7) To remain an MD or MSC Malaysia Status company and comply with all the conditions under MD or MSC Malaysia Status at all times.
	(8) To submit to MDEC annually a self-declaration form (“SDF”) on compliance of conditions within seven (7) months from the end of each year of assessment, and the information submitted in the SDF must first be verified by an independent external auditor appointed by the company at its own costs.
	(9) Any other conditions stated in the approval letter.
	(10)To comply with modified nexus approach based on a prescribed formula.	Not applicable
	(11) Any other conditions stated in the approval letter.

c) Option 2 – Investment Tax Allowance

Rate of ITA	30% of qualifying capital expenditure, against up to 100% statutory income	60% of qualifying capital expenditure, against up to 100% statutory income
Period of ITA	Five (5) consecutive YAs
Conditions (to be complied within 3 years from principle approval date)	(1) To maintain the number of existing full-time employees (FTE) at all times.
	(2) To employ an adequate number of new FTE in Malaysia to carry on the Approved Qualifying Activity.
	(3) To incur an adequate amount of qualifying capital expenditure.
	(4) To undertake the qualifying activity in Malaysia at all times.
	(5) To remain an MD or MSC Malaysia Status company and comply with all the conditions under MD or MSC Malaysia Status at all times.
	(6) Any other conditions stated in the approval letter.
Additional Conditions (to be complied by expiry of ITA Period)	Not applicable	(7) To meet minimum three (3) conditions related to sustainable economic development such as relevant initiatives in education, social and environment, each in year 4 and year 5 of the ITA Period, as stated in the approval letter.

Key Definitions

For the purposes of the tax incentives mentioned under item 2 above, the following are definitions of certain terms.

Full-time employee (FTE)

Full-time employee (FTE) means a person working in the company for at least six (6) hours a day, twenty (20) days a month, twelve (12) months a year and receives salary directly from the company. This includes traveling sales, engineering, maintenance, and repair personnel who are paid by and are under the control of the company. Personnel outsourced from a third party and not directly under the company’s payroll are not considered as the company’s employees.

Knowledge worker

A “knowledge worker” is an individual who holds one of the following qualifications:

tertiary qualification from an institution of higher learning (in any field); or
diploma in ICT, engineering, technology or specialised certification plus at least two (2) years’ relevant experience in a field that is a heavy user of technology; or
professional, executive, management and technical work categories in information technology enabled services e.g. Information System, Finance, Accounting, Business Administration, Engineering, Medical, Legal,

and also includes:

foreign workers with knowledge-based skills that are not prevalent in Malaysia and required by MD Status companies.
workers who are utilised for their creative talent to produce value-added creative work for MD Status companies.

Operating expenditure

Operating expenditure means expenses incurred in the course of undertaking the qualifying activity. For the purpose of condition compliance, it will be based on the operating expenditure reflected in the company’s audited financial statements (excluding interest, depreciation and other expenses which are not directly incurred for the production of income in relation to the qualifying activity). Examples of operating expenditures are transportation services, banking services, insurance services, legal services, information and communication technology, employee’s remuneration for service activities (i.e. wages, salaries, bonuses, social insurance contributions, etc.), rental, utilities, sales and marketing.

Qualifying capital expenditure

Qualifying capital expenditure means capital expenditure incurred by the company on an asset used in Malaysia for the purpose of the qualifying activity, namely, any multimedia and peripheral equipment (software and hardware), machinery, plant and building.

Basic salary

Basic salary means the gross monthly salary of an employee including any contractual bonus but excluding contributions to the Employees Provident Fund, gratuities, performance bonus, allowance and benefits-in-kind.

Related company

Related company shall have the same meaning as the definition of “related company” under the Promotion of Investments Act 1986.

Conclusion

Malaysia’s digital economy is poised for significant growth, bolstered by strategic initiatives such as Malaysia Digital (MD). However, this evolution takes place within a broader global context—particularly Malaysia’s commitment to the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan. In line with efforts to counter harmful tax practices, the government has taken steps to reform its tax incentive landscape, resulting in fewer available incentives and stricter eligibility conditions.

For companies seeking to obtain Malaysia Digital Status and benefit from the associated tax incentives, this means careful planning is essential. Eligibility is no longer automatic — businesses must demonstrate substantive activities, compliance with the outlined criteria, and a genuine contribution to the digital economy.

As such, companies that wish to tap into the available tax advantages should engage in early strategic planning, assess their readiness, and align their operations to meet the prescribed requirements.

To quote Benjamin Franklin:-

“If you fail to plan, you are planning to fail.”

In this new landscape, foresight and compliance will be key to unlocking the benefits of Malaysia Digital — enabling companies not only to grow but to become true champions of Malaysia’s digital future.

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