Inveiss Legal Guide Operational Headquarters Tax Incentive

1. Why OHQ?
   The Operational Headquarters (OHQ) tax incentive is a highly sought after incentive offered by the Malaysian government to attract foreign investment. An OHQ status provides foreign investors with a three-fold advantage:

(a)  the entitlement to have 100% foreign shareholding in the OHQ company;
(b)  the ability to bypass Foreign Investment Committee approval; and
(c)  the right to a maximum ten year 0% tax on all income derived through or inconnection with the provision of qualifying services by the OHQ company (subject to some limitations).

In addition to these key advantages, the Malaysian government has offered OHQ companies a slew of other exemptions and facilities, including the eligibility to open foreign currency accounts, foreign currency credit facilities, use professional services of foreign firms provided that such services are not available locally and the availability of import duty, sales tax and excise duty exemptions on machinery, equipment and materials.

2. How it WorksThe diagrammatic representation below shows how an OHQ company may be used as a tax effective strategy:

Generally, all qualifying services income earned by the OHQ company, such as management fees, royalties and interests, will be tax free for a period of 10 years commencing from the assessment year in which the date of approval falls (sections 6 and 60E Income Tax Act 1967). One exception to the rule is that if more than 20% of qualifying services income is derived from a Malaysian office or related company (being MalCo in the diagrammatic representation above), then the 0% tax rate will only apply to income earned from MalCo up to the maximum 20% limit.

The fact that such qualifying services income is tax free permits the group of companies to effectively manage Australian, Malaysian and worldwide income or company tax through the provision of qualifying services, subject of course, to transfer pricing and other anti-tax avoidance rules imposed by tax authorities within the relevant taxing jurisdictions of the group.

3. What is an OHQ Company?
   Under the Malaysian income tax legislation, an OHQ company is an approved company which carries on business in Malaysia of providing qualifying services to its offices or related companies outside Malaysia (section 60E Income Tax Act 1967).A “related company” means, in relation to the OHQ company, a company:

(a)  the operations of which are or can be controlled, either directly or indirectly, by the approved OHQ company
(b)  which controls or can control, either directly or indirectly, the operations of the approved OHQ company; or
(c)  the operations of which are or can be controlled, either directly or indirectly, by a person or persons who control or can control, either directly or indirectly, the operations of the approved OHQ company.

While this legal definition of OHQ applies, it would appear that an OHQ company may carry on more than just the business of providing qualifying services, and may include companies whose sources of income are derived from both qualifying and non-qualifying services, such as, for example, income derived from the sale of products and services to third party clients or customers whether in Malaysia or otherwise.

Nonetheless, it is important to note that such non-qualifying services will be taxed at the ordinary company tax rate imposed in Malaysia. For this purpose, separate accounts for qualifying and non-qualifying services must be kept and should be audited for compliance.

4. What are Qualifying Services?
   “Qualifying services” mean:

(a) services provided by an approved OHQ company to its offices or related companies outside Malaysia in respect of:

(i) general management and administration;
(ii)  business planning;
(iii)  procurement of raw materials, components and finished products, for use in the business of the non-Malaysian offices or related companies;
(iv)  technical support;
(v)  marketing control and sales promotion planning;
(vi)  training and personnel management; or

(b)  the provision of treasury and fund management services to its offices or related companies outside Malaysia. If credit facility services are provided, funds obtained from Malaysia cannot exceed RM10 million; and

(c)  research and development work carried out in Malaysia on behalf of its offices or related companies outside Malaysia.

As with the definition of an OHQ company, it appears that services falling within the categories outlined above which are provided to related companies in Malaysia will also be considered “qualifying services”, hence the 20% limit imposed qualifying services income earned from Malaysian offices and/or Malaysian related companies.

5. Application ProcessAn application for an OHQ status must be filed with the Malaysian Industrial Development Authority (MIDA) using Form OHQ-1 together with supporting documents. The process usually takes about 6-10 weeks depending on whether all information required by MIDA has been given.

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