Malaysia has emerged as a thriving industrial hub in the region, providing ample opportunities for domestic businesses to flourish. As the manufacturing sectors gained momentum, the Malaysian government recognized the need to facilitate trade-related activities and streamline customs regulations.
In response, the Free Zones Act of 1990 was introduced, establishing duty-free zones within the country. These zones operate under the regulations outlined in the Free Zones Regulations of 1991. By designating specific areas as free trade zones, Malaysia aims to foster economic growth, attract foreign investment, and enhance international trade.
This article aims to explore the concept of free trade zones, their advantages, the process of setting up a business in a free zone, the role of the Free Zone Authority, and the locations of the free zones in Malaysia.
Let's delve into the world of free trade zones in Malaysia and discover their significance in the country's economic landscape.
A free trade zone is a designated area within which industrial and commercial activities can be carried out with minimal customs oversight and tax exemption for most goods and services. This is because it is considered a location outside of the Principal Customs Area (which basically means any part of Malaysia but excluding a free zone, Labuan, Langkawi, Tioman and Pangkor) and is not subject to the regulations of the Customs Act 1967 and the Excise Act 1976, except in cases where specific imports and exports are prohibited under Section 31 of the Customs Act 1967.
There are 2 types of free trade zones which are Free Industrial Zone (FIZ) and Free Commercial Zone (FCZ).
A free industrial zone – or FIZ – is a designated area created for importing raw materials and manufacturing goods to be exported. Typically, companies that wish to operate in FIZs have to import all their raw materials and export 80% of their output. Companies that export only 60% of their output may apply for special permits from the Ministry of International Trade and Industry (MITI) to allow them to operate in a free industrial zone. They may sell the remaining 20% in Malaysia. However, these products will be considered imports when they are brought into the country and will be subject to Malaysia’s import taxes and duties.
Free commercial zones – or FCZ – were created to promote commercial and trade activities in Malaysia. These activities include trading, grading, and repacking materials obtained by trading within other free zones, relabeling, bulk breaking, transhipping, and others. However, companies generally cannot carry out retail trading in a free commercial zone. This rule applies to all FCZs, except the Rantau Panjang Free Zone (Kelantan), Stulang Laut Free Zone (Johor) and Bukit Kayu Hitam Free Zone (Kedah).
Companies operating in free zones are exempt from customs duties, excise taxes and sales tax. This makes it cost-effective for manufacturing, industrial, and commercial activities.
However, there are some goods that are not exempted from being charged with duties and taxes while in a free zone. These include:
Construction/building materials and equipment
Office equipment or furniture
Firefighting and pollution control equipment
Motor vehicles and spare parts
Petroleum and petroleum products
Explosives and chemicals
Air conditioning equipment
Goods imported or transported into a free zone for use or consumption in a free zone
Wine, spirits, beer, malt liquor, tobacco, and tobacco products imported or transported into Tasik Kenyir Duty-Free Area.
Cigarettes, tobacco products, smoking pipes (including pipe bowls), electronic cigarettes and similar personal electric vaporising devices, and preparation of a kind used for smoking through electronic cigarettes and electric vaporising devices, in the form of liquid or gel, whether or not containing nicotine.
Customs control at the free zone is at the minimum and basically only at the exit point. Businesses benefit from streamlined customs procedures, making import and export processes faster and more efficient. This reduced regulatory burden not only saves time and money but also encourages innovation and flexibility in importing and exporting, ultimately helping companies stay competitive in the global market.
Free trade zones provide businesses with the ability to easily import and export goods globally, expanding their reach to a broader customer base. The strategic locations of free zones near seaports, airports, highways, and railways facilitate efficient transportation and connections with other companies, ensuring the smooth movement of goods.
Setting up businesses in free zones offers cost-effective access to warehouses and factories, allowing for streamlined logistics and supply chain control. The infrastructure, especially in electronics and logistics, supports efficient business operations with transhipment facilities and modern warehousing.
Free trade zones are strategically located in regions with skilled labour, providing companies with access to a ready workforce. This is advantageous for companies requiring specialised skills or rapid scaling, ensuring high-quality products and services to maintain a competitive edge in the global market.
Step 1: Register your company as a Private Limited Company (Sdn Bhd) with the Companies Commission of Malaysia (SSM).
It can be foreign-owned, locally owned, or a branch company (requirements may differ based on preferred Free Trade Zones and business activities).
Checkout the guide about SSM business registration in Malaysia.
Step 2: Ensure your company meets the paid-up capital, permit, license, and physical office requirements.
Step 3: Register with Customs as SMK Dagang Net users at the official dagang site.
Step 4: Register with the Authorities of the free zone you're interested in.
The Free Zone Authority is a regulatory body appointed by the Ministry of Finance in Malaysia. This authority can be any statutory organization established under Malaysian federal or state government laws or even a company. Their primary role is to administer, maintain, and operate the free zones within the country. When a company, even if fully owned by foreign investors, intends to operate within a free zone, it must secure prior approval from the Free Zone Authority. This ensures compliance with the regulations and guidelines governing these special areas.
In the most recent Customs list dated August 3, 2023, there are 22 Free Industrial Zones (FIZ) and 24 Free Commercial Zones (FCZ) in Malaysia. The visual above shows the location of these free zones in each state.
In reference to the Free Zone Act 1990, “Free Zone” means any part of Malaysia declared to be a Free Commercial Zone or a Free Industrial Zone.
A Free Commercial Zone is a designated area to perform commercial activities that include trading (excluding retail trade), breaking bulk, grading, repacking, relabeling and transit.
A Free Industrial Zone is a gazetted area meant for manufacturing activities aimed at exports.
Shipments entering Free Zones do not require payment of duties and taxes. However, a declaration of entrance and exit must be performed by the clearance agents.
For Free Zones declaration, we need commercial invoice, packing list, air waybill label, and any related exemption if applicable.
No, companies in the Free Zones are responsible for managing their own shipment records.
DHL Express only gives copies of the Invoice, Waybill, and Declaration Form to companies upon shipment delivery.
There are 4 types of declaration forms - K1, K2, K8 and ZB No 1.
Identify the movement of your shipment to determine the type of declaration form apply to your shipment.
Form K1 is designated for goods moving -
Form K2 pertains to goods moving from the principal customs area or a licensed manufacturing warehouse to a free zone area.
Form K8 is utilized for goods moving -
ZB No 1 serves as an additional documents for goods moving from overseas into a free zone.
Yes, a company in the free trade zone can be wholly foreign-owned. There are no foreign shareholding restrictions in Malaysia except for selected industries.