free trade zones in malaysia

Free Trade Zones in Malaysia

Malaysia is a member of the Association of South East Asian Nations (ASEAN), benefitting from the free trade agreement among its member states. As stated under section 3(1) Free Zones Act 1990 (Act 438), a free zone is a designated, secured area in which commercial and industrial activities are carried out and gazetted by the Minister of Finance.

Malaysian FTZs are equipped with different incentives and focuses. Customs control at the free zone is at the minimum and basically only at the exit point. They facilitate customs processing as well as providing bonded warehousing for transshipment.

There are 27 free zones in Malaysia, the most popular being:

  • Pasir Gudang (Manufacturing)
  • Port Klang (Logistics)
  • Bayan Lepas (Manufacturing)
  • Port Tanjung Pelepas (Logistics)
  • Kulim Hi-Tech Park(High-Tech Manufacturing)

-13 Free Industrial Zones (FIZ), with different phases of development and different sites

-14 Free Commercial Zones (FCZ)

-Licensed Manufacturing Warehouse (LMW): no statistics

Malaysia free zones are notably suitable for foreign companies who wish to use Malaysia as a regional manufacturing or distribution base, with the purpose of conducting a large amount of their business outside of Malaysia.

Main Sectors of Activity in Free Zones

Electronics and Electrical Industry, Petrochemicals, Food products, Plastics, Medical equipment, General assembly industries, Services, Logistic, Warehousing, e-Commerce, and etc.

There are 2 types of Free Zone

I) Free Zone for Commercial Activities (FCZ)

FCZ is allocated for carrying out commercial activities such as trading (except retail trading), grading, repacking, relabeling, transhipment, break-bulking, transit and other value-added activities.

II) Free Zone for Industrial Activities (FIZ)

FIZ is equipped with facilities meant for export-orientated companies. It is a place where most of the manufacturing activities are carried out mainly for export purposes.

Advantages and Benefits of Free Trade Zones

Setting up a business in Malaysia Free Trade Zones allow businesses to enjoy, among others:

  • Tax free environments including tax exemptions on customs duties, taxable services, and imports/exports activities (on selected equipment and raw materials)
  • Companies can enjoy efficient and extensive transport networks, free ports in Malaysia are in close proximity to deep sea ports, airports, highways, and railways
  • No stringent foreign exchange controls and investors are free to repatriate their earnings abroad without any limitation
  • Simplified and flexible import and export procedures
  • Cost-effective measures for manufacturing, industrial and commercial activities
  • Exemptions of customs duty on products imported into the free zone for re-exportation purposes
How much a company can save from operating in a FTZ very much depends on their business model and the size of the company. Reducing import customs declaration fees alone can save a company a substantial amount of money.

Drawbacks or Disadvantages of Free Trade Zones

  • Comprehensive rules and regulations to follow, Customs department have rights to conduct regulatory audits.
  • Paid-Up Capital Requirement could be high depending on business activities, some goes up to RM500,000 or RM1 million.
  • Specific permit or Licenses required, rather long time to secure a license (up to 4 months).
  • Must maintain office in the zone (increase operating cost).
While the cost savings seem attractive, operating in an FTZ requires companies to be able to track their inventory, trace manufacturing and production orders, determine whether material came from domestic or international sources, and classify goods for duty deferrals and reductions.

How to register an entity in Free Trade Zones

  1. Make sure you can satisfy mandatory requirement, i.e: Paid-Up Capital, Permit and License (depends on preferred FTZs and business activities).
  2. Register a Private Limited Company (Sdn Bhd). It can be a foreign owned, local owned or branch company (requirement might be vary depending on preferred FTZs and business activities).
  3. Register with custom as SMK Dagang Net users & register with respective Free Zone Authority.

Licenses and Pledge Forms used in the FTZs:

For the most popular licenses being Licensed Manufacturing Warehouse (LMW) & Authorised Economic Operator (AEO), WRT License, Business License (issued by Municipal Council), Registration of Machinery , Approval from Fire Department, and etc.

Types of Pledge Form: Borang ZB No. 1, ​Borang  ZB No. 4, Borang Kastam No.1, ​Borang Kastam No.2, ​​Borang Kastam No. 3, ​​​​Borang Kastam No. Borang Kastam No. 8, and etc.

Setting up a company within a Malaysian free zone offers multiple benefits such as flexible trading laws and exemption from customs duties. It also allows foreign investors to gain advantage by using these entities to export their products across South East Asian markets. With it’s remarkable reputation and advantages, Malaysia free zones are suitable for foreign companies intending to use Malaysia as a regional manufacturing or distribution base.

Come discuss with us your needs to set up a company in a Free Trade Zone. Free consultation.

Reach out to us today at [email protected] or give us a call at +6016-619 4720 or +6011-5352 9492.

The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.

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