R&D Tax Incentives in Malaysia — There Is No Approved Research Allowance

Ask three advisors about the approved research allowance and you will get three answers, because there is no such relief. Nothing in the Income Tax Act 1967 uses the phrase. What exists is three separate deductions with different approval routes and different deadlines, plus a fourth, entirely different regime run by MIDA. Conflating them is how a company ends up with a double deduction it cannot support.

The three deductions in the Income Tax Act 1967

Provision	Relief	Approval	Claim form
s.34(7)	Single deduction for non-capital in-house R&D related to the business	None required	Form 4
s.34A	Twice the non-capital expenditure on in-house R&D	Required, before the claim	Form 1 then Form 2
s.34B	Twice the non-capital expenditure paid out to an approved provider	Required	Form 3, retained

s.34(7) allows a resident to deduct revenue R&D expenditure related to its business and directly undertaken by it or on its behalf. No certificate, no application to approve the activity — Form 4 is lodged within 30 days after the return filing deadline. It is the fallback when an s.34A application was never made or was made too late.

s.34A doubles it. Section 34A(4) sets the deduction at twice the expenditure, but the proviso in s.34A(1) and (4)(a) cuts it back to a single deduction where R&D expenditure incurred outside Malaysia exceeds 30 per cent of total R&D expenditure for the period. Section 34A(5) then blocks any further deduction for the same expenditure under s.33 or s.34.

The approval is the part people get wrong. Section 34A(1) refers to R&D approved by the Minister, and LHDN’s procedural guideline records that under s.5 of the Delegation of Powers Act 1956 the Minister has delegated that power to the Director General and the Deputy Director General. The application goes to LHDN, Jabatan Dasar Percukaian in Cyberjaya, on Form 1 (PIN.1/2023).

Form 1 deadlines are unforgiving. For a new project: not less than six months before the accounting period ends if the R&D began in the first half of that period, or not later than one month after it ends if it began in the second half. For an extension project expected to run beyond twelve months: not less than six months before the period ends. Form 2, the claim, is filed on the same date as the return where the approval certificate is issued before the filing deadline, or within three months of the certificate where it is issued afterwards. Section 34A(4A) lets a resident pioneer company elect to shift the deduction into the first basis period of its post-pioneer business.

s.34B covers money paid out rather than spent in-house: a cash contribution to an approved research institute; a payment for the services of an approved research institute or approved research company; or a payment for the services of an R&D company or contract R&D company. Section 34B(2) doubles it, and s.34B(3) blocks a further deduction under s.33, s.34 or s.34A for the same expenditure. Form 3 is completed and kept, then produced on audit rather than filed.

The trap sits in the proviso to s.34B(2): no deduction where the claimant is a related company of an R&D company that has been given approval under s.27D(1) of the Promotion of Investments Act 1986 and whose period under s.29E(2)(b) of that Act has not ended. Group R&D structures walk into this regularly.

The MIDA regime is a different animal

Pioneer Status and Investment Tax Allowance for R&D companies come from the Promotion of Investments Act 1986, not the Income Tax Act, and MIDA administers them against its own guideline:

• A contract R&D company — one providing R&D services in Malaysia only to unrelated companies — may apply for Pioneer Status with 100 per cent exemption of statutory income for five years, with unabsorbed pioneer losses carried forward for seven consecutive years of assessment; or Investment Tax Allowance of 100 per cent of qualifying capital expenditure incurred within ten years, offset against 70 per cent of statutory income.
• An R&D company — one providing R&D services to related companies or any other company — may apply for the same Investment Tax Allowance.

MIDA’s guideline states the consequence directly: related companies do not enjoy the s.34B double deduction on payments to the R&D company unless that company opts not to take the ITA. The group has to choose.

Separately, Schedule 3 of the Income Tax Act treats plant and machinery used for R&D approved under s.34A as qualifying expenditure, and buildings used for R&D as industrial buildings — capital allowances sit outside all of the deductions above, because every one of them excludes capital expenditure.

Does the activity even qualify?

The s.2 definition, amended with effect from 28 December 2018, requires systematic, investigative and experimental study involving novelty or technical risk in science or technology. It expressly excludes quality control and routine testing, research in social sciences or humanities, routine data collection, efficiency surveys and management studies, market research and sales promotion, routine modification of materials or processes, and cosmetic or stylistic changes. Public Ruling 5/2020 works through the qualifying activity test; Public Ruling 10/2021 covers the special deductions.

Common mistakes

• Calling it an allowance. Ask which section you are claiming under. If the answer is not s.34(7), s.34A or s.34B, or an approval under the Promotion of Investments Act 1986, there is no claim.
• Missing the Form 1 window. Approval cannot be backdated into a period whose window closed, and the fallback is a single deduction.
• Applying to the Ministry of Finance. The s.34A power is delegated to the Director General.
• Claiming s.34A and s.34B on the same spend. Section 34B(3) forbids it.
• Ignoring the 30 per cent offshore limit. Offshore R&D above 30 per cent of the total halves the relief.
• Overlooking the related-company bar where the service provider holds a PIA s.27D approval.

What’s next

Map each project to a section before the accounting period is half over — that is when the Form 1 window for first-half projects is still open. Then check whether any provider you pay holds R&D status with MIDA, because that single fact decides whether your s.34B claim exists at all.