A free zone is a designated, secured area in which commercial and industrial activities are carried out. It is mainly designed to promote entreport trade and specially established for manufacturing companies that produce or assemble products mainly for export.
Goods in a free zone may—
(a) be removed from such free zone for export or sent into another free zone;
(b) be stored, sold, exhibited, broken up, repacked, assembled, distributed, sorted, graded, cleaned, mixed, or otherwise manipulated or be manufactured; or
(c) be sent into any part of the principal customs area.
Any goods and services may be brought into, produced, manufactured or provided in a free zone without payment of any customs duty, excise duty, sales tax or service tax.
The activities and industries therein are subject to minimal customs formalities as it is deemed under to be a place outside the Principal Custom Area. Customs control at the free zone is at the minimum and basically only at the exit point. Free Zone Authority administers, maintains and operates the zone.
Malaysia offers several free zones with different focuses and incentives. Some of the most popular zones include:
Port Klang Free Zone – logistics
Pasir Gudang free zone – manufacturing
Tanjung Pelepas free zone – logistics
Bayan Lepas free zone – manufacturing
Kulim Hi-Tech Park – high-tech
FTZs in Malaysia facilitate customs processing as well as providing bonded warehousing for transshipment.
Main Sectors of Activity
Electronics and Electrical Industry, Petrochimicals, Food products, Plastics, Medical equipment, General assembly industries, Services, Logistic, Warehousing, e-commerce, etc.
There are two types of free zone, that is, the free zone for industrial activities (FIZ) and free zone for commercial activities (FCZ).
FREE ZONE FOR INDUSTRIAL ACTIVITIES (FIZ)
FIZ is a place where most of the manufacturing activities carried out are for export purpose. It is a facility meant for export-orientated companies. Besides that, FIZ can also carry out other activities such as evaluation, testing of goods, research, designing etc.
Other than minimal customs formalities, FIZs enable export-oriented manufacturing companies to enjoy duty free import of raw materials, component parts, machinery and equipment required directly in the manufacturing process, as well as minimal formalities in exporting their finished products.
Number of Free Zones
To-date there are 22 FIZs located at Pasir Gudang, Tanjung Pelepas, Batu Berendam I, Batu Berendam II, Tanjung Kling, Telok Panglima Garang, Pulau Indah (PKFZ), Sungai Way I, Sungai Way II, Ulu Kelang, Jelapang II, Kinta, Bayan Lepas I,II, III, IV, Seberang Perai and Sama Jaya.
Eligibility for Free Industrial Zones
To qualify for location within a FIZ, a company has to export its entire production or at least 80% of its output and its raw materials/ components are mainly imported, even though the government encourages the use of local raw materials/components.
If a FIZ company has obtained an approval from the Ministry of International Trade and Industry to reduce its export condition to 60%, it can also apply to the Customs to be allowed to export 60% instead of 80%.
FIZ companies are eligible to enjoy import duty exemptions equivalent to ATIGA (ASEAN Trade in Goods Agreement) rates if they comply with the following conditions;
i. achieve 40% of value from local content, and
ii. if the local content value does not reach 40%, consideration can be given if the FIZ companies can prove that the non-originating raw material to the end products produced had undergone substantive transformation process through a mechanism which has been set.
Companies operating in a FIZ can enjoy duty-free imports of raw materials, including packaging materials and machinery and equipment used directly in the production of approved products as in their Manufacturing Licence (ML) (unless these manufacturers are exempted from ML).
FIZ will have minimal customs control and deemed to be a place outside Malaysia and the FIZ manufacturers are also exempted from the payment of customs, excise duty, sales tax and service tax.
FREE ZONE FOR COMMERCIAL ACTIVITIES (FCZ)
FCZ is regarded as a place outside the Principal Customs Area (PCA). It is a Free Zone allocated for carrying out of commercial activities such as trading (except retail trading), break-bulking, grading, repacking, relabeling, transhipment, transit and other value-added activities.
Retail trade activities may be approved to be conducted in certain FCZ such as in Rantau Panjang Free Zone in Kelantan, Bukit Kayu Hitam Free Zone in Kedah and Stulang Laut Free Zone in Johor.
Number of Free Zones
To-date there are 21 FCZs located at North, South and West Port of Port Klang, Port Klang Free Zone, Pulau Indah MILS Logistic Hub, Butterworth, Bayan Lepas, KLIA, Rantau Panjang, Pengkalan Kubor, Stulang Laut, Johor Port and Port of Tanjung Pelepas.
Generally all FCZs are located at ports and airports. However, a few FCZs are not located at ports and airports such as Stulang Laut Free Zone in Johor Bahru, Bukit Kayu Hitam Free Zone in Kedah and Rantau Panjang Free Zone in Kelantan.
Regulatory framework allows goods that were brought into Free Commercial Zones and re-exported or transhipped, to not be subjected to import duty and SST, as such goods are not considered as having been imported into Malaysia.
If you would like to know more, please contact Bestar RW William.