Why UAE Businesses Should Establish a Principal Hub in Malaysia

Malaysia presents itself as an attractive principal hub for UAE-based businesses that are seeking to expand in ASEAN, offering a cost-effective alternative to Singapore.

Malaysia offers a dynamic business environment, a productive workforce, and a well-developed infrastructure which is further supported by pro-business government policies.

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Malaysian Prime Minister Datuk Seri Ismail Sabri Yaakob with UAE President Sheikh Mohamed bin Zayed Al Nahyan.

Malaysia and the United Arab Emirates (UAE) began diplomatic relations around 1983, which has since developed into an important trade and investment relationship. The UAE is Malaysia’s largest trade partner in the Middle East with bilateral trade reaching US$5.4 billion in 2021, an increase from US$4.93 billion in 2020. Trade is almost evenly split with the UAE enjoying a small surplus of just under US$200 million.

Importantly for Malaysia, the country is competing with Singapore to serve as a principal hub for businesses in the UAE, particularly in manufacturing, logistics, information, and communications technology, and Islamic finances, seeking to enter the huge ASEAN market.

Current Malaysia and UAE trade

The UAE’s most important export to Malaysia is oil and mineral fuels of which some US$1.39 billion worth was exported in 2021. This was followed by more than US$600 million worth of pearls, precious stones, and precious metals, over US$200 million of plastic exports, and US$187 million in aluminum exports.

For Malaysia, the country’s main exports to the UAE comprise over US$700 million in electrical and electronic equipment, close to US$500 million in pearls and precious stones, some US$256 million in boilers, nuclear reactors, and machinery, as well as US$220 million for oil and mineral fuels (like the UAE, Malaysia is also a net exporter of crude oil and its products).

Increased push for palm oil exports

Malaysia is keen to export more of its coveted palm oil to the UAE market as well as the Middle East region. Malaysia is the second-largest producer and exporter of palm oil in the world, behind Indonesia, and accounts for 24 percent of global production and 31 percent of global exports.

The Middle East and North Africa region imported 2.34 million tons of palm oil from Malaysia in 2021, with the UAE, Turkey, Saudi Arabia, and Iran accounting for 82 percent of this total. Research conducted by the Malaysian Palm Oil Council stated that the UAE is expected to import 400,000 tons of palm oil by 2025, presenting a new export market and opportunities for Malaysian palm oil producers. There will be tough competition here from Indonesian producers, as historically, Indonesian palm oil is cheaper due to its larger market share and lower production costs.

How UAE-based exporters can use Malaysia as a base for regional expansion

Over the last decade, Malaysia has emerged as an attractive hub for international businesses, particularly in manufacturing, logistics, information and communications technology, conventional financial services, as well as Islamic financial services. The country is aiming to rival its neighbor Singapore as a cost-competitive alternative for access to one of the fastest-growing markets in ASEAN.

Importantly, the country is well-positioned as an investment destination for companies looking to diversify their supply chains, especially amid the ongoing geopolitical tensions in the region. Malaysia offers a dynamic business environment, a productive workforce, and a well-developed infrastructure, which is further supported by pro-business government policies. Further, the country is strategically located along the Strait of Malacca and the southern South China Sea, giving businesses direct access to the ASEAN region with its more than 600 million population as well as to the more developed markets of China, South Korea, and Japan.

The principal hub scheme

One important policy is the principal hub scheme that offers numerous incentives for multinational companies seeking to establish a regional hub in ASEAN. To be determined as a principal hub, the company must be incorporated in Malaysia, and use the country as a base to manage, and support key functions of its regional or global business.

The new rules include easing the eligible conditions for businesses in addition to providing a corporate income tax (CIT) rate of between zero and 10 percent, depending on the qualifying business activity.

To qualify, businesses must engage in one of the following activities:

Qualifying Activities for Principal Hubs in Malaysia
Business type	Qualifying service
Business services	1.       Sales and marketing 2.      Logistic services 3.      Business development 4.      Bid and tender management 5.      Technical support consultancy 6.      Information management and processing 7.       Project management 8.      Research, development, and innovation 9.      Investment research analysis 10.   Strategic sourcing and distribution 11.    Treasure and fund management
Strategic services	1.       Intellectual property management 2.      Senior-level talent acquisition and management 3.      Strategic business planning and corporate development 4.      Corporate finance advisory services 5.      Regional profit and loss/business unit management
Share services	1.       Finance and accounting services 2.      Corporate training and human resource management services

Malaysia’s access to the CPTPP and RCEP to Benefit UAE exporters

Malaysia has unique access to both the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), as the country is a signatory to both free trade agreements (FTAs).

The RCEP is a 15-member FTA that is essentially the world’s largest, covering 30 percent of the global GDP of US$25.8 trillion and comprising 30 percent of the world’s population. Malaysia ratified the agreement in March 2022, and according to the Ministry of Trade, the country is expected to be the largest beneficiary among ASEAN members with a projected export gain of US$200 million.

The CPTPP is an 11-member FTA covering some 15 percent of global trade. Malaysia officially submitted the instrument of ratification for the CPTPP on September 30, 2022, becoming the ninth country to do so; only Chile and Brunei have yet to ratify the agreement. The Ministry of Trade predicts that Malaysia’s total trade is expected to increase to US$655 billion by 2030 — total trade as of 2021 stood at US$481 billion. Moreover, the CPTPP offers to broaden new market access such as to Peru, Canada, and Mexico, which are not covered by existing trade agreements.

This article previously appeared on ASEAN Briefing.

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