Outline
In Malaysia, a Licensed Manufacturing Warehouse (LMW) is an alternative to Free Industrial Zones (FIZs) for export-oriented firms, providing comparable benefits such as tax breaks on imported goods, although it is not a physical free trade zone. This scheme significantly reduces operational costs and enhances the competitiveness of manufacturers targeting global markets. But what exactly is an LMW? How does it benefit manufacturers—and more importantly—how do you apply for one? Let’s break it down.
What Key Industries That Benefit From Licensed Manufacturing Warehouse (LMW)?
An LMW is a facility licensed under Section 65/65A of Malaysia’s Customs Act 1967, allowing qualified manufacturers to bring in raw materials, parts, and equipment without paying import duties or sales tax, provided these items are used to produce export goods. This model is specifically designed to reduce the operational burden for businesses focused on international trade, helping companies minimize upfront costs on imported materials and machinery. The LMW scheme streamlines customs procedures and offers fiscal advantages, allowing businesses to improve cash flow, avoid unnecessary tax payments, and maintain competitive pricing.
Industries such as electronics, automotive manufacturing, and pharmaceuticals benefit greatly from the LMW system. These sectors rely heavily on the importation of raw materials and parts for manufacturing products intended for export. The LMW structure enables these industries to reduce operational costs and enhance competitiveness in the global marketplace, providing a significant edge in the increasingly interconnected international trade environment.
Who Qualifies for an LMW License?
To qualify for an LMW license, businesses must meet specific eligibility criteria set by Malaysia’s Customs Department. The company must hold a valid Manufacturing License issued by the Malaysian Investment Development Authority (MIDA), or it must be exempted from this requirement. Additionally, businesses must demonstrate that they export at least 80% of their finished goods annually. Engaging in genuine manufacturing activities, as defined by Malaysian Customs law, is also a crucial requirement. This includes assembling, processing, or transforming raw materials into finished goods for export.
The LMW license is designed to support manufacturers who are truly engaged in production for export markets. Businesses that primarily serve the domestic market may not qualify for this scheme. As such, ensuring that a company meets the eligibility requirements before applying is essential to avoid delays or rejection during the approval process.
Benefits of Setting Up an LMW
Duty-Free Imports
One of the primary benefits of establishing an LMW is the exemption from import duties and sales tax on materials, parts, and machinery imported for manufacturing purposes. This makes it easier for manufacturers to lower their costs and increase profit margins, as they can bring in raw materials without having to pay taxes that would typically increase the cost of their operations.
Improved Cash Flow
By avoiding upfront payments of import duties and sales taxes, businesses can improve their cash flow and manage their working capital more efficiently. The deferral of these costs allows manufacturers to reinvest savings into their business, whether for expansion, upgrading equipment, or optimizing production processes.
Customs Flexibility
The LMW scheme offers streamlined customs procedures for both imports and exports, reducing delays and administrative hurdles. Manufacturers benefit from faster clearance times and simplified processes, allowing them to operate more efficiently and meet global demand in a timely manner.
Operational Cost Savings
LMWs enable manufacturers to save on operational costs, especially those who rely on the importation of raw materials or components. These savings can help companies maintain competitive pricing in international markets, which is crucial in industries with tight profit margins.
Step-by-Step Application Process
Prepare Documentation – Step 1
Gather necessary documents, including your company’s incorporation details, MIDA Manufacturing License (or exemption), factory layout, and a list of raw materials and machinery. Complete and accurate documentation is vital to prevent application delays.
Submit Application – Step 2
Submit the prepared documents to the Royal Malaysian Customs Department in your factory’s state. Ensure the application is thorough and follows Customs’ required format.
Facility Readiness – Step 3
Ensure your factory complies with regulatory requirements, including security, storage zones, and safety standards. The facility must be permanent and secured with appropriate measures such as fencing and alarms.
Customs Review and Approval – Step 4
After submission, Customs will review the documents and may schedule an on-site inspection to verify compliance with physical, security, and operational requirements. If everything is in order, Customs will issue the LMW license.
Inspection and Evaluation – Step 5
Customs officers conduct an on-site inspection to evaluate security, safety features, and overall facility compliance before granting the LMW license.
Security and Safety Features
The factory must meet specific security and safety standards. This includes having a secure perimeter, with appropriate fencing and alarm systems. The building must be permanent and constructed from sturdy materials to prevent unauthorized access. In some cases, non-fenced buildings like shophouses may be accepted if they are reinforced with additional safety features, such as iron grills.
Designated Zones Within the Facility
Your facility layout must include clearly demarcated zones for manufacturing, storage of raw materials, finished goods, and waste disposal. These zones help ensure accountability and compliance with customs regulations. They also help with inventory management and support traceability of goods.
Strategic Location
While LMWs are typically encouraged to be located in less developed areas to support regional economic growth, businesses may also apply to set up within the Principal Customs Area (PCA). The location will be approved at the discretion of the Director General of Customs, but it must meet all operational and security requirements.
Approval for Premises Modifications
Any modifications or renovations to the LMW premises must be approved by Customs. This ensures that any changes made to the warehouse or factory are in line with the LMW’s operational and security standards.
What Else Can You Do in an LMW?
Businesses with an LMW license can also engage in activities like packaging, labeling, product testing, and R&D, but these cannot exceed 40% of annual revenue unless they have IPC or RDC status. Secondary operations, such as repair and re-manufacturing, are allowed if they align with manufacturing and require prior approval from Customs.
Compliance & Reporting Obligations
Licensed Manufacturing Warehouses come with strict record-keeping and compliance obligations. Businesses that operate an LMW must submit monthly and annual returns, such as the M1, M2, and M4 reports, to the Royal Malaysian Customs Department. Additionally, companies must maintain detailed transaction and inventory logs to ensure that their operations comply with all relevant laws and regulations.
LMW holders must also accommodate Customs inspections and audits. Failing to comply with these reporting and regulatory requirements can result in penalties or the revocation of the LMW license.
Annual License Renewal
An LMW license is valid for one year, and businesses must renew it annually. The renewal fee for an LMW license is typically RM2,400. Businesses must also ensure that their facility continues to meet all operational and security requirements during the renewal process. If any modifications have been made to the premises, these must be reported to Customs for approval before the renewal can proceed.
Exemption of Certain Goods
The LMW scheme can offer exemptions for specific goods, particularly those related to high-tech industries or machinery. These exemptions often include reduced duties or taxes on essential imports like equipment or raw materials used in specialized manufacturing, providing significant savings. For companies involved in advanced sectors, such as electronics or automotive manufacturing, these benefits can help reduce overall operational costs, thus enhancing competitiveness in global markets. By offering such incentives, the LMW scheme helps streamline the supply chain for manufacturers, making Malaysia a more attractive destination for high-value manufacturing operations.
Strategic Location and Potential Restrictions
While the LMW scheme allows for some flexibility in location, businesses need to be aware of the potential restrictions tied to the facility’s placement. For instance, setting up within the Principal Customs Area (PCA) might involve stricter regulatory oversight and higher costs. On the other hand, the Malaysian government encourages businesses to establish LMWs in less-developed areas as part of its regional economic development plan. This initiative provides incentives such as lower operational costs and tax benefits, helping to balance economic growth across the country. However, businesses should weigh these benefits against any location-specific requirements or limitations that may impact their operations.
Final Thoughts
The Licensed Manufacturing Warehouse scheme is a valuable tool for export-oriented manufacturers seeking to reduce costs and streamline operations in Malaysia. By offering tax incentives, import duty exemptions, and streamlined customs procedures, it provides manufacturers with a competitive edge in the global market. However, compliance is key to successfully benefiting from this scheme. Businesses must dedicate time and resources to meeting Customs’ requirements, ensuring they maintain their LMW license and continue to operate smoothly.
If you are considering applying for an LMW license, it’s highly advisable to consult with experienced trade advisors or customs specialists. They can guide you through the application process, ensure compliance with all regulations, and help you maximize the benefits of the LMW scheme.
