Manufacturing, Agriculture or Services? PN 3/2026 Clarifies Which Capital Allowance Fits

Malaysian income tax law offers two special incentive reliefs for capital expenditure, and LHDN's Practice Note No. 3/2026 sets out how they differ. They serve different sectors and follow very different rules.

The Reinvestment Allowance (RA) rewards manufacturing and agricultural companies that reinvest in a qualifying project, namely the expansion, modernisation, automation or diversification of an existing business. The company must be resident in Malaysia and have been in operation for at least 36 months. Qualifying expenditure covers plant and machinery, and for agricultural projects, items such as land clearing, planting and irrigation. No prior approval is needed. The company self claims through its income tax return, subject to LHDN's audit.

The Investment Allowance in the Service Sector (IASS) is aimed at approved service projects in transportation, communications, utilities and other sub-sectors approved by the Minister of Finance. Qualifying expenditure is wider, covering plant, machinery, fixtures, premises, buildings and structures of a permanent nature. However, the project must first be approved by the Minister on a written application.

Both allowances are based on 60% of the capital expenditure incurred, set off against up to 70% of statutory income. For RA, this can rise to 100% of statutory income where the project achieves the productivity level prescribed by the Minister. For IASS, the 60% is a minimum, and the 70% cap may be replaced by another rate in the approval letter. RA may be claimed over 15 consecutive years of assessment from the first claim, while IASS runs for five years from the effective date of approval. For both, any unabsorbed allowance may be carried forward for a further seven years of assessment, after which the balance is disregarded.

Neither allowance covers assets provided for directors or staff. RA also does not apply while a company enjoys certain other incentives, such as pioneer status, Investment Tax Allowance or group relief, while IASS does not apply during a period of exemption under section 127. The right allowance therefore depends on the business and the incentives already in place.

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