Foreign investors comparing Indonesia and Malaysia often ask: which country offers stronger FDI incentives? While Malaysia scores high on regulatory efficiency, Indonesia stands out with longer tax holidays, resource-driven opportunities, and bold incentives for R&D and labor-intensive industries.
For investors seeking growth in Southeast Asia, Indonesia provides distinct advantages that align with global demand in manufacturing, mining, and green technology.
Also read: Comparing Indonesia’s Foreign Business Entry Barriers vs. Other ASEAN Countries
Tax Holiday Incentives: Indonesia’s Long-Term Edge
Indonesia offers one of the most comprehensive tax holiday frameworks in the region. For investments exceeding $33.3 million in pioneer industries, companies enjoy 100% Corporate Income Tax (CIT) exemption for up to 20 years. Medium-scale investments still benefit from partial exemptions, providing flexibility for both large corporations and mid-sized investors.
By contrast, Malaysia’s Pioneer Status program grants exemptions for 5–10 years, which is shorter in duration. For businesses aiming at long-term operational certainty, Indonesia provides more durable incentives.
Also read: Step-by-Step: How to Qualify for Tax Holiday in Indonesia
Special Economic Zones: Indonesia’s Gateway to Growth
Indonesia’s Special Economic Zones (SEZs) offer full CIT exemption for qualifying investments, alongside VAT and import duty exemptions. These zones support industries such as mineral processing, EV supply chain, and export-oriented manufacturing, making them a key driver of regional competitiveness.
While Malaysia’s Johor-Singapore SEZ targets high-value digital and aerospace projects, Indonesia’s SEZs cover a broader scope with strong government backing for industrial development. For businesses looking at scale and workforce availability, Indonesia’s SEZ network presents significant opportunities.
Also read: The Benefits of Investing in Indonesia’s Special Economic Zones (SEZs)
Investment Allowances and R&D Incentives
One of Indonesia’s most compelling advantages lies in its R&D and labor incentives. Investors can claim up to 300% tax deductions on R&D activities and 200% on training programs, signaling strong government commitment to innovation. Additionally, industries hiring over 300 Indonesian workers enjoy a 60% net income reduction.
Malaysia provides robust capital allowances, but Indonesia’s incentives are better suited for companies seeking both cost efficiency and innovation-driven growth.
Also read: Understanding Indonesia’s Super Deduction Tax for R&D and Training
Business Environment and Policy Shifts
It is true that Malaysia ranks higher in global business climate indexes. However, Indonesia is rapidly catching up through its Online Single Submission (OSS) system, which centralizes licensing and simplifies compliance. The government has also prioritized policy stability in priority industries, reducing risks for large-scale investors.
Sector-Specific Strengths: Why Indonesia Shines
- Mining and Smelting: Indonesia is the world’s top supplier of nickel, a critical material for electric vehicle (EV) batteries.
- Manufacturing Expansion: With lower labor costs and strong workforce availability, Indonesia supports large-scale industrial operations.
- Green Economy Transition: Incentives for renewable energy and EV development strengthen Indonesia’s long-term FDI appeal.
In 2025, Indonesia attracted $13.67 billion FDI in Q1, led by mineral and manufacturing investments. Although Q2 saw a decline, the long-term fundamentals remain robust given its resource base and domestic market size.
Also read; Top Foreign Investment Sectors in Indonesia
Indonesia vs. Malaysia Incentives Comparison
| Incentive Category | Indonesia | Malaysia | |
| Corporate Tax Holiday (High Investment) | 100% CIT exemption 5-20 years (>$33.3M) | 100% statutory income exemption 5+5 years (strategic) | |
| Corporate Tax Holiday (Medium Investment) | 50% CIT reduction 5 years ($6.6M-$33.3M) | 70% statutory income exemption 5 years (Pioneer Status) | |
| Investment Tax Allowance | 60% net income reduction (labor-intensive, 300+ employees) | 60-100% qualifying capex over 5 years, offset 70-100% income | |
| Special Economic Zones – Corporate Tax | 100% CIT exemption (>$6.6M investment) | JS-SEZ: 5% corporate tax rate for 15 years | |
| Special Economic Zones – Additional Benefits | VAT exemption, import duty exemption, simplified licensing | Stamp duty exemption, accelerated capital allowance | |
| Knowledge Workers Tax Rate | Standard progressive rates (up to 30%) | JS-SEZ & Iskandar: 15% flat rate for 10 years | |
| Pioneer Status Duration | 5-20 years for pioneer industries | 5-10 years (enhanced for strategic projects) | |
| Ease of Doing Business Rank (2019) | 73rd position | 12th position | |
| R&D Tax Incentives | Up to 300% deduction for qualifying R&D expenses | Expanded R&D credits under New Investment Framework | |
| Employment Creation Incentives | 60% tangible investment deduction for labor-intensive sectors | Double tax deduction for MNEs (supply chain resilience) | |
Why Indonesia is the Better Bet
For investors evaluating FDI incentives , Indonesia offers:
- Longer tax holidays for pioneer and manufacturing industries.
- Broader SEZ benefits covering large-scale and labor-intensive industries.
- Unmatched R&D incentives supporting innovation and skill development.
- Sectoral strengths in mining, EV supply chain, and downstream processing.
Malaysia remains attractive for knowledge-intensive industries, but Indonesia delivers more comprehensive benefits for large-scale, resource-based, and growth-oriented investors.
Smooth Transition to Service
If you are ready to expand in Indonesia, navigating regulations and incentives can feel overwhelming. This is where expert guidance becomes essential.
InvestinAsia provides end-to-end support for company registration in Indonesia, ensuring compliance, efficiency, and optimal use of available incentives. Our expertise helps foreign investors maximize benefits while reducing bureaucratic risks.
We also provide other services such as:
- PMA registration in Indonesia (Foreign Company)
- Representative office registration in Indonesia
- Indonesia Local PT PMDN Set Up
- Indonesian Virtual office setup
- Business registration number in Indonesia
- Business Licenses in Indonesia
- Trademark Registration in Indonesia
- Franchise License in Indonesia
If you are interested in starting a business in Indonesia without hassle, you can start by contacting us for FREE consultation.
FAQs
What is Indonesia’s main FDI advantage over Malaysia?
Indonesia offers longer tax holiday periods and higher R&D tax deductions, making it ideal for large-scale manufacturing and resource-based industries.
Are Indonesia’s Special Economic Zones competitive?
Yes. Indonesia’s SEZs provide CIT, VAT, and import duty exemptions, covering a wide range of industries beyond Malaysia’s more specialized zones.
How does the OSS system help investors in Indonesia?
The Online Single Submission (OSS) system simplifies licensing and reduces bureaucracy, making investment processes more transparent.
Which sectors are most attractive in Indonesia for 2025?
Mining, EV supply chain, manufacturing, and renewable energy are Indonesia’s strongest FDI magnets.
What steps should foreign investors take to establish a company in Indonesia?
Through InvestinAsia’s company registration services, investors gain professional guidance on setup, compliance, and incentive optimization.
