Transfer of Technology

Policy

Types of Agreements

Guidelines for the Approval of Technology Transfer Agreements

Intellectual Property Protection

1. Policy

All manufacturing projects licensed under the Industrial Coordination Act 1975 must obtain the prior written approval of the Ministry of International Trade and Industry (MITI) before entering into any technology transfer agreement involving foreign partners.

This is done to ensure that the agreement will not impose unfair and unjustifiable restrictions or handicaps on the local party, the agreement will not be prejudicial to national interest, and the payment of fees (if applicable) will be commensurate with the level of technology to be transferred.

2. Types of Agreements

Technology transfer agreements cover license rights over specific processes, formulae or manufacturing technology (patented or unpatented); other knowledge and expertise necessary for the setting up of a plant; and provision of various technical assistance and supporting services.

Under these arrangements, specific agreements entered could be in the form of:

(i) Joint-Venture Agreement. An agreement to set up a joint-venture company between two or more parties involving locals and foreigners.

(ii) Technical Assistance and Know-how Agreement. An agreement between two or more parties where one party will provide the technical assistance and know-how for the manufacture of certain products for a certain amount of fee or royalty.

(iii) Licence Agreement. An agreement between two or more parties where the licensor grants a licence/right to the licensee to use its patents, trademarks and other industrial/intellectual properties for the manufacture of certain products for a certain amount of fee or royalty.

(iv) Patent and Trademark Agreement. An agreement between two or more parties where one party gives the right to the other to use its patents and trademarks for the manufacture of certain products for a certain amount of fee.

(v) Turnkey Contract. A contract between two or more parties where the contract is awarded to one of the parties to perform all stages from the initial to the final stage, inclusive of consultancy, managerial, technical and other services, until the contractual project is ready for immediate commercial production or final use.

(vi) Management Agreement. An agreement between two or more parties where one party will provide management services to the other for a management fee.

3. Guidelines for the Approval of Technology Transfer Agreements

Agreements on transfer of technology must define in detail the following:

• Technological content and principal features of technology or process
• Anticipated production
• Quality and specification of products
• Particulars of technical assistance, services and manner in which they are to be provided.

The following areas are considered for the approval of transfer technology agreements:

(a) Access to Improvements

The technology to be supplied should incorporate the latest development known to the supplier and access to innovations or breakthrough in technology, including new patents applied for or registered.

(b) Remuneration for Technology

Payment for technology can be in the form of a “fixed lump sum fee” or a “running royalty” or a combination of the two for a specified period of time. Lump sum payments are usually allowed in cases where the know-how can be fully and completely transferred and absorbed within a specified period of time. The method of payment that is preferable is the running royalty based on net sales. Initial lump sum payments in addition to running royalties are not encouraged. Where such payments are requested, it should be only for the recovery of actual expenses incurred by the licensor for preliminary services provided to the licensee.

(c) Method of Payment

Royalty is imputed in relation to the level of technology and the principal elements of transfer. The quantum of royalty, as a percentage of net sales, which can be considered depends upon the merits of each case.

The Government has liberalised the present policy for regulating technology transfer agreements by allowing automatic approval of the following:-

i) Technology transfer agreements signed between 100% foreign-owned companies in Malaysia and any foreign party or foreign holding company.

ii) All technical assistance, licence and know-how agreements signed between Malaysian-owned/ Malaysian joint-venture companies and any foreign party where the royalty payment is as follows:-

• Running royalty not exceeding 3% of net sales
• Lump sum payment not exceeding RM 500,000
• Lump sum payment and running royalty in total not exceeding 3% of net sales

iii)Trade mark and patent agreements signed between Malaysian-owned/Malaysian joint-venture companies and any foreign party involving royalty payments not exceeding 1% of net sales for each category.

Net Sales is defined as gross sales less sales discounts or returns, transport costs (including freight), insurance, duties, taxes and other charges, including, where applicable, cost of raw materials, parts and components imported from the foreign licensor concerned or its subsidiaries or affiliated companies.

The practice of itemisation of service under separate agreements and the capitalisation of know-how fee/royalty are not encouraged.

(d) Duration and Renewal

Duration of agreements should be adequate for full absorption of technology. The life of any patent relating to the technology is also taken into consideration.

An initial period of five years is normally approved and any renewal is subject to the prior approval of MITI.

(e) Training

A provision for adequate training for the local company’s personnel in the technology supplier’s plant as well as in-plant training in the local company’s plant should be incorporated and clearly specified. In the case of the former, the number of personnel to be trained, the areas of training and its duration, together with arrangements and the facilities to be made available for the training, should also be defined.

The costs of training should be borne by the technology supplier but all expenses related to salaries, wages, living and travelling allowances may be borne by the local company.

(f) Patents and Trade Marks

Patents and trade marks may come as one of the components of the whole technology transfer package. In the case of patents, it is of utmost importance that those patents involved in any process know-how be explicitly defined in the agreements and the local company is granted the user rights over all such patents. Where the life of the patent extends beyond the duration of the agreement concerned, an arrangement should be made for the continued use of the patent after the expiry of the agreement.

(g) Confidentiality/Secrecy

Confidentiality of information should be confined to the duration of the agreement.

(h) Guarantee/Warranty

The agreement should define guarantee with respect to the production capacity, product quality and specifications and other features of the manufacturing process.

(i) Taxes

A withholding tax of 10% is levied on payments made to the foreign supplier of technology and this tax has to be borne by the foreign recipient. Application for exemption under Double Taxation Agreements, where applicable, has to be made to the Ministry of Finance.

(j) Sales Territory

The local company should be free to sell its products (manufactured with the licensed technology) in the whole of Malaysia and all other countries, except where the foreign technology supplier is manufacturing directly or where he has given exclusive rights to others or where he is legally not empowered to allow sales based on his technology.

(k) Governing Laws and Arbitration

The governing laws for technology transfer agreements signed between Malaysian-owned/Malaysian joint-venture companies and any foreign party should be Malaysian laws and arbitration proceedings must be conducted in Malaysia in accordance with either the Malaysian Arbitration Act 1952 (Revised 1972) or the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, and conducted at the Asian-African Legal Consultative Committee (AALCC) Regional Centre for Arbitration in Kuala Lumpur.

This requirement does not apply to agreements signed between 100% foreign-owned companies in Malaysia and any foreign party or foreign holding company.

4. Intellectual Property Protection

(a) Patents Act 1983

Malaysia provides adequate protection in the field of industrial property for local and foreign investors. Patent protection in Malaysia is governed by the Patents Act 1983 and the Patents Regulations 1986.

Under the Act and Regulations, an application for a patent can be made directly in Malaysia and registration is effective for the whole of Malaysia. Similar to the provisions in the legislations of other countries, an invention is patentable if it is new, involves an inventive step and is industrially applicable.

The Act provides that the period for patent protection is 15 years from the date of grant, subject to yearly renewal.  A utility innovation certificate is granted for a period of 5 years from the date of grant and be extended to a maximum of 10 years, subject to use. The owner of a patent has the right to exploit the patented invention, to assign or transmit the patent, and to conclude licence contracts. Malaysia is a signatory of the Paris Convention thus providing further safeguards in the field of industrial property in the country. Malaysia’s industrial property laws accord the same treatment for both nationals and foreigners.

(b) Trade Marks Act 1976

Trade mark protection in Malaysia is governed by the Trade Marks Act 1976 and the Trade Marks Regulations 1997. The Act modelled along the Acts of some of the industrialised countries provides effective and adequate protection for registered trade marks in Malaysia. If a trade mark is registered, no person or enterprise other than its owner or authorised users may use it, otherwise infringement actions can be taken against them. The period of protection is 10 years which is renewable for a period of every 10 years thereafter.  The proprietor of the trade mark has the right to assign as well as to license the use of a trade mark. Amendments have also been made to the Trade Marks Act and Trade Marks Regulations to provide for the registration of Service Marks.

(c) Copyright Act 1987

Copyright protection in Malaysia is governed by the Copyright Act 1987 which provides comprehensive protection for copyrightable works. The Act outlines the nature of works eligible for copyright (which includes computer software), the scope of protection, and the manner in which the protection is accorded.

The duration of copyright protection in literary, musical or artistic works is the life of the author and 50 years after his death, while the duration of protection in sound recordings, broadcasts and films is 50 years after the works were published or made. A unique feature of the Act is the inclusion of provisions for enforcement of the Act, which include such powers to enter premises suspected of having infringing copies and to search and seize infringing copies and contrivances. A special team of officers is appointed to enforce the Act.

Malaysia is a signatory of the Berne Convention. Foreign works of non-Berne member countries are also protected if they are made in Malaysia and are published in Malaysia within thirty days of their first publication in the country of origin.

(d) Industrial Designs

Industrial designs are protected by the United Kingdom Designs (Protection) Act 1949 (Revised 1978) for West Malaysia, the United Kingdom Designs (Protection) Ordinance Chapter 152 for Sabah and the Designs (United Kingdom) Ordinance Chapter 59 for Sarawak. By these legislations, the registered proprietor/owner of any design registered in the United Kingdom under The Registered Design Act, 1949 (United Kingdom) has the same rights and privileges as though the registration in the United Kingdom has been issued with an extension to Malaysia.  Therefore, Malaysian residents and others who desire design protection in Malaysia must obtain a British registration before they can obtain protection in Malaysia.

The Government is taking the necessary steps to enable registration of industrial designs to be done in Malaysia. The Malaysian Designs Act 1996 has been enacted and once the regulations comes into force, registration will need to be done in Malaysia in order to secure design protection in the country.

For further information on the intellectual property protection, please contact the Ministry of  Domestic Trade and Consumer Affairs.