Industrial Building Allowance (IBA) Malaysia: Rates, Who Qualifies and a Worked Example

Key Takeaways

• Industrial Building Allowance (IBA) lets the owner of a qualifying industrial building deduct its cost from taxable business income: a 10% initial allowance in the first year and a 3% annual allowance every year, so the cost is written off over about 30 years of assessment (Income Tax Act 1967, Schedule 3, paragraphs 12 and 16).
• Land never qualifies. When you buy a factory, only the building part of the price counts, plus the share of legal fees and stamp duty that relates to the building. If the SPA does not split land and building, LHDN expects a valuation from JPPH or a professional valuer.
• Some buildings get faster rates: export and import-processing warehouses (paragraph 37C), workers' hostels of manufacturers and approved childcare centres get 10% a year for 10 years; employee housing under paragraph 42(1) gets a 40% initial allowance.
• A second-hand factory qualifies. Since year of assessment 2005, the buyer's qualifying expenditure is simply its own purchase price for the building, whether the seller is a developer or a previous owner.
• A landlord can claim IBA on a factory leased to a manufacturer (paragraph 60), but not on warehouses, hotels and the other paragraph 37A to 42C buildings it lets out. Tenants cannot claim on the landlord's building.
• The Budget 2026 accelerated capital allowance (20% + 40%) covers locally made machinery and ICT, not buildings. Budget 2027, tabled on 9 October 2026, proposes extending it to 31 December 2030.

Industrial Building Allowance (IBA) in Malaysia is a tax deduction for capital spent on constructing or buying a building used as an industrial building, such as a factory, in your business. The standard rates are a 10% initial allowance in the year the expenditure is incurred plus a 3% annual allowance each year the building is in use, both on the qualifying building expenditure (QBE), which excludes land. A company that buys a factory building for RM2.5 million can deduct about RM327,000 in year one and about RM75,000 a year after that.

This guide is based on the Act's Schedule 3 and the three LHDN public rulings that still govern IBA: Public Ruling No. 3/2018 on qualifying expenditure and computation, and Public Rulings 8/2016 and 10/2016 on which buildings qualify. LHDN's public ruling list, checked on 11 October 2026, shows none of them withdrawn or replaced. It is general information for factory and warehouse owners and buyers, not tax advice.

What is Industrial Building Allowance (IBA)?

Accounting depreciation is not tax deductible in Malaysia. Instead, Schedule 3 of the Income Tax Act 1967 gives capital allowances at fixed rates. Machinery and equipment get capital allowances on plant; buildings get IBA, but only if the building is an "industrial building" as defined in the Act. Offices, shops, showrooms and houses are excluded by paragraph 65(3).

Three terms come up again and again:

• Qualifying building expenditure (QBE): capital spent on constructing or buying the building, used as an industrial building at any time afterwards (paragraph 3).
• Initial allowance (IA): a one-off allowance in the year the QBE is incurred (paragraph 12).
• Annual allowance (AA): a yearly allowance for every year of assessment the building is in use as an industrial building at the end of the basis period (paragraph 16).

The QBE that has not yet been claimed is the residual expenditure. It matters when you sell, because the sale price of the building is compared with it.

Industrial building allowance rates by building category

LHDN summarises the rates in Public Ruling No. 8/2016 (Industrial Buildings Part I, 23 November 2016) and Public Ruling No. 10/2016 (Industrial Buildings Part II, 5 December 2016). The categories most relevant to industrial property are:

Building category	Schedule 3 reference	Initial allowance	Annual allowance
Factory, including mills, workshops and buildings housing manufacturing or processing machinery	Para 63(a), 64(a)	10%	3%
Storage building in the same curtilage as your factory (raw materials, fuel, finished goods before sale)	Para 64(b)	10%	3%
Warehouse where the business is hiring storage space to the public; dock, wharf, jetty	Para 63(b), 63(c)	10%	3%
Canteen, rest room, toilets and wash rooms for staff of an industrial building	Para 65(1)	10%	3%
Warehouse used solely to store goods for export, or imported goods to be processed and distributed or re-exported	Para 37C	None	10% for 10 years
Building used for approved research and development	Para 37B	10%	3%
Living accommodation built for employees where an industrial building is in use	Para 42(1)	40%	3%
Living accommodation for employees of a manufacturing, hotel or tourism business or approved service project	Para 42A(1)	None	10% for 10 years
Childcare centre provided by an employer for its staff	Para 42A(2)	None	10% for 10 years
Building for approved industrial, technical or vocational training	Para 42C	None	10% for 10 years

Accommodation for directors, controlling individuals and management, administrative or clerical staff does not count under paragraphs 42 and 42A. Public Ruling 10/2016 also lists rates set by Income Tax Rules for MSC status companies, BioNexus companies, kindergartens and privatisation projects; those rarely apply to a factory purchase, so check with LHDN if you fall into one of them.

Who can claim IBA?

The Act sets two conditions at the end of the basis period. For the initial allowance, you must own the building and it must be in use, or about to be used, as an industrial building (paragraph 13(c)). For the annual allowance, you must own it and it must be in use as an industrial building for your business (paragraph 16).

Situation	Can claim IBA?	Basis
Manufacturer that owns and runs its own factory	Yes, 10% IA + 3% AA	Para 12, 16, 63(a)
Owner that leases its factory to a manufacturer who uses it as a factory	Yes, against the rental income	Para 60; PR 3/2018 para 10.1
Owner that lets out a paragraph 37C warehouse, hotel, research building or other para 37A to 42C building	No, for buildings built or bought from YA 2016	Para 16B(1); PR 3/2018 para 8.1
Tenant, on the landlord's building	No	The tenant does not own the building
Tenant, on additions or renovations it pays for and uses as an industrial building	Yes, on its own spending	PR 3/2018 paras 10.5 to 10.9
Trading company using a standalone warehouse for local distribution	Usually no, unless it fits para 37C or 63(c)	Para 63, 64(b)
Office block, showroom or shop	No	Para 65(3)

Two practical points. First, an office inside the factory still qualifies if its construction cost is not more than one tenth of the whole building's cost (paragraph 66). Above that, the office part is cut out of the claim. Second, a factory that stands empty for a while keeps its allowances if it was used immediately before, is kept ready for use, and the disuse is temporary (paragraphs 56 and 57; PR 3/2018 para 11).

If you collect rent as non-business income, how unused allowances are carried forward is a technical point. Confirm it with your tax agent or LHDN before you rely on the deduction.

What counts as qualifying building expenditure

Building you construct

PR 3/2018 lists architect's fees, plan approval costs, legal charges and stamp duty on the building's title, piling and foundations, construction materials and labour, wiring for electricity supply and other fittings that form part of the building, drainage and water and power installation, and later additions, renovations and alterations that are capital in nature. The QBE is deemed incurred on the day construction is completed, or on the day the business starts if the building is finished earlier (paragraph 55).

Building you buy

For a purchased building, the QBE is the purchase price of the building (paragraph 3(2)). Paragraph 70 says the purchase price includes legal fees, stamp duty and other incidental costs of the purchase, but excludes the part of the price attributable to the land. The QBE is deemed incurred when the price becomes payable.

What does not qualify

• Land cost, and the legal fees, stamp duty and surveyor costs of acquiring the site.
• Clearing a site where the old structure was itself an industrial building.
• Compensation paid to obtain the right to occupy or own a property.
• Repairs and normal maintenance, such as replacing a leaking roof with one of the same quality. These are deducted as expenses under section 33(1) instead (PR 3/2018, Example 3).
• Anything that is plant or machinery, which gets capital allowances on plant instead (paragraph 6).

Splitting land and building

If the sale and purchase agreement does not state the land and building values separately, PR 3/2018 para 4.2.3 says you need a valuation from the Valuation and Property Services Department (JPPH) or a professional valuer. Legal fees that cover both are apportioned by the same ratio. In LHDN's own example, a RM950,000 factory was split RM500,000 land and RM450,000 building, and only 450/950 of the RM28,500 legal fees, RM13,509, was added to the QBE.

Buying from a developer or buying a used factory

Before year of assessment 2005, the QBE for a purchased building depended on whether it had been used before and when. Paragraph 3 was amended from YA 2005 so that the QBE is simply the buyer's purchase price for the building (PR 3/2018 para 4.2.4). In practice:

• New factory from a developer: your QBE is the building part of your price plus related incidental costs.
• Second-hand factory: the same rule. You do not inherit the seller's residual expenditure. In PR 3/2018 Example 4, a factory built for RM90,000 decades earlier was sold for RM250,000 excluding land, and the buyer's QBE was RM250,000.

Worked example: IBA on a RM6 million factory purchase

Assume a Malaysian company buys a completed factory for RM6,000,000 and uses it for manufacturing straight away. The SPA states land RM3,600,000 and building RM2,400,000 (a 60:40 split chosen for illustration). Transfer stamp duty for a Malaysian buyer on RM6 million is RM224,000. The scale legal fee under the Solicitors' Remuneration Order 2023 is RM61,250, or RM66,150 with 8% service tax. You can check both with our legal fees calculator.

Item	Amount (RM)
Building part of the price	2,400,000
Incidental costs (stamp duty 224,000 + legal fee 66,150)	290,150
Share of incidental costs for the building (40%)	116,060
Qualifying building expenditure (QBE)	2,516,060
Year 1 initial allowance (10%)	251,606
Year 1 annual allowance (3%)	75,482
Total allowance in year 1	327,088
Residual expenditure after year 1	2,188,972
Annual allowance from year 2	75,482 a year
Years of assessment to write off in full	30 (10% + 30 × 3%)

At the 24% company tax rate shown on LHDN's company tax rate page, the year 1 allowance reduces tax by about RM78,500, and each later annual allowance by about RM18,100, provided the company has enough business income to absorb it. If the same building qualified as a paragraph 37C export warehouse instead, there would be no initial allowance but RM251,606 a year for 10 years.

Your loan does not change the QBE, but interest on money borrowed for the business is a separate deduction question for your tax agent. The mortgage calculator and the commercial loan rates page help with the financing side.

Selling: balancing allowance, balancing charge and the two-year rule

A sale of the building is a disposal (paragraph 48). The building part of the sale price is compared with the residual expenditure:

• Sale price above residual expenditure: a balancing charge is added to income (paragraph 35), but it can never exceed the total allowances you claimed (paragraph 37).
• Sale price below residual expenditure: you get a balancing allowance for the difference (paragraph 34).

Continuing the example, after 8 years of assessment the company has claimed RM855,462 and the residual expenditure is RM1,660,598. If the building part of the sale price is RM2.8 million, the gap is RM1,139,402, but the balancing charge is capped at RM855,462. If the building part is RM1.5 million, the company gets a balancing allowance of RM160,598. Any gain on the property as a whole is a separate question under real property gains tax.

The two-year rule: paragraph 71 says that if you own an asset for less than two years, allowances are not given, and any already given are clawed back as a balancing charge, unless the reason is death or another reason the Director General accepts. Plan to hold a factory for at least two years if the IBA matters to your numbers.

IBA vs capital allowance on plant and machinery

Many items in a factory are plant, not building, and plant gets much faster rates. Public Ruling No. 12/2014 gives the standard rates:

Asset class	Initial allowance	Annual allowance
Heavy machinery, motor vehicles	20%	20%
Plant and machinery (general)	20%	14%
Others	20%	10%
Industrial building (for comparison)	10%	3%

LHDN's dividing line is function: an asset that works as a tool in the business is plant, while an asset that is the premises or setting is not (PR 12/2014, functional and premise tests). PR 3/2018 treats electrical wiring that forms part of a building as QBE, but treats additional air-conditioning equipment as plant. Site preparation for a machine is added to the machine's cost if it is not more than 10% of the combined cost (Public Ruling No. 6/2015); if it is more than 75%, the whole lot is treated as a building (paragraph 67).

So when you buy a factory with an overhead crane, transformer or production line included, ask for those items to be listed and valued separately. Whether a specific item is plant, and at which rate, is a facts question to confirm with your tax agent or LHDN.

Is there an accelerated allowance for factory buildings in 2026?

No accelerated IBA has been announced. The accelerated capital allowance in the Budget 2026 speech (Annex 21) gives a 20% initial and 40% annual allowance for capital spent from 11 October 2025 to 31 December 2026 on heavy machinery and general plant acquired directly from local manufacturers, ICT equipment and software packages, and customised software development fees. Buildings are not on the list. The Budget 2027 speech on 9 October 2026 proposes extending that accelerated allowance for local plant and machinery and ICT to 31 December 2030 and raising the per-item limit for small value assets to RM3,000. These are proposals until the Finance Bill is passed. Our Budget 2026 guide for factory and warehouse owners covers the other measures.

Buyer's checklist: protect your IBA claim

• Get the land and building values written into the SPA, or order a JPPH or registered valuer valuation before you file.
• Keep the paperwork that forms the purchase price: SPA, stamp duty certificate, legal fee invoices and receipts.
• Record key dates: when the price became payable, completion or possession, and when the building was first used in the business.
• Keep the CCC and approved plans for a building you construct or extend, as evidence of completion and of the office to factory split.
• Check the use fits a qualifying category: a factory, same-curtilage storage, public storage hire, or a paragraph 37C export or import-processing warehouse.
• Measure the office and showroom share against the one tenth test in paragraph 66.
• Ask for a separate list of plant such as cranes, transformers, air-conditioning and racking, for capital allowances on plant.
• Plan to hold for at least two years to avoid the paragraph 71 clawback.
• If you will lease the building out, check whether paragraph 60 or paragraph 16B(1) applies before you buy.
• Have a tax agent confirm the computation before the first return that claims it.

For the buying process itself, see our step-by-step guide to buying a factory, the full cost of setting up a factory, and our breakdown of lawyer fees and stamp duty on a factory purchase. If you are still weighing renting against buying, our rent or buy note on IBA and our Klang guide on how capital allowances affect buying cover that decision. Browse factories for sale, check JPPH-recorded industrial transactions by area, or, if you own a factory and are thinking about the balancing charge, read how we help owners sell a factory.

FAQ

What is the rate of industrial building allowance in Malaysia?

For a factory and most other industrial buildings, the rate is a 10% initial allowance in the first year plus a 3% annual allowance each year, on the qualifying building expenditure (Schedule 3, paragraphs 12 and 16). That writes the cost off over 30 years of assessment. Some categories get different rates, such as 10% a year for 10 years for a paragraph 37C export warehouse.

Can I claim IBA on land?

No. Paragraph 70 excludes the part of the purchase price attributable to land, and PR 3/2018 lists land cost and the legal fees, stamp duty and surveyor costs of buying the site as non-qualifying. If the SPA does not split land and building, get a valuation from JPPH or a professional valuer.

Can I claim IBA on a second-hand factory?

Yes. Since year of assessment 2005, the qualifying expenditure for any purchased industrial building is your own purchase price for the building part, plus related legal fees and stamp duty. It does not matter whether you buy from a developer or a previous owner, and you do not take over the seller's residual expenditure.

Can a landlord claim IBA on a factory rented to a manufacturer?

Yes. Under paragraph 60, an owner that leases out a building used by the tenant as an industrial building, such as a factory, can claim IBA against the rental income. The exception is the paragraph 37A to 42C categories, including paragraph 37C warehouses and hotels: since YA 2016 the owner must also run the business there to claim.

Can a tenant claim IBA?

Not on the landlord's building, because only the owner can claim. A tenant can claim IBA on capital it spends itself on additions, renovations or alterations that are clearly identifiable from the original building and used as an industrial building, and capital allowances on machinery it owns.

What is the difference between IBA and capital allowance on machinery?

IBA applies to the building at 10% plus 3% a year. Plant and machinery get 20% initially plus 10%, 14% or 20% a year depending on the asset class, so they are written off in a few years instead of 30. The Budget 2026 accelerated allowance of 20% plus 40% applies only to qualifying plant from local manufacturers and ICT, not to buildings.

Does a warehouse qualify for industrial building allowance?

It depends on the use. A storage building in the same curtilage as your factory, a warehouse whose business is hiring storage space to the public, and a warehouse used solely for export goods or imported goods for processing and re-export qualify. A standalone warehouse used by a trading company for local distribution usually does not.

Is there an accelerated IBA for factory buildings in 2026?

No accelerated IBA has been announced. The Budget 2026 accelerated capital allowance covers machinery from local manufacturers, ICT equipment and software, and Budget 2027 proposes extending it to 31 December 2030, but neither covers buildings. Confirm any new measure with your tax agent or LHDN.

Sources

• LHDN, Public Ruling No. 3/2018: Qualifying Expenditure and Computation of Industrial Building Allowances, 12 September 2018.
• LHDN, Public Ruling No. 8/2016: Industrial Buildings Part I, 23 November 2016.
• LHDN, Public Ruling No. 10/2016: Industrial Buildings Part II, 5 December 2016.
• LHDN, Public Ruling No. 12/2014: Qualifying Plant and Machinery for Claiming Capital Allowances, 31 December 2014.
• LHDN, Public Ruling No. 6/2015: Qualifying Expenditure and Computation of Capital Allowances, 27 August 2015.
• Income Tax Act 1967 (Act 53), Schedule 3, updated text as at 21 May 2024.
• LHDN, list of public rulings (Ketetapan Umum), accessed 11 October 2026.
• Ministry of Finance, Budget 2026 speech, Annex 21, 10 October 2025, accessed 11 October 2026.
• Ministry of Finance, Budget 2027 speech, 9 October 2026.
• LHDN, company tax rates, accessed 11 October 2026.

Buying or renting, talk to us

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