As tax information begins to flow efficiently between tax authorities and with government in various jurisdictions, it is essential for businesses involving in cross border transactions to set up their structures with a proper business purpose together with the correct commercial substance.
Labuan IBFC, with a number of unique features and attractive tax system, is highly suitable and has the ideal business environment for trading companies to navigate the new tax landscape.
The most popular and commonly used vehicle for carrying out trading activities in Labuan is a company limited by shares. All Labuan companies are governed by the Labuan Companies Act 1990 and this Act requires the engagement of services of a Labuan IBFC registered trust company to act as its incorporation agent.
Kensington Trust Labuan Limited is a licensed trust company in Labuan and may assist you with the establishment and administration of your company.
PURPOSE / COMMERCIAL SUBSTANCE
With on-going mechanisms in place to exchange tax information, it is important to set up the trading company with a proper business purpose and together with the correct commercial substance.
The establishment of the company or arrangement of transaction structure is not aimed solely at utilizing tax treaty. It is also not to be set up as a “Conduit company” for purpose of avoiding tax or transferring profits
LABUAN IBFC TAXATION SYSTEM
Labuan Business Activity Tax Act 1990 (“LBATA”) governs the imposition, assessment and collection of tax on a Labuan business activity carried on in, from or through Labuan.
Labuan entities that carry on a non-Labuan business activity are subject to the provisions of the Malaysian Income Tax Act, 1967 (ITA).
“Labuan business activity” means:
- a Labuan trading or a Labuan non-trading activity carried on in, from or through Labuan,
- excluding any activity which is an offence under any written law.
Pursuant to the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 that took effect on 1st January 2019:
- Labuan trading activity has been restricted to license business activities and selected type of trading activities only. Please refer to the above Regulations 2021.
- Labuan non-trading activity has been restricted to holding company, namely Pure Equity Holding and Non-Pure Equity Holding.
SUBSTANCE REQUIREMENT UNDER LBATA
Pursuant to section 2B(1) (b) of LBATA, the Labuan entities shall, for the purpose of the Labuan business activity, have :-
- an adequate number of full time employees in Labuan; and
- an adequate amount of annual operating expenditure in Labuan, as prescribed by the Minister by regulations made under this Act.
Section 2B (1A) of LBATA provides that a Labuan entity carrying on a Labuan business activity which fails to comply with the substance requirement for a basis period for a year of assessment shall be charged to tax at the rate of twenty four per cent (24%) upon its chargeable profits for that year of assessment.
The Substance Requirements for Labuan Other Trading Activities are as follows:
- To comply with minimum of two (2) full time employees in Labuan and a minimum annual operating expenditure of RM50,000 per annum in Labuan.
DEALINGS WITH RESIDENT
All Labuan entities may conduct transactions with Residents of Malaysia in Ringgit Malaysia except for:
- Issuing or offering to any Residents of Malaysia for subscription or purchase; or
- Invite any resident to subscribe or purchase
any interest pursuant to the relevant provisions of the Interest Schemes Act 2016 where such issue or offer or invitation is made in Malaysia, other than Labuan, unless the provisions of the Interest Schemes Act 2016 are complied.
“Resident” here means:
- in relation to a natural person, a citizen or permanent resident of Malaysia; or
- in relation to any other person, a person who has established a place of business, and is operating in Malaysia.
- and includes person who is declared to be a resident pursuant to paragraph 214(6)(a) of the Financial Services Act 2013 and paragraph 225(6)(a) of the Islamic Financial Services Act 2013.
The amount of deductions allowed in respect of payments made by Residents to Labuan entities are as follows:-
|> Interest expense||75% deductible|
|> Lease rental||75% deductible|
|> General reinsurance premiums||100% deductible|
|> Other type of payments||3% deductible|
LABUAN OTHER TRADING ACTIVITIES
Labuan Other Trading Activities are Labuan trading companies carrying out the following activities:
- Administrative Services
- Accounting Services
- Legal Services
- Backroom Processing Services
- Payroll Services
- Talent Management Services
- Agency services
- Insolvency Related Services
- Management Services (other than Labuan Company Management services as defined in section 129 of the Labuan Financial Services and Securities Act 2010).
WHY LABUAN IBFC FOR INTERNATIONAL TRADING BUSINESS?
- Tax system is simple, clear and straightforward.
- Possible to establish tax residency in Malaysia by demonstrating that its ‘highest level of control’ is exercised in Malaysia, Labuan in particular in this case.
- Access to Double Tax Agreements between Malaysia and over 70 countries.
- Labuan is a sophisticated financial centre where it is possible to create substance in real terms. A Labuan trading company has the ability to maintain local office, employ local staff and access to local support services at a relatively low cost.
- Strategically situated in the Asia Pacific region and sharing a common time zone with many large Asian cities.
- No withholding tax on payments made to non-residents.
- No import duty / sales tax / capital gain tax.
- No stamp duty on instruments relating to offshore business activities including share transfer.
- No foreign exchange controls.