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.
EXAMPLE OF TYPICAL TRADING STRUCTURE
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.
- “Labuan trading activity” includes banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a Labuan non-trading activity. The Labuan entity shall pay 3% of net profits as per audited accounts.
- “Labuan non-trading activity” means an activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties by a Labuan entity on its own behalf. Such activity is not subject to tax under LBATA.
- Labuan companies carrying on both Labuan trading and non-trading activities will be deemed to be carrying on Labuan trading activities. Hence, it will have the same tax treatment as those undertaking Labuan trading activity mentioned above.
SUBSTANCE REQUIREMENT UNDER LBATA (with effect from 1st January 2019)
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.
DEALINGS WITH RESIDENT
All Labuan entities are allowed to conduct transactions with Residents of Malaysia in Ringgit Malaysia subject to the filing of a notification to Labuan FSA within 10 days from the transaction effective date. “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 s. 43 of the Malaysian Exchange Control Act 1953.
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|
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.