Malaysia in principle has committed to implement and to adhere to requirements of the OECD – Forum on Harmful Tax Practices (“FHTP”), which ensures tax regime across countries are equitable, transparent and substantive.
In Nov 2018, changes to tax treatment for Labuan entities were announced at the 2019 Budget. The new Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 came into operation on 1st Jan 2019. With these changes, Labuan as a jurisdiction has been rated:
- “Not Harmful” based on the recent FHTP meeting held on 9th to 11th Jan 2019.
- “Largely Compliant” by Global Forum on Tax Transparency and Exchange Information.
REVISED TAX FRAMEWORK EFFECTIVE 1ST JANUARY 2019
| CORPORATE INCOME TAX | |
| Trading Business Activity | Flat tax of MYR 20,000 under the Labuan Business Activity Tax Act 1990 would be abolished with effect from 1 Jan 2019. The current tax rate of 3% of audited net profits will continue to remain. |
| Non Trading Business Activity | Continue to remain at zero tax rate |
| Combination of Non Trading and Trading Business Activity | 3% of audited net profits |
| OTHER TAXATION | |
| Withholding Tax | Remain exempted |
| Capital Gains Tax | Remain exempted |
| Stamp duty on Labuan transactions / instruments | Remain exempted |
| INTELLECTUAL PROPERTY ASSETS | |
| Income from intellectual property assets held by Labuan entity | Subject to prevailing income tax rate under the Malaysian Income Tax Act 1967 |
| DEALING WITH RESIDENTS | |
| Dealing with resident | Permitted |
| Transaction in Ringgit Malaysia | Permitted |
| EXPENSE DEDUCTABILITY BY RESIDENT COUNTERPARTY | |
| Interest payment | 67% deductible (previously 100% allowable) |
| Lease payment | 67% deductible (previously 100% allowable) |
| General reinsurance premiums | 100% deductible (no change) |
| Other type of payments | 3% deductible (previously 100% allowable) |
| SUBSTANTIVE REQUIREMENTS | |
Labuan entity carrying on these Labuan business activity shall have the number of full time employees and annual operating expenditure. Further guidance will be issued by the Labuan FSA on the economic substance requirements including outsourcing procedures within the jurisdiction. | Labuan insurer, Labuan reinsurer, Labuan takaful operator, Labuan retakaful operator Labuan underwriting manager or Labuan underwriting takaful manager Labuan insurance manager or Labuan takaful manager Labuan insurance broker or Labuan takaful broker Labuan captive insurer or Labuan captive takaful Labuan International Commodity Trading Company Labuan bank, Labuan investment bank, Labuan Islamic bank or Labuan Islamic investment bank Labuan trust company Labuan leasing company of Labuan Islamic leasing company Labuan credit token company or Labuan Islamic credit token company Labuan development finance company or Labuan Islamic development finance company Labuan building credit company or Labuan Islamic building credit company Labuan factoring company or Labuan Islamic factoring company Labuan money broker or Labuan Islamic money broker Labuan fund manager Labuan securities licensee or Labuan Islamic securities licensee Labuan fund administrator Labuan company management Labuan International Financial Exchange Self-regulatory organisation or Islamic self-regulatory organisation Holding Company |
| Consequences of non-compliance | For licensing entities, non-compliance will not have any impact on the license as long as it meet with the requirements under the respective licencing legislations. If the Labuan entity does not comply with the required substantive requirements in Labuan, the Labuan entity may not fall within the provisions of the Labuan Business Activity Tax Act 1990 to enjoy its benefits therein. |
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