Labuan Business Activity Tax Act 1990 (LBATA)
Labuan business activities are required to be carried out in, from or through Labuan, with non-residents of Malaysia or with another Labuan entity, and in foreign currencies except for specific purposes.
A Labuan entity is subject to tax under the LBATA in respect of its Labuan business activity - i.e. in foreign currency with non-residents or other Labuan entities, or in respect of any designated Labuan business activities which then may be transacted with residents or in the Malaysian currency.
Why Labuan international companies are gaining popularity among Expatriates in Malaysia?
Low tax of 3% on net profit
For investment holding companies, no tax and no audit required
Most business do not require trade licenses
Flexibility to operate with foreign currencies and Malaysian Ringgit Bank accounts
Permissible to deal with Malaysian market, corporate tax is 24%
No personal tax for all foreign directors under exemption order 7 2011
Net profit per audited accounts for Labuan trading activities
Tax is chargeable only on the net profits per audited accounts in respect of Labuan trading activities (- i.e. banking, insurance, trading, management, licensing, shipping operations and other activity (other than the holding of investments in securities, stock, shares, loans, deposit or other properties.
The tax rate is 3% upon the chargeable income from only the Labuan trading activities. This means the income from the Labuan non-trading activities (- i.e. the holding of investments in securities, stock, shares, loans, deposits or other properties) of a Labuan entity is not subject to tax at all.
Dividends received from Labuan company which are distributed out of income derived from a Labuan business activity or income exempted from tax and distributions received from a Labuan trust by its beneficiaries are not subject to tax in the hands of the recipients.
Tax return and statutory declaration
Labuan entity carrying on Labuan business activities which are Labuan trading i.e. by 31 March of the following calendar year.
A Labuan entity may elect (within three months of the start of the year of assessment, in a prescribed form) to be charged to tax of RM20,000 instead of the 3% of net profits.
This means that the Labuan entity will not require to submit a tax return for that year of assessment.
With Common Reporting System (CRS) by OECD in place and progress, more and more business owners begin to look into and chose Labuan for their international business ventures especially when their business are of Asia Pacific region.
CRS aims to provide convenience to individual country tax authorities to access info of individuals and business owners of their wealth or involvement worldwide.
IRB is focusing on taxpayer avoiding paying WHT by using Labuan as a conduit of payments
Manipulation of withholding tax using a related Malaysian incorporated company in Labuan as a conduit for payments made to a non-resident person, which otherwise would have been paid directly to the non-resident person and subject to withholding tax, is considered as an avoidance act.
Local company issuing payment to Labuan company is not subjected to WHT.
Labuan company making payment to a Singapore or Indonesian company will not be subjected to WHT.
Review of the Labuan International Business Financial Centre
Labuan entities carrying on Labuan trading activities can no longer have the option of electing to pay a flat tax of Rm20,000 (regardless of its income level) instead of a 3% tax on its chargeable profits.
As from 1 January 2019, all Labuan companies (carrying out both Labuan trading and Labuan non-trading activities) falling under LBATA will be subject to the 3% tax rate on net profits and will have to file the requisite tax returns.
Restrictions on transacting in Ringgit and on transaction conducted between Labuan entities and residents of Malaysia is abolished.
Substance requirements for Labuan Enterprise
For the purpose of Labuan business activity, required to have adequate number of full-time employees in Labuan and adequate amount of annual operating expenditure in Labuan.
Details will be as prescribed under the regulations to be made by the Minister of Finance.
Requirements for Labuan business activity – PU(A) 392/2018
A Labuan entity carrying on a Labuan business activity shall have the number of full-time employees and an amount of annual operating expenditure as specified in the schedule.
Income tax deductions for payment made to Labuan Company by residents – PU(A) 375/2018
Section 39(1)r ITA 1967 with effect from 1.1.2019
Section 4 of the LBATA is amended to exclude royalties and income derived from ‘intellectual property rights’ will now be taxed under the ITA.
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