Recent Tax Development in Labuan as Announced in Budget 2019

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On Friday, 02 November 2018 during the 2019 Budget delivered by the Minister of Finance Mr Lim Guan Eng in the Malaysia Parliament titled “A Resurgent Malaysia, A Dynamic Economy, A Prosperous Society” it was announced that:

  1. Tax ceiling of RM 20,000 under the Labuan Business Activity Tax Act 1990 will be removed and the current tax rate of 3% will be maintained.
  2. Nevertheless, the Government of Malaysia will continue to enhance Labuan’s competitiveness by:
    1. Removing restrictions on 20 trade in Malaysian Ringgit,
    2. Removing restrictions on transactions between Labuan and Malaysian residents

With the abolishment of ceiling tax of RM 20,000 this means that all Labuan company may be subjected to compulsory audit.

This new measure will come into effect 01 January 2019.

 

The Labuan International Business and Financial Centre was set up as an offshore and mid-shore services centre to provide a wide range of business and investment structures facilitating cross-border transactions, business dealings and wealth management needs.

In line with the initiative to further promote long term competitiveness of Labuan as an international financial hub, as well to ensure compliances to the international tax standards, it is proposed that:

It was proposed that the current tax treatment and conditions as below to be abolished

  1. Election for the income tax at the fixed rate of RM 20,000 under Labuan Business Activity Tax Act 1990
  2. Restriction on certain transactions conducted in Ringgit Malaysia. In accordance to Section 7 (4) of the Labuan Companies Act 1990, No Labuan company shall carry on any business in Ringgit
  3. Restriction on certain transactions conducted with resident of Malaysia

The imposition of new conditions:

  1. Labuan IBFC activity carrying out in Labuan is subjected to substantive condition to be announced by Labuan Financial Services Authority soon. While we await those new guidelines it is the writer opinion that the below may be propose:
  2. The requirement to set up a physical office in Labuan to create substance. While Not all Labuan company are required to set up operational office in Labuan, the Authority may impose certain condition such as certain company that meets certain sales figure and expenses may be required to set up offices in Labuan.
  3. The need for operational office to display the company sign board company number. The operational office also needs to have separate entrance and should not be shared office; while certain common area can be shared such as meeting rooms, pantry and wash rooms.
  • the company need to show substantial economic activity and the necessary operating tools or office equipment such as computer, fax machine, accounting software for reporting purposes to be done in Labuan.
  1. In addition, the Regulator may require the Labuan company to have in place an office fixed line telephone. A mobile number may not be appropriate for this purpose.
  2. Functional substance for the office in Labuan such as the need to employ operation or accounting staff to run the day-to-day operations of the Labuan company.
  3. To maintain a bank account in Labuan and all banking activities need to be done In and Out of Labuan
  • The Authority may also require key decisions to be made by the board of directors while physically present in Labuan. As a result, the BOD may be required to come to Labuan 6 monthly for boards meeting.

It is no doubt with such implementations, this will spur the Labuan economy and create more employment opportunities.  While some may see that this will cause Labuan to be less competitive especially with the abolishment of the tax ceiling of RM 20,000, it may however have a double edge sword effect in the sense that it is a good measure as only those business which are legitimate and willing to comply to international tax standards will remain in Labuan.

Clament Chua

Clament started his career with Ernst & Young before joining The National Australia Bank Limited from 1999 to 2005. In 2009 he founded CS Trust to provide tailored incorporation solutions to international clients.

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