The Inland Revenue Board of Malaysia or the Lembaga Hasil Dalam Negeri has issued many tax incentives for Labuan Companies. We explore some of these Income Tax Exemption Orders.
1. Income Tax (Exemption) (No.2) Order 1998
Rental income for the rent of any asset in Malaysia payable to none resident of Malaysia are subject to Witholding Tax in Malaysia. Witholding Tax is a tax amount normally withheld by a Malaysia remitting party making payment for any payment to a none resident and the withheld amount is then remitted to the Malaysia Inland Revenue Board. The Witholding tax means Malaysia companies has to retain 10% to 15% gross payment before it is remitted out of Malaysia for services such as:
- Rental payment
- Technical fees
- Management services
- Advisor fees
However, under the Income Tax Exemption No. 2 Order 1998, Lease rental received by none resident person from the use of movable property by a Labuan company licensed to conduct leasing business in Labuan are NOT taxable.
Labuan leasing is defined as the business of letting or sub-letting property on hire for the purpose of the use of such property by the hirer, regardless whether the letting is with or without an option to purchase the property, including charters of ships.
Property includes any plant, machinery, equipment or other chattel attached or to be attached to the earth. Charters of ships means bareboat charters only and the ships are normally specialized ships with engines example Harbour Tug and those especially used in oil and gas activities such as Anchor Handling Tug, Platform Supply Vessel, Pipe laying Vessels and etc. However, these vessel does not include the transportation of passengers, cargo by sea or the charter of ships on a voyage or time charter basis.
2. Income Tax (Exemption) (No.22) Order 2007
Dividend received by a Labuan company is Not subject to tax.
Dividend received by the Shareholder of a Labuan company is Not taxable in Malaysia
Prior to 1 January 2008, Malaysia adopted the imputation system which required the imposition of tax on the profit at corporate level and again at shareholders level. The principle behind the imputation system is to overcome the double taxation of income. Under the imputation system, company resident in Malaysia are required to deduct tax at source at the prevailing corporate tax rate on dividends paid to their shareholders. The same income would be taxed twice if the credit is not imputed to the shareholders.
The single-tier tax system was introduced in Budget 2008 to replace the imputation system with effect from year of assessment 2008. Under this system, corporate income is taxed at corporate level and this is a final tax. Therefore, shareholders that received dividend from corporate level are No more tax.
Labuan obviously benefited from this single-tier tax system which was implemented throughout Malaysia since this system do not differentiate the difference in tax rate which the local Senderian Berhad Company has to pay under the Income Tax Act 1967.
This Income tax Exemption Order also exempted tax for:
- Distributions from a Labuan Trust to the beneficiaries
- Royalties received from a Labuan company by none Malaysia resident or another Labuan company
- Interest received from a Labuan company by none Malaysia resident or another Labuan company
- Interest received from a Labuan company by Resident Malaysia. (other than a person licensed to carry on a business under the Banking and Financial Institutions Act 1989, Islamic Banking Act 1983, Insurance Act 1996 or Takaful Act 1984). It is very interesting to point put while interest received from an Offshore Bank in Labuan is Not taxable whilst interest received from a Commercial bank in Malaysia is taxable 100%
- Technical fees received from a Labuan company by a none Malaysia resident or another Labuan company
- No Witholding Tax for Technical fees received from a Labuan company by a none Malaysia resident or another Labuan company
- No Witholding Tax for Management fees received from a Labuan company by a none Malaysia resident or another Labuan company
3. Income Tax (Exemption) (No. 6) Order 2011
The Minister of Finance of Malaysia exempts any person from the payment of income tax on 65% of the statutory income derived from a source consisting of the provision of qualifying professional services rendered in Labuan by that person to a Labuan entity from the year of assessment 2011 until the year of assessment 2020.
Qualifying professional services includes:
- External and Internal Audit which the firm is registered with the Malaysia Institute of Accountants
- Accounting services in which the firm or the Accountant is recognized by the Malaysian Institute of Accountants
- Legal services in which the legal firm is registered with Malaysia Bar or Badan Peguam Malaysia
Please also note that this exemption order is only applicable to the provision of services rendered in Labuan and Not services rendered out of Labuan such as when the services is discharge from Kuala Lumpur. Some professional firm from Kuala Lumpur for example go to the extend to set up a manded physical offices in Labuan to satisfy this condition.
4. Income Tax (Exemption) (No. 7) Order 2011
The Malaysia government hereby exempts any individual who is a non-Malaysian citizen from the payment of income tax in respect of fees received by that individual in his capacity as a director of a Labuan entity from the year of assessment 2011 until the year of assessment 2020.
It is interesting to point out that even though this exemption order is for 10 years from year assessment 2011 to 2020, it was an extension to the previous issued for 10 years from year assessment 2001 to 2010
Many Labuan company work permit holders has the tendency to miss understand this exemption order when it comes to making personal tax payment to the Inland Revenue Board. For the monthly gross income of RM 10,000 per month received from their employment with a Labuan company as stated in the Labuan work permit guidelines, an individual tax payer can not take advantage of this income exemption order to reclassify their employment income as Directors Fee.
5. Income Tax (Exemption) (No. 8) Order 2011
This exemption order means an individual non-Malaysian citizen is exempted from payment of income tax on 50% of gross income received from exercising an employment in a managerial capacity with a Labuan entity in Labuan, co-located office or marketing office from the year of assessment 2011 until the year of assessment 2020.
Co-located office means a co-located office of a Labuan entity approved by the Labuan Financial Services Authority which operates in other parts of Malaysia to perform the functions assigned by the Labuan entity; and
Marketing office means a marketing office of a Labuan entity approved by the Labuan Financial Services Authority which is located in other parts of Malaysia to facilitate meetings with clients and establish contacts with potential clients except exercising trading activities on behalf of the Labuan entity. LFSA only allows Labuan entity to set up marketing offices in Kuala Lumpur and Iskandar in Johor.
Many Labuan work permit holders under sole directorship and No employees in their Labuan office tend to miss understand this Exemption Order, claiming 50% exempt tax when filing their personal tax with the Inland Revenue Board for their monthly gross income of RM 10,000 per month received from their employment with a Labuan company as stated in the Labuan work permit guidelines. The Inland Revenue Board will only allow the 50% exempt tax if the tax payer is in a Managerial Capacity and supervising with at least a staff in their Labuan office.
6. Income Tax (Exemption) (No. 9) Order 2011
Exemption for 50% on Gross Housing and Labuan Living Allowances received by an individual Malaysia tax resident from employment with a Labuan entity for year assessment 2011 to 2020.
Some Labuan companies pays allowances to their staffs when they are recruited from Kuala Lumpur to be stationed in Labuan. This was given as an incentive for the staffs and their family to be up rooted from Kuala Lumpur to Labuan especially during the commencement of Labuan IBFC in the early 2000. For example, many offshores banks and Labuan Insurance company could Not find the local expertise and have to transfer internal staffs from Head Office during the commencement of Labuan IBFC. However after 20 years many of the locals have acquire the expertise and now heads the company department. Whilst the new recruit for these Labuan companies continue to enjoy the Labuan Housing and Labuan Living Allowance as their company Human Resource policy continue to provide so.
For the purpose of this exemption order, the employee of the Labuan company must be stationed in Labuan to enjoy the 50% tax exemption.
7. Stamp Duty (Exemption) (No. 3) Order 2012
Any instruments executed in Labuan by a Labuan company in connection with business activities in Labuan are exempted from stamp duty according to this income tax exemption order. So there is No stamp duty for example when performing transfer of shares in Labuan company and all Memorandum and Articles of Association, statute, charter, rules, by-laws, partnership agreement or other instrument, under or by which a Labuan entity is established and the scope of that entity’s function, business, powers and duties are set out, whether contained in one or more documents.
However Stamp Duty are payable for Labuan company for example when they enter into an employment agreement with its employees for Labuan work permit purposes or when a Labuan company sign a office rental agreement with a Resident of Malaysia. Stamp duty is also payable when a Labuan company enter into a charter party with a Resident for the charter of vessel leasing purposes.
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