Labuan Leasing Company Deductions Allowable for Malaysia Resident

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The Impact to Labuan Leasing Company of the new Malaysia Finance Bill 2018 passed on 10 December 2018

The amended Finance Bill 2018 passed by the Dewan Rakyat on 10 December 2018 prescribe that a tax deduction will not be allowed on payments by Malaysian residents to Labuan companies, subject to any rules that may be prescribed by the Minister of Finance. It is expected that Labuan Financial Service Authority to release these Rules which will provide guidance on the conditions which need to be met in order for a deduction to be obtained.

It is not yet known when the Rules will be released but at the time of writing it is understood that the below will be applicable. The Labuan leasing company has to establish substantial activities and perform strategic functions in Labuan. In this regard, the substance requirements should include but not limited to the following factors:

(a) Physical presence: Maintain an operational office in Labuan. The operational office should be used for business purposes only and must display the company name and company number with separate entrance.  The office must be appropriately furnished with office equipments.  However there was No mentioned that the office must have its own telephone line.  For a Group of companies it is allowed to share 1 office.

(b) Employment: The Labuan Leasing Company should employ at least 2 staffs of which 1 staff must be full time staff in Labuan Office and the other staff can be based for example in the HQ, KL Marketing Office or elsewhere not necessary in Labuan.  The staffs must be full-time employees with necessary qualification, skills or experiences in the relevant fields related to the leasing business.  Full time employees mean the Labuan Leasing company must pay the payroll of the staffs and Not engage contract works or engaged the employee of their service providers.  The Organization Chart and the name of all the staffs and their particulars such as Malaysia Identity Card must be submitted to Labuan Financial Services Authority.

(c) Annual business spending: Each Labuan Leasing Company must spend at least MYR 100,000 business expenses per annum in Labuan.  Business expenses in Labuan may include the Annual license fee of MYR 60,000, Staff Salary, Company Secretary Fee, Financing Cost which is easily achievable.  It is also interesting to note that now the Finance Bill 2018 allows the Labuan company to transact in Ringgit, especially to those Malaysia Company vessel owners may now want to:

(i) finance their vessel in Ringgit to reduce foreign exchange risk.

(ii) To received the charter hire in Ringgit to reduced foreign exchange exposure risk

(iii) To report their financial statement in Ringgit to reduce foreign exchange conversion work

(d) The amended Finance Bill 2018 now removes the reference to a 3% allowable deduction limitation and from our source it was learned that the new proposed rate is 67% deduction of the expenditure incurred by Malaysian Residents in relation to lease rental payments to Labuan company is allowed. This is an icing to the cake compared to the initial Budget 2019 proposal where only 3% deduction of the expenditure incurred by Malaysian Residents in relation to lease rental payments to Labuan company is allowed will send most Labuan Leasing Company packing their bags especially those Malaysian vessel owners.

To illustrate:

If a Malaysian company which lease an asset say a tug boat from a Labuan Leasing Company which makes payments for lease rental of USD 1,000,000 per year.

A. Computations based on 3% allowable expenses:

Of the USD 1,000,000 of rental paid, only USD 30,000 (ie 3% X USD 1,000,000) is allowed as deduction against the chargeable income of the Malaysian Company for tax computation purposes. So by disallowing USD 970,000 (ie USD 1,000,000 less USD 30,000) of the lease payment, the Malaysian Company would have to pay tax of USD 232,800 (based on 24% on the Malaysia Company tax bracket of USD 970,000 ie USD 1,000,000 less USD 30,000).

Thus in this example, the Malaysian Company would have to pay USD 1,000,000 of lease rental plus USD 232,800 to Inland Revenue which sum up to USD 1,232,800 when making a payment of USD 1,000,000 lease rental

B. Computations based on 67% allowable expenses:

Of the USD 1,000,000 of rental paid, only USD 670,000 (ie 67% X USD 1,000,000) is allowed as deduction against the chargeable income of the Malaysian Company for tax computation purposes. So by disallowing USD 330,000 (ie USD 1,000,000 less USD 670,000) of the lease payment, the Malaysian Company would have to pay tax of USD 79,200 (based on 24% Malaysia Company tax bracket of USD 330,000 ie USD 1,000,000 less USD 670,000).

Thus in this example, the Malaysian Company would have to pay USD 1,000,000 of lease rental plus USD 79,200 to Inland Revenue which sum up to USD 1,079,200 when making a payment of USD 1,000,000 lease rental

From the above example A and B above means now with the revised 67% allowable expenses the Malaysia Company can safe tax amount of USD 153,600 (USD 232,800 less USD 79,200)

This comes as a much relief to all the Industry Players in Labuan.  We hope the Regulator will push above the 67% allowable expenses.  Whilst most of the Labuan Leasing Company would want to get the Most of the % allowable for deductions the Inland Revenue are certainly hoping for the least % allowable expenses.  But we hope the Ministry of Finance will come up with the best and fair % allowable for deductions.  Since the Bank and Leasing Company are regulated business why Not maintain 100% deductibles to keep Labuan competitive above other jurisdictions.

The Labuan Leasing Guidelines is still effective and all Labuan Leasing Company need to comply to the below:

  1. Have sufficient and positive capital or working funds which commensurates with the Labuan leasing business at all times. Labuan FSA may exercise its discretion to require a Labuan leasing company to inject additional capital, taking into account its business profile as well as nature, scale, complexity and diversity of their business activities.
  2. Ensure that the directors and officers responsible for the management of the company meet the Fit and Proper Person requirements as specified in the Guidelines on Fit and Proper Requirements issued by Labuan FSA.
  3. Establish an adequate set of internal policies and controls for its operations, compliances, corporate governance and risk management. These need to be regularly reviewed to ensure that they remain appropriate, relevant and prudent.
  4. Ensure that all its leased assets are adequately insured. In this regard, Labuan leasing companies are encouraged to primarily secure the insurance coverage for their leased assets/properties from Labuan-based insurance companies and takaful operators prior to securing the services of other insurance players elsewhere. For this purpose, the requirement of paragraph 12 would need to be observed prior to entering into such insurance arrangement.
  5. Maintain adequate and proper records and books of accounts in Labuan in line with the Directive on Accounts and Record-keeping Requirement for Labuan Entities issued by Labuan FSA. Its name and company number must be clearly indicated on its letterhead, stationery and other documents.
  6. Maintain bank account(s) under its name preferably in Labuan IBFC and/or Malaysia to facilitate the leasing operations including any lease remittances/lease rental payment transactions.
  7. The lease agreement shall be stamped and endorsed by the Collector of Stamp Duties, at the Stamp Duty Office of Inland Revenue Board of Malaysia, Labuan branch.
  8. Ensure that all leasing transactions with any of its related party are conducted at arm’s length basis and are subjected to the transfer pricing rules and guidelines issued by the relevant authorities.
  9. Obtain prior approval from Labuan FSA for:
    (i) each new and subsequent leasing transactions. In this regard, no leasing transaction shall be undertaken prior to Labuan FSA’s approval;
    (ii) establishment of office outside Labuan and establishment or acquisition of subsidiary;
    (iii) change of lessee and leased asset;
    (iv) change of shareholders of more than ten per centum; and
    (v) appointment of directors.
  10. Notify Labuan FSA within 30 days pertaining to the following matters:
    (i) resignation of directors;
    (ii) any change of information with regard to the place of business or office in Labuan;
    (iii) any changes to the constituent documents and business plan which is not tantamount to the change of lessee and leased asset. This may include the change of its company name; and
    (iv) termination / extension of any leasing transactions.
  11. Comply with applicable laws, rules and regulations relevant to the leasing business, including relevant guidelines issued by Labuan FSA and regulatory requirements of the jurisdictions where Labuan leasing business is authorised to operate in (where applicable). Labuan leasing company is expected to obtain necessary approvals from the relevant authorities in the market it intends to operate prior to commencing its business in those respective markets and provide a copy of the approvals to Labuan FSA.

About the Author

Clament Chua is a 3rd generation native of Labuan and one of the first local to start his Trust Company in Labuan.  Clament specialized in Labuan Marine Leasing Structure and run a ship management company in Labuan together with his partners who are license marine pilots and master mariners (FG).

For more Information Please contact:

Corporate Services Trust Co Ltd
Unit B, Lot 49, 1st Floor, Block F,
Jalan Ranca-Ranca,
P O Box 80192
87000 Federal Territory of Labuan,
Malaysia.

Tel: 6 087 419000 or 419100
Fax: 6 087 419 200
Email: info@cstcl.com.my 

Website
www.cstcl.com.my

Facebook
https://www.facebook.com/cstcl.com.my/

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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