The Finance Act 2018 incorporating the removal of ceiling tax of MYR 20,000 has been gazetted with effective 01 January 2019. Going forward all Labuan Trading Company will be taxed at 3% of Audited Net Profit.
Malaysia’s government are commitment to International Tax Standard Practise and are Associate Members of the Organization for Economic Cooperation and Development (OECD) Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS). In order to address the issue of BEPS, OECD and the G20 countries introduced BEPS Action Plan as international taxation standard.
During the participation in the Forum on Harmful Tax Practices (FHTP) has identified jurisdictions which provide preferential regimes for mobile geographical services activities related to intellectual property (IP) and non-intellectual property (Non IP). Malaysian incentives that have been identified for FHTP evaluation.
As a result of The Finance Act 2018, Income from intellectual property assets held by a Labuan Company is taxed under the Income Tax Act 1967 will be taxed based on 20% for the first MYR 500,000 and subsequently at 24% of chargeable income. Previously assets held under this category by Investment Holding company in Labuan is Not taxable. Intellectual property means intangible creations of the human intellect includes trademarks, patents and copyrights.
Non IP Incentives
Incentives that comply with FHTP’s requirement was gazetted before 31 December 2018.
- Finance Act 2018
- Income Tax (Deductions Not Allowed for Payment Made to Labuan Company by Resident) Rules 2018
- Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018
- Ring Fencing
No distinction on tax treatment including transaction and currency restrictions between residents and non-residents. The Finance Act 2018 has amended the definition of Labuan Business Activity and all Labuan company would be allowed to conduct transactions in Malaysian ringgit and to conduct transactions with residents of Malaysia.
Previously, a Labuan companies are only allowed to use the Ringgit for administrative expenses and only certain business activities carried out by the Labuan company with a Resident company are restricted to certain regulated business such as Banking and Labuan Leasing.
With effective 01 January 2019, The Income Tax (Deductions Not Allowed for Payment Made to Labuan Company by Resident) Rules 2018 prescribed that the amount Not allowed for deduction for the types of payment made by a resident to a Labuan Company shall be as follows:
|No||Type of payment||Amount Not allowed for Tax deduction||Amount Allowable for Tax deduction|
|1||Interest Payment||33 %||67%|
|2||Lease Rental||33 %||67%|
|3||Other Payment||97 %||3%|
So what does the amount not allowable paid to a labuan company by a resident for tax deduction means?
Illustration No. 1 and 2 Computations based on 67% allowable expenses:
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
- 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
Illustration No. 3 Computations based on 3% allowable expenses:
If a Malaysian company buys from a Labuan company any goods say for example an industrial crane for USD 1,000,000.
- Of the USD 1,000,000 of payment made, 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 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 for the crane plus USD 232,800 to Inland Revenue which sum up to USD 1,232,800.
- Substantial Activities
Substantial activities requirements under Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 means that Labuan company need to minimum amount of annual operating expenditure in Labuan and minimum number of full-time employees in Labuan.
|No||Labuan entity carrying on a Labuan business activity||Minimum number of full time employees in Labuan||Minimum amount of annual operating expenditure in Labuan|
|Estimated Amount in|
|1||a. Labuan Insurer|
b. Labuan Reinsurer
|2||Labuan Underwriting Manager|
|3||Labuan Insurance Manager|
|4||Labuan Insurance Broker|
|5||Labuan Captive Insurer|
|6||Labuan International Commodity Trading Company|
|7||a. Labuan Bank|
b. Labuan Investment Bank
|8||Labuan Trust Company|
|9||Labuan Leasing Company|
|10||Labuan Credit Token Company|
|11||Labuan Development Finance Company|
|12||Labuan Building Credit Company|
|13||Labuan Factoring Company|
|14||Labuan Money Broker|
|15||Labuan Fund Manager|
|16||Labuan Securities License|
|17||Labuan Fund Administrator|
|18||Labuan Company Management|
|19||Labuan International Financial Exchange|
|20||Self Regulated Organization|
About the Author
Clament Chua is a humble Labuan local boy and owner of Corporate Services Trust Co Ltd in Labuan.
For more Information Please contact:
Corporate Services Trust Co Ltd
Unit B, Lot 49, 1st Floor, Block F,
P O Box 80192
87000 Federal Territory of Labuan,
Tel: 6 087 419000 or 419100
Fax: 6 087 419 200