Labuan Company – The Removal of Maximum Tax of MYR 20,000 and the Implementation of substantive conditions commencing 1 January 2019

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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.

 

IP Incentives

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

  1. Transparency

Incentives that comply with FHTP’s requirement was gazetted before 31 December 2018.

  1. Finance Act 2018
  2. Income Tax (Deductions Not Allowed for Payment Made to Labuan Company by Resident) Rules 2018
  3. Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018

 

  1. 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:

NoType of paymentAmount Not allowed for Tax deductionAmount Allowable for Tax deduction
1Interest Payment33 %67%
2Lease Rental33 %67%
3Other Payment97 %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

  1. 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.

  1. 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.

  1. 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.

NoLabuan entity carrying on a Labuan business activityMinimum number of full time employees in LabuanMinimum amount of annual operating expenditure in Labuan

(in RM’000)

Estimated Amount in

(USD’ 000)

1a.    Labuan Insurer

b.    Labuan Reinsurer

 

415037.5
2Labuan Underwriting Manager

 

410025
3Labuan Insurance Manager

 

410025
4Labuan Insurance Broker

 

410025
5Labuan Captive Insurer

 

410025
6Labuan International Commodity Trading Company

 

33,000750
7a.    Labuan Bank

b.    Labuan Investment Bank

 

318045
8Labuan Trust Company

 

312030
9Labuan Leasing Company

 

210025
10Labuan Credit Token Company

 

210025
11Labuan Development Finance Company

 

210025
12Labuan Building Credit Company

 

210025
13Labuan Factoring Company

 

210025
14Labuan Money Broker

 

210025
15Labuan Fund Manager

 

210025
16Labuan Securities License

 

210025
17Labuan Fund Administrator

 

210025
18Labuan Company Management

 

210025
19Labuan International Financial Exchange

 

212030
20Self Regulated Organization

 

212030
21Holding Company

 

25012.5

 

 

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,
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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