2021 Latest Labuan Tax Legislation
All You Need to Know!
A new Labuan Tax Legislation was introduced to all to Labuan industry players with the recent meeting organized by Labuan Financial Services Authority (LFSA) on 17th Jan 2019 and there have been changes ever since that is confirmed by the Inland Revenue of Malaysia.
Labuan IBFC’s new friendly tax introduction is carefully crafted to boost the export of Malaysia products and services. The latest Labuan legislative changes have made it more viable for foreigners to use one single entity in Malaysia to reach the international and Malaysia markets. This was not possible before.
Now foreigners may register a Labuan Company to deal with both Malaysian and International markets and as long as the substance requirements are met accordingly, the corporate tax rate of 3% can be enjoyed!
2021 Latest Labuan Tax – Changes and Information You Need to Know!
Generally, all Labuan entities complying with the substance requirements will be eligible for the preferential tax treatment of 3% on net profits under the LBATA 1990. If these requirements are not met, 24% on net profits will apply which falls under the local Malaysia Income Tax Act Law 1967. Under both tax treatments, all accounts will have to be audited on a yearly basis.
The two criterion that constitute substance requirements are:
1. Employment of Full Time Employees in Labuan (FTE)
2. Minimum annual operating expenditure in Labuan (OPEX)
The numbers of employees and expenditure varies depending on the nature of business activities performed by the Labuan entity as seen in the summarized table below.
Labuan Substance Requirements
|No.||Type of Labuan Entities||FTE||OPEX (RM)|
i. Pure Trading
involved in goods trading, import export trade, online trading
To be confirmed
To be confirmed
ii. Other Trading
Carries out administrative, accounting and legal services including backroom processing, payroll services, talent management, agency services, insolvency related services and management services
i. Pure Equity Holding
Holds shares and receives dividend and capital gains from subsidiaries
|– (Management and control in Labuan)||20,000|
ii. Non-pure Equity Holding
Overseas investment in property, bonds, stocks, futures, options, etc (holding of variety of assets)
Note: Labuan Authority states that OPEX in Labuan includes only invoices and bills issued from Labuan. This includes staff costs, Labuan office rents, annual fees, license fees and secretary fees.
2021 Latest Labuan Tax – Impact on Local Dealing with Malaysians
Labuan Companies may now deal in both Ringgit Malaysia and foreign currencies with its counterparts.
The three (3) major deductions that are not allowed by Malaysian companies payment made to Labuan company under the Labuan New Tax Law 2019 is explained as follows:
A) 25% on Interest Payment
Labuan company receiving interest payment from Malaysia companies
Labuan company will be entitled to 3% tax and Malaysia companies will not be entitled to a 25% deduction. The interest payable by Malaysian companies to Labuan company on loan, etc will not be entitled to a deduction to reduce the tax of the company.
B) 25% on Leasing Payment
Labuan company receiving rental income from Malaysia real estate or leasing payment from leasing assets to Malaysian companies
Labuan company will be entitled to 3% tax and Malaysian company will not be entitled to a 25% deduction. The lease or rental amount payable by Malaysian company to Labuan company will not be entitled to a deduction to reduce the tax of the company.
C) 97% on Others Payment
Labuan Company buys products or services from Malaysian company
Labuan company will be entitled to 3% tax and Malaysian company will not be entitled to a 97% deduction. The deduction is not a concern since it is a sales transaction for the Malaysian company.
Labuan company sells products or services to Malaysian company
Labuan company will be entitled to 3% tax and Malaysian company will not be entitled to a 97% deduction. The Malaysian company will be impacted as these purchases are not entitled to deduction to reduce the tax of the company.
As long as your Malaysian counterpart is willing to accept the non-deductibility as mentioned above, Labuan company is entitled to the tax rate according to the latest Labuan Tax 2019 law. Alternatively, you may also opt to pay the 24% tax rate under the local Malaysian tax law.
2021 Latest Labuan Tax – Effect on Corporate Tax Assessment 2020 and Beyond
The Latest Labuan Tax 2019 changes have taken effect since 1st January 2019 (Year Assessment 2020), hence the new corporate tax filing are as follows:
1. For all Labuan Companies that comply with the substance requirements, the corporate tax rate will be 3% on net audited profits.
2. For all Labuan Companies that do not comply with the substance requirements, the corporate tax rate will be 24% on net audited profits.
3. For Pure Trading Companies, the Inland Revenue has not confirmed the tax rate and as such, the company must seek clarification from the Inland Revenue Department directly.
4. For Labuan licensed entities and special entities, it is mandatory to adhere to the substance requirements to maintain good standing for future license renewal. Corporate tax rate remains to be 3% on net audited profits.
Note: The above tax rules may be redefined by the relevant authorities from time to time. A Labuan approved auditor must be appointed to audit the company accounts on a yearly basis.
2021 Latest Labuan Tax – Latest legislation guides issued by Ministry of Finance Malaysia:
Labuan New Tax Rate 3% Legislation
Labuan Substance Requirement for License Entities and Special Entities Legislation
Circular on Revision of Non-Deductibility (Dec 23, 2019)
LIC Circular 1
LIC Circular 2(1)
LIC Circular 2(2)
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