Finance Act 2018 Changes to Labuan Company

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The government of Malaysia is commitment to international tax practices and counter the effect of harmful tax practices in light of the Organization for Economic Cooperation and Development (OECD) base erosion and profit shifting project (BEPS).

On 31 December 2018 The Finance Act 2018 which resulted the changes to the Labuan Business Activity tax Act 1990 was gazetted which comes into effective commencing 1 January 2019.

  1. The election for tax at the flat rate of MYR 20,000 was abolished.

This means that Labuan company tax rate will be 3 percent of Audited Net Profit.  OECD argue that the maximum tax of MYR 20,000 is a fee and Not a tax and that was the reason it was removed.  Unlike some similar jurisdiction like BVI, the preparation of financial statement by Labuan company which usually are made of the Profit and Loss Account and the Balance Sheet is compulsory.  Other than those License Company that must be audited, previously normal Labuan Trading company do not require to be audited if they elect maximum tax of MYR 20,000.  All financial statements audited or not audit must be lodge with Labuan Financial Services Authority and the Inland Revenue Board of Malaysia

With the introduce of Finance Act 2018 audit will now be compulsory for all Labuan Trading Company.  The audit requirement will be additional cost to the Labuan Trading company; not to mentioned time cost to attain and to clear audit queries and etc.

  1. Income from intellectual property assets held by a Labuan company will be taxed under the Income Tax Act 1967.

The Income Tax Act 1967 tax bracket is 20% for the first MYR 500,000 and subsequently 24% of chargeable income for the Year Assessment 2019. Intellectual property means the category of property that includes intangible creations of the human intellect such as trademarkspatents, designations of origin, industrial designs and models and copyright.

Previously all None Trading Company in Labuan do not need to pay tax and do not need to be audited.  During Malaysia participation in the OECD’s Forum on Harmful Tax Practices (FHTP) it have been identified jurisdictions which provide preferential regimes for mobile geographical services activities related to intellectual property and thus the Finance Bill 2018 resulted in Income from intellectual property assets held by a Labuan company will be taxed under the Income Tax Act 1967.

  1. Under the Finance Bill Section 2(1) the definition of Labuan business activity has been amended and the restriction on transactions conducted with residents and restriction to transacts in Malaysia Ringgit has been removed.

With effective 1 January 2019, 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%

 

  1. Labuan company undertaking Labuan business activities are subject to substantive conditions namely full time employees in Labuan and adequate amount of annual operating expenditure as prescribe below under the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018

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
1 a.    Labuan Insurer
b.    Labuan Reinsurer
4 150,000
2 a.    Labuan Underwriting Manager
b.    Labuan Insurance Manager
c.     Labuan Insurance Broker
d.    Labuan Captive Insurer
4 100,000
3 Labuan International Commodity Trading Company 3 3,000,000
4 a.    Labuan Bank
b.    Labuan Investment Bank
3 180,000
5 Labuan Trust Company 3 120,000
6 a.    Labuan Leasing Company
b.    Labuan Credit Token Company
c.     Labuan Development Finance Company
d.    Labuan Building Credit Company
e.    Labuan Factoring
f.      Labuan Money Broker
g.    Labuan Fund Manager
h.    Labuan Securities License
i.      Labuan Funds Administrator
j.      Labuan Company Management
2

 

100,000
7 a.    Labuan International Financial Exchange
b.    Self-regulated Organization
2 120,000
8 Holding Company 2 50,000

 

It looks like the above substantive requirements are intended towards Labuan License Company.  While normal Labuan trading company ie. Un-regulated or Not licensed Labuan company business are not required to employ full time employees and do not need to meet adequate amount of annual operating expenditure in Labuan. We hope for more clarification in the coming Industrial briefing on the 17 January 2019.

The definition of Holding company is also Not cleared. Are the Regulator referring this to Labuan Holding company who hold intellectual properties?  There are many Labuan company with which are none trading activities holding properties in shares, fixed deposit held in banks, real property and etc.  If this is also extended to such company surely this will be very infamous requirements as many holding companies in Labuan would not want to employ staffs cause there is not much work to do and also to incur unnecessary expenses such as rent for offices.

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@nullcstcl.com.my

Website
www.cstcl.com.my

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