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Labuan

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    LABUAN CORPORATE TAX

    Labuan does offer various tax incentives to businesses operating in the region, and the Labuan corporate tax rate in 2023 is 3% for qualifying companies which is one of the lowest in the world.

    Labuan IBFC (International Business and Financial Centre) was established more than 25 years ago to develop and improve the economic activities in Labuan, Malaysia. Labuan companies are governed by several Labuan IBFC acts, and the Labuan tax laws are mainly governed by the Labuan Business Activity Tax Act 1990 (LBATA 1990).

    The LBATA act was last updated on December 23, 2020. This low tax rate, combined with other incentives, makes Labuan an attractive destination for businesses looking to minimize their tax liabilities.

    Labuan offers various tax incentives to businesses operating in the region. The corporate tax rate in Labuan is 3% for qualifying companies which is one of the lowest in the world. This low tax rate, combined with other incentives, makes Labuan an attractive destination for businesses looking to minimize their tax liabilities.

    One of the main advantages of doing business in Labuan is the ability to take advantage of the country’s double tax treaty network. Labuan has signed over 60 double-tax treaties with countries around the world, which can help businesses avoid or reduce double taxation on their income.

    Additionally, Labuan’s corporate tax system is based on a territorial principle, which means that businesses are only taxed on income generated within the territory of Labuan. This can provide further tax savings for businesses that operate in multiple jurisdictions.

    Labuan offshore companies are often used for wealth management, asset protection, and holding investments such as real estate, shares, and other assets. Labuan is at times deemed as Malaysia’s Tax Haven due to its tax incentives. 

    Under the LBATA 1990 act, companies are taxed based on their Labuan business activity category and whether it meets the Labuan substance requirements as stipulated by the authorities.

    Labuan incorporated companies are categorized into the following two categories before determining their tax rate.

    Labuan Trading Activities Labuan Non-Trading Activities
    Banking, Insurance, Trading, Management, Licensing, Shipping Operation and Others (Those not listed above and do not fall under a non-trading company) Labuan non-trading activities generally refer to a company that is holding investments in securities, stocks, loans, deposits, or any other properties situated in Labuan on the company’s behalf
    Labuan Business activity carried on by a Labuan entity Substance requirements met? Applicable Tax Rate
    Trading Yes 3%
    Trading No 24%
    Non-trading Yes Nil
    Non-trading No 24%

    LABUAN TRADING ACTIVITY

    A company undertaking Labuan Trading activity will be taxed at 3% of the net profit before tax. However, to qualify for the 3% a Labuan company has to meet the following physical substance requirements. Failure to meet the substance requirements will subject the company to a 24% tax rate. The substance requirements were implemented effective 1st January 2019.

    The substance requirements are assessed mainly by the minimum number of employees (full-time) employed in Labuan and the minimum annual operating expenditure incurred in Labuan.

    Substance requirements (1): Minimum employees (full-time) employed in Labuan

    Substance requirements (2): Minimum annual operating expenditure in Labuan (RM)

    Substance Requirements For Different Business Activities In Labuan:

    As per the Labuan business activity tax regulations 2019. The substance requirements are assessed mainly by the minimum number of employees (full-time) employed in Labuan and the minimum annual operating expenditure incurred in Labuan. Based on Labuan’s business activity, a company has to meet the following requirements:

    Labuan Business Activity Full-Time Employees and Minimum Annual Operating Expenditure in Labuan (RM) are required. 
    Labuan insurer or Labuan takaful operator 3 employees and RM 200,000
    Other trading entity – (i.e trading company carrying out administrative accounting and legal services including backroom processing. 3 employees and RM 50,000
    Based on the Labuan regulations, the definition of Labuan full-time employees is as follows:

    1. At least an officer of managerial capacity and
    2. Other employees dedicated to serving the Labuan entities may be employed either on a permanent or contract basis by the Labuan entities, which include non-managerial and clerical staff.

    As per the Inland revenue board of Labuan, any company that undertakes activities that do not fall within the activities in Regulations will not be a Labuan business activity, hence it will be taxed at 24%.

    Tax Filing and Payment

    Businesses operating in Labuan must file their tax returns and pay their taxes to the Labuan Financial Services Authority (LFSA) within six months of the end of their financial year. Companies engaged in non-trading activities may have to file additional forms and have to comply with different regulations.

    Labuan withholding Tax

    Labuan companies will have access to most of Malaysia’s double tax agreements. Selected countries such as Australia, Chile Spain have excluded Labuan from their Double tax agreement. For qualifying companies, the usual withholding tax will be applicable.

    Sales and Service Taxes

    Labuan has been given a concessional sales and service tax as a designated area. Hence any sales within Labuan or overseas will not be subjected to the Malaysian SST. However, if a Labuan company is providing services to other states and places in Malaysia the SST might be enforced.

    Inheritance Tax and Gift Tax

    Malaysia and Labuan do not have any inheritance tax or estate duty.

    The following items are exempted from the income tax act:

    • Payments of royalties, interest, technical fees, or other profits or gains not derived from the specified classes of income.
    • Payments to non-residents made.

    Relin Consultant is a specialist assisting international businesses expanding their operations into Asia.

    LABUAN COMPANY ANNUAL COMPLIANCE REQUIREMENTS

    Annual Return Filing

    All Labuan-incorporated companies are required to submit an annual return to the Labuan authorities. The annual return must be accompanied by a fee of US$ 800 government fee, and the annual return must be accompanied by a certificate from an approved auditor and a certificate from the company director.

    The annual return is due annually 30 days prior to the anniversary of the date of incorporation of the Labuan company. Failure to submit the annual return by the specific deadline may result in penalties for the company and its director.

    Tax Filing

    All Labuan companies are required to submit their corporate tax filing before the deadline of 31 March annually.

    Accounting and Auditing

    A Labuan company’s financial year-end is December 31st annually. As such, all Labuan business entities must hold the annual general meeting and finalize the financial statements within 9 months from the end of the financial year.

    However, a Labuan Holding Company or a Labuan Dormant Company is not required to submit audited financial statements. A copy of the management accounts is acceptable by the authorities. The deadline for a Labuan Company (Licensed) to submit the audited financial statements to the authorities is June 30th.

    Penalties for non-compliance

    If a Labuan company fails to comply with the above requirements, it may be subject to penalties such as fines, penalties or even being struck off by the Labuan Financial Authority if the annual fee is not paid or the non-compliance has been more than 3 years. It is important for companies to stay compliant with the regulations and requirements set by the Labuan Financial Services Authority in order to avoid these penalties.

    Relin Consultants offers corporate tax filing services for businesses operating in Labuan, Malaysia. Our team of experts is well-versed in the local tax laws and regulations, and we can help ensure that your company complies with all tax filing requirements.

    We can assist with everything from initial registration to ongoing compliance, accounting and bookkeeping services and we will work with you to minimize your tax liability and take advantage of any available incentives. If you’re looking for reliable and efficient tax filing services in Labuan, look no further than Relin Consultants.

    FAQs

    What is the rate of tax imposed on Labuan business activities?

    The rate of tax imposed on business activities in Labuan, Malaysia, is 3% on net profits. However, it’s important to note that Labuan companies are eligible for certain tax exemptions and incentives, and the specific tax treatment may vary depending on the type of business activity and the company’s tax residency status.

    It’s always recommended to check with a professional tax advisor or local authorities to get the most accurate tax information obligation.

    Is Labuan a Tax Haven?

    Labuan is considered to be a tax haven because it has a low tax rate and offers various tax incentives and exemptions. It is a federal territory of Malaysia, located off the coast of Borneo. It has its financial services regulator and operates as an International Business and Financial Centre (IBFC).

    It offers a range of services, including offshore banking, trust, foundation formation, and the incorporation of offshore companies. The low tax rate and other tax incentives make it attractive for international businesses and individuals to set up operations or invest in Labuan.

    However, it’s important to note that there is a lot of misconception about tax havens, and what is considered a tax haven does not necessarily mean that the jurisdiction is involved in illegal activities or tax evasion.

    Is Labuan Subject to withholding tax?

    Labuan companies are generally not subject to withholding tax on their foreign-sourced income. However, it’s important to note that this rule has some exceptions. Dividends paid by a Labuan company to non-resident shareholders are not subject to withholding tax.

    However, certain types of income may be subject to withholding tax, such as interest, royalties, and technical service fees. Also, it’s important to note that Malaysia has double tax agreements with several countries, which may affect the withholding tax rate on certain types of income.

    What is the definition of Labuan of trading and non-trading activities?

    In Labuan, “trading activities” refers to businesses engaged in buying and selling of goods or services. This would include businesses such as retail and wholesale trade, manufacturing, and import and export activities.

    On the other hand, “non-trading activities” refers to businesses that do not involve buying and selling goods or services. These would include businesses such as investment holding, leasing, and licensing of intellectual property.

    It’s important to note that the definition of “trading” and “non-trading” activities is not always clear-cut and can vary depending on the specific circumstances of the business. It is always recommended to check with professional tax advisor or local authorities to confirm the classification of a particular business activity.

    It’s also important to note that in Labuan, there are different tax treatments for trading and non-trading activities, as non-trading activities are taxed at a flat rate of 3% on net profit, while trading activities are taxed at a standard rate of 24% on net profit, but with certain exemptions and incentives.

    Can a Labuan company elect to be taxed under Income Tax Act 1967?

    Yes, a Labuan company can elect to be taxed under the Income Tax Act 1967 of Malaysia. The Labuan Business Activity Tax Act 1990 (LBATA) provides the option for a Labuan company to be taxed under the Income Tax Act 1967 instead of the LBATA.

    This election must be made within six months from the date of incorporation and is irrevocable. The company can choose to be taxed under the LBATA at a flat rate of 3% or under the Income Tax Act 1967 at progressive rates, depending on the company’s income level.

    How do corporation file taxes in Labuan?

    A company must engage a registered tax filing agent in Labuan to represent the company and assist to submit its corporate tax. Failure to do might lead to a tax audit by LHDN.

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