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Labuan
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LABUAN ECONOMIC SUBSTANCE REQUIREMENTS
Since 2018, Labuan has been implementing various substance requirements for companies operating in the jurisdiction. These requirements aim to ensure that companies operating in Labuan have a sufficient physical presence and economic substance in the territory.
In 2018, the Labuan Financial Services Authority (Labuan FSA) introduced the Labuan Business Activity Tax (BAT) Act 2018, which requires companies to meet certain economic substance requirements Labuan to be eligible for the reduced tax rate of 3% on their net income.
In 2019, the Labuan FSA issued guidelines on the economic substance requirements for companies engaged in relevant activities, such as banking, insurance, leasing, fund management, and shipping. These guidelines set out the criteria that companies must meet to demonstrate that they have adequate economic substance in Labuan.
In 2020, the Labuan FSA issued further guidelines on the economic substance requirements for companies engaged in Islamic finance and digital Labuan activities, which include digital assets and digital tokens.
The overall substance requirement for companies in Labuan is that the management and control of the company must be exercised in Labuan, and the company must have an adequate number of employees, expenditure, and physical office space in Labuan to carry out its activities. Companies are also required to maintain accurate financial and accounting records, and to make these records available to the Labuan FSA upon request.
Understanding the Labuan substance requirement is essential if you are a business owner or planning to register a company in Labuan. In 2019, Labuan introduced a new regulation, which is the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018. A detailed explanation of this new regulation and requirements can be seen below.
WHAT DOES ‘ECONOMIC SUBSTANCE’ MEAN?
Economic substance refers to the level of genuine business activity and the presence of real economic activity that a company carries out in a particular jurisdiction. In the context of international tax and financial regulations, economic substance is used to determine whether a company is conducting real economic activities in a jurisdiction and whether it has a sufficient physical presence in that jurisdiction.
Economic substance is used to evaluate the activities of companies that are based in low-tax or no-tax jurisdictions, also known as tax havens, to ensure that they are not engaging in tax avoidance or other illegal activities. Companies must have an adequate level of economic substance in a jurisdiction in order to be considered a legitimate business and to be eligible for benefits such as reduced tax rates.
Economic substance requirements typically include criteria such as the level of expenditure, the number of employees, the physical presence of the company, and the management and control of the company. Companies must demonstrate that they meet these criteria in order to be considered to have adequate economic substance in a jurisdiction.
GUIDANCE FOR LABUAN SUBSTANCE REQUIREMENTS
On January 1, 2019, the new Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 went into effect.
The Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 is a set of regulations that were introduced by the Labuan Financial Services Authority (Labuan FSA) in 2018, as part of the Labuan Business Activity Tax (BAT) Act 2018. The regulations are aimed at ensuring that companies operating in Labuan have a sufficient level of economic substance in the jurisdiction.
The regulations require companies to meet certain economic substance requirements to be eligible for the reduced tax rate of 3% on their net income. These requirements include:
- The management and control of the company must be exercised in Labuan.
- The company must have an adequate number of employees, expenditure, and physical office space in Labuan to carry out its activities.
- The company must maintain accurate financial and accounting records, and make these records available to the Labuan FSA upon request.
- The company must appoint a resident director who is responsible for ensuring compliance with the regulations Companies that are unable to meet these economic substance requirements will be subject to the standard tax rate of 24% on their net income.
In addition to these regulations, the Labuan FSA has also issued guidelines on the economic substance requirements for companies engaged in specific activities, such as banking, insurance, leasing, fund management, and shipping.
This is the Malaysian Government’s initiative to commit to the Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
LABUAN NEW ECONOMIC SUBSTANCE REQUIREMENTS
All Labuan entities that engage in “Labuan business activities” must now fulfill extra-economic substance standards. These enterprises must now have an appropriate number of full-time Labuan workers as well as an adequate quantity of yearly Labuan operational expenses. The number of workers and the number of operational expenses vary depending on the business activity.
According to the Economic Substance Regulations, a Labuan holding company must adhere to the following requirements: –
- A Labuan holding company must now employ at least two full-time Labuan workers
- A Labuan holding company must have an annual operational expenditure of RM100,000.
Full-time employees are those who are employed by the Labuan entity to service the entity in Labuan. The employee must sign an employment contract or be included in the Labuan office’s organizational chart. The operational expenses might be pro-rated beginning with the day the firm is launched.
What Is Considered As ‘Labuan Business Activities?
A list of the activities that are included in the ‘Labuan business activities is as follows.
- Labuan insurer, Labuan reinsurer, Labuan takaful operator, Labuan retakaful operator
- Labuan underwriting takaful manager or Labuan underwriting manager
- Labuan takaful manager or Labuan insurance manager
- Labuan captive insurer or Labuan captive takaful
- Labuan International Commodity Trading Company
- Labuan bank, Labuan investment bank, Labuan Islamic bank or Labuan Islamic investment ban
- Labuan trust company
- Labuan leasing company of Labuan Islamic leasing company
- Labuan development financing company or Labuan Islamic development finance company
- Labuan building credit company or Labuan Islamic building credit company
- Labuan Islamic factoring company or Labuan factoring company
- Labuan money broker or Labuan Islamic money broker
- Labuan fund manager
- Labuan Islamic securities licensee or Labuan securities licensee
- Labuan fund administrator
- Labuan company management
- Labuan International Financial Exchange
- Self-regulatory organization or Islamic self-regulatory organization
- Holding Company
If you have any doubts or questions regarding the business activities outlined above, please do not hesitate to reach out to us for further clarification. You can contact us via email at enquiry@relinconsultants.com. Our team at Relin Consultants will be happy to assist you and will respond to your inquiry promptly.
Labuan Intellectual Property (IP) Assets
Income resulting from intellectual property rights or royalties is no longer exempt from taxation under the Labuan Business Activity Tax Act of 1990. The income is now subject to the Income Tax Act of 1967 and will be taxed at the current corporate income tax rate of 24%.
Labuan Intellectual Property (IP) assets refer to the intellectual property rights and assets that are registered or owned by companies in the jurisdiction of Labuan. Intellectual property rights include patents, trademarks, copyrights, and industrial designs.
Labuan has been actively promoting itself as a hub for the digital economy and Islamic finance activities, and as a result, it has put in place various regulations and guidelines to attract companies that are engaged in these activities. The Labuan FSA has introduced regulations and guidelines for companies operating in the digital economy and Islamic finance to ensure that they have an adequate level of economic substance in Labuan.
Companies that are engaged in the digital economy and Islamic finance activities, including digital assets and digital tokens, must comply with the economic substance requirements set out by the Labuan FSA. This includes maintaining a physical presence in Labuan, having an adequate number of employees and expenditures, and maintaining accurate financial and accounting records.
In addition, they must also register their IP assets with the Labuan Intellectual Property Office (LIPO) to obtain protection and legal recognition.
In summary, Labuan Intellectual Property (IP) assets refer to the intellectual property rights and assets that are registered or owned by companies in the jurisdiction of Labuan, and companies must comply with the economic substance requirements and register their IP assets with the LIPO to obtain protection and legal recognition.
FAQs
What is the corporate rate tax for trading businesses in Labuan?
The corporate tax rate for trading businesses in Labuan is 3%. This rate applies to companies that are engaged in trading activities and that meet the economic substance requirements set out by the Labuan Financial Services Authority (Labuan FSA). These requirements include maintaining a physical presence in Labuan, having an adequate number of employees and expenditures, and maintaining accurate financial and accounting records.
Companies that are unable to meet the economic substance requirements will be subject to the standard corporate tax rate of 24% on their net income.
It is important to note that Labuan trading businesses that are considered tax residents in Malaysia will be subject to the Malaysia corporate tax rate which is currently 24%.
In summary, Labuan trading businesses that meet the economic substance requirements set out by the Labuan FSA will be subject to a corporate tax rate of 3%, while those that do not meet these requirements will be subject to the standard rate of 24%.
Following the new regulation, can a Labuan company now deal with Malaysian residents?
Labuan companies are allowed to deal with Malaysian residents as per the regulations set out by the Labuan Financial Services Authority (Labuan FSA). However, it is important to note that these companies must comply with the economic substance requirements set out by the Labuan FSA, which include maintaining a physical presence in Labuan, having an adequate number of employees and expenditures, and maintaining accurate financial and accounting records.
It is also important to note that certain business activities and transactions with Malaysian residents may be subject to additional regulations and requirements set out by other relevant authorities in Malaysia. For example, companies engaged in the financial sector may be subject to regulations set out by the Central Bank of Malaysia or the Securities Commission Malaysia.
In summary, Labuan companies can deal with Malaysian residents, but they must comply with the economic substance requirements set out by the Labuan FSA and may be subject to additional regulations and requirements set out by other relevant authorities in Malaysia.
What are the consequences of the failure to comply with the new regulation in Labuan?
Failure to comply with the Labuan regulations and guidelines set out by the Labuan Financial Services Authority (Labuan FSA) can result in various penalties and consequences. These include:
- Financial penalties: Companies that fail to comply with the economic substance requirements may be subject to fines and penalties.
- Loss of tax benefits: Companies that fail to meet the economic substance requirements will not be eligible for the reduced corporate tax rate of 3% and will be subject to the standard tax rate of 24% on their net income.
- Reputation damage: Non-compliance with regulations can damage a company’s reputation and may make it more difficult for them to conduct business in the future.
- Revocation of licenses: The Labuan FSA has the authority to revoke the licenses of companies that fail to comply with the regulations, which can lead to the company being unable to operate in Labuan.
- Criminal penalties: In severe cases of non-compliance, the company and its directors may be subject to criminal prosecution, which can result in fines and imprisonment.
It is important to note that companies that fail to comply with the Labuan regulations may also be subject to additional penalties and consequences set out by other relevant authorities in Malaysia.
In summary, failure to comply with the Labuan regulations and guidelines set out by the Labuan FSA can result in financial penalties, loss of tax benefits, reputation damage, revocation of licenses, and even criminal penalties. It is important for companies to be aware of the regulations and to take steps to ensure compliance.
Are Investment Holding Companies subjected to the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018?
Investment holding companies are considered as companies that invest in other companies and securities, such as stocks, bonds, and real estate, and they are not engaged in any operational activities.
According to the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018, companies that are considered passive holding companies and do not carry out any operational activities in Labuan, are not subject to the economic substance requirements set out by the Labuan Financial Services Authority (Labuan FSA) and are not required to pay the Labuan Business Activity Tax (BAT).
However, it is important to note that companies that are considered active holding companies, meaning they carry out operational activities such as managing and renting out properties, will be subject to the economic substance requirements and the BAT.
It’s also important to note that all companies operating in Labuan are required to maintain accurate financial and accounting records and submit annual tax returns to the Labuan FSA.
In summary, Investment holding companies that are considered passive holding companies and do not carry out any operational activities in Labuan, are not subject to the economic substance requirements and the Labuan Business Activity Tax (BAT) set out by the Labuan FSA. But active holding companies are subject to those regulations. All companies operating in Labuan are required to maintain accurate financial and accounting records and submit annual tax returns.
What are the costs that qualify as part of Labuan company’s yearly operating expenditure?
The costs that qualify as part of a Labuan company’s yearly operating expenditure are those expenses that are incurred in the course of carrying out the company’s business activities in Labuan. These costs are used to demonstrate that the company has an adequate level of economic substance in the jurisdiction.
The following costs are commonly considered as part of a Labuan company’s yearly operating expenditure:
- Salaries and wages of employees based in Labuan
- Rent for office space in Labuan
- Utilities and other bills related to the office in Labuan
- Travel and accommodation costs for employees based in Labuan
- Professional fees, such as accounting and legal fees, incurred in Labuan
- Costs of maintaining and updating company records and books
- Costs of any equipment or materials that are used in the course of the company’s business activities in Labuan
It’s important to note that these costs must be incurred in the course of carrying out the company’s business activities in Labuan and must be reasonable and commensurate with the level of activity carried out by the company in Labuan.
In summary, the costs that qualify as part of a Labuan company’s yearly operating expenditure are those expenses that are incurred in the course of carrying out the company’s business activities in Labuan. These include employee salaries, office rent, utilities, professional fees, costs of maintaining records and books, and equipment costs.
For a recently incorporated business entity in Labuan, do they need to meet the substantial activity requirements upon commencing their business?
For a recently incorporated business entity in Labuan, the requirement to meet the substantial activity requirements will depend on the specific regulations and guidelines set out by the Labuan Financial Services Authority (Labuan FSA).
Generally, new business entities will be required to meet the substantial activity requirements upon commencing their business in Labuan. This includes maintaining a physical presence in Labuan, having an adequate number of employees and expenditures, and maintaining accurate financial and accounting records. These are the requirements that are set out by the Labuan FSA to ensure that companies operating in Labuan have a sufficient level of economic substance in the jurisdiction.
It’s important to note that companies must comply with these substantial activity requirements to be eligible for the reduced corporate tax rate of 3% and other benefits. If a new business entity fails to meet these requirements, it may be subject to the standard tax rate of 24% on its net income and may face penalties.
It is recommended that new business entities seek professional advice on the substantial activity requirements and the compliance process, as well as to keep accurate records of their activities and expenses.
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