A federal territory of Malaysia, Labuan is an independent nation with its own laws but is under Malaysia’s sovereignty. For the great majority of businesses with income from sources other than Malaysia, Labuan imposes a no-tax policy, similar to many other low-tax jurisdictions. Investors seeking Malaysia offshore company registration have a fantastic opportunity due to Malaysia’s strategic position.
The Malaysian government identified Labuan as an International Offshore Finance Center in 1989. After that, in 1990, the Offshore Companies Act was established to set up offshore corporate laws. Along with the Labuan Trust Companies Act 1990, the Offshore Banking Act of 1990 was also created.
REQUIREMENTS TO INCORPORATE A MALAYSIA OFFSHORE COMPANY
- Registered address – The Malaysia offshore company must have a registered address, which is the Labuan Trust Company’s main office.
- Share capital – Share capital in any currency is accepted. There must be a minimum of one (1) share, regardless of the share’s par value.
- Director – A minimum of one (1) director who is 18 years old is required.
- Accounting requirements – As part of the tax filing responsibility, the applicant must provide an audited financial statement. The account information is not a publicly available record as defined by LCA 1990.
- Company Secretary – A minimum of one (1) Company Secretary from a Labuan Trust Company is required.
- Economic substance requirements – The company must employ a prescribed minimum number of workers in Labuan. It must incur a certain amount of yearly operational expenses in Labuan, based on a specific activity carried out by the applicable Labuan offshore Company.
CHARACTERISTICS OF MALAYSIA OFFSHORE COMPANY
- Confidentiality – High levels of confidentiality and anonymity are available to the company.
- Taxation – A Malaysia offshore Company is nevertheless subject to 0% to 3% tax even though it is regarded as a tax haven. Annual tax filing is necessary.
- Governing Corporate Legislation – British Common Law is the foundation of Malaysia’s legal system for offshore companies, and these companies are governed by:
- Central Bank of Malaysia (Bank Negara)
- The Labuan Company Formation Authority
- Malaysia’s Immigration
- Inland Revenue Authority Law
- Accounting Requirements – All accounting must be created with auditing in view. Following an audit, it must be filed annually.
- Auditor – A certified local auditor must be appointed by a Malaysia Offshore Company.
LABUAN OFFSHORE COMPANY BUSINESS ACTIVITIES AND ITS TAX TREATMENT
- Non-trading activity in Labuan
Holdings by a Labuan corporation in securities, stocks, shares, loans, deposits, or any other assets situated there are not subject to tax.
- Trading in Labuan.
This includes any business that isn’t a Labuan non-trading activity, such as banking, insurance, trading, management, shipping operations, licensing, or any other activity. They are subject to a 3% net profit per audited account.
- Performing both trading and non-trading activities in Labuan
They are regarded as trading activity in Labuan and have the same tax treatment as Labuan trading activity (3 percent of net income as reported in audited accounts).
- Businesses that are not located in Labuan or those that have taken an irrevocable decision to be taxed under the MITA 1967. They are taxed in accordance with the MITA 1967 at the current 24% income tax rate.
DOCUMENTS REQUIRED FOR MALAYSIA OFFSHORE COMPANY FORMATION
- Each stakeholder’s and account signatories’ NRIC or passport copies (which must be certified)
- Each shareholder involved in the company must provide evidence of their residential address (original utility bills or personal bank statements are preferred).
- Proposed Labuan Company detailed business plan
- The trust company’s statutory declaration of compliance
- Acceptance to serve as a director
- Memorandum and Articles of Association of the proposed Company
- Licenses required for conducting business, if any, must be secured and approved before the incorporation of the company.
REQUIREMENTS TO FULFILL FOR MALAYSIA OFFSHORE COMPANY
- Establish the name and identity of the business. The applicant must have three names ready to submit for approval.
- Determine whether the company’s structure and the nature of the operation are compliant with tax laws.
- Choose a suffix for the name of the business. The applicant can choose from Labuan, Inc., Limited, Ltd., Co., or Limited Ltd.
- Determine the stockholders’ percentage of ownership.
- the minimum authorized capital should be prepared.
- Complete the process of opening a bank account. For more information, refer to our Malaysia corporate bank account opening page.
- Prepare the registration fee.
- A business visa with multiple entries valid for two years will be available to foreign nationals. It is possible to add dependents to this visa. With that visa, they are free to live wherever they want in West Malaysia.
ANNUAL REPORTING & COMPLIANCE FOR MALAYSIA OFFSHORE COMPANY
A Labuan Offshore Company is still required to submit its annual business reporting lodgement, which comprises an annual return, financial statements, and income tax return, per the Labuan Companies Act of 1990.
All Labuan offshore companies that engage in trading must annually examine their financial statements. For the assigned auditor to finish the audit process by May each year, all accounts must be completed and authorized by the Board of Directors no later than the month of March.
Income tax return
The audited financial statement is needed to file taxes with the Labuan Inland Revenue Board. On international sales, the company tax rate is 3%. However, under the Income Tax Act of 1967, local transactions will be subject to a 24% tax on net profits paid to the local Inland Revenue Board.
If a company conducts business both domestically and abroad, the auditor must separately identify both markets as “Labuan Business” and “Non-Labuan Business” operations in the audit report.
Each year, by May 31st, corporation tax filings must be submitted.
TAX TREATMENT & EXEMPTIONS FOR MALAYSIA OFFSHORE COMPANIES
TAX TREATMENT ON LABUAN OFFSHORE COMPANIES
According to the Labuan Business Activity Tax Act of 1990 (LBATA), a Labuan firm must pay tax on its Labuan business activity.
Only chargeable revenue from Labuan Trading activities is subject to the 3% tax rate that applies to Labuan entities. Income from non-trading activities, including holding interests in securities of a Labuan firm, is automatically exempt from taxation.
Only net profit, as shown in the signed audited report, is subject to taxation with regard to Labuan trading activities such as management, licensing, etc.
Regarding intellectual property revenue, starting on January 1, 2019, any royalties or other income obtained from an IP right by a Labuan firm will be subject to taxation under the Revenue Tax Act of 1967, not the LBATA. In plain English, this means that no income from intellectual property rights will be eligible for the 3% tax rate or tax exemption.
Another recent government initiative is that all Labuan entities conducting Labuan economic activities but failing to meet the aforementioned substance criterion will not be eligible for the 3% tax rate in 2020. In contrast, they will be subject to 24% of the taxable profit under Labuan tax law.
TAX EXEMPTIONS AVAILABLE FOR MALAYSIA OFFSHORE COMPANIES
- No indirect tax – Labuan offshore enterprises are exempt from indirect taxes and have free-port status. Therefore, Malaysian entities that are located in Labuan are exempt from indirect taxes like services and sales taxes.
- Stamp duty – All documents signed by a Labuan corporation in connection with its business are exempt from stamp duty.
- Exchange control – The entity is also exempt from limitations on exchange control.
- Payments made by Labuan entities – Recipients of income from Labuan entities are eligible for the following exemptions:
- Dividends received by Labuan Company
- Dividends from the Labuan Company that are received and paid, credited, or distributed from profits from Labuan business operations
- Distributions received from Labuan Trust by beneficiaries
- Interest that a resident received from Labuan Company
- Withholding tax – Payments made by Labuan entities to non-residents in the following categories are exempt and not subject to withholding requirements:
- Technical services, advice, or assistance
- Other income
ADVANTAGES OF MALAYSIA OFFSHORE COMPANY
- In Malaysia, establishing an offshore business is comparatively easy and effective. The registration procedure has been simplified by the government, enabling businesses to be established swiftly and with little red tape.
- Compared to some other offshore jurisdictions, Malaysia enjoys a stable political environment. Because of this stability, businesses can function in a secure and confident atmosphere.
- Malaysia’s strategic location in Southeast Asia gives companies access to a sizable and expanding local market. International trade is facilitated by its advanced infrastructure and commercial ties.
- With a variety of financial services and foreign banks operating there, Malaysia has a well-developed banking industry. For handling overseas funds, having access to banking facilities might be useful.
- Depending on the selected business structure and corporate regulations, offshore firms in Malaysia can provide owners and shareholders with a certain level of privacy and asset protection.
- A Labuan offshore Company does not require a local nominee director to be incorporated, much like a Private Limited Company (Sdn. Bhd.) under the Company Act 2016.
The government loosened the registration requirements and changed it to be wholly foreign-owned with a minimum of one director and one shareholder to attract foreign investors to the Malaysian market.
DISADVANTAGES OF MALAYSIA OFFSHORE COMPANY
- It will be challenging for prospective financial partners or investors to do their independent study and appraise the business’s value before deciding whether to invest or not. This is because there isn’t much publicly available information on the Company.
- It is common knowledge that offshore companies are not required to keep public company registers. Due to this, it is now difficult to demonstrate to external parties who control the company. Even though such entities can benefit from confidentiality and anonymity, identifying the owner of such an entity will be highly challenging and time-consuming.
- Even while the main motivation for foreign investors to engage in offshore companies is frequently the tax advantages they provide, doing so may nonetheless appear to be an attempt to cheat taxes, either directly or indirectly. Because of this, the idea and acceptance of offshore Companies are not given the highest consideration.
Reach out to us at Relin Consultants for further assistance with your Malaysia Offshore Company.
Is Labuan Company a part of the Malaysian corporate structure?
A Labuan offshore company is one of the several business formats Malaysia offers, even if it is governed by different Acts.
What is the Labuan Trust Company?
A Labuan Trust Company is a business that has been authorized by the Labuan Financial Services and Securities Act 2010 (LFSSA) to serve as the company secretary for other Labuan incorporated businesses and that is registered under the Labuan Companies Act 1990.
Is Labuan considered a tax haven?
Yes, Labuan is regarded as a tax haven due to its advantageous tax structures for non-residents.
What is a foreign Labuan Company?
A company formed in accordance with the Labuan Companies Act of 1990 is essentially a Labuan company. Such a business entity is permitted to conduct operations in, out of, or via Labuan in order to benefit from Labuan’s tax neutrality.