Labuan Tax Structures

Labuan Malaysia is the best option if you are thinking in terms of establishing an offshore entity in Asia. It is greatly beneficial to businessmen, especially if you handle huge volumes of trades, as Malaysia has entered into double tax protection agreement with many countries to prevent your income from getting taxed twice. Further, Labuan is included in the whitelist released by the Organization for Economic Co-operation and Development OECD.

In Malaysia, income tax computation is governed by the Income Tax Act (ITA) 1967. In 1990, the Labuan Business Activity Tax Act (LBATA) was introduced to govern the business activities of Labuan entities. Under the act, Labuan entities had the freedom to choose to pay either RM 20,000 or a tax of 3 percent. However, the LBATA was revised substantially as part of Budget 2019. Section 7 of the LBATA was deleted and Labuan entities have to pay 3 percent tax on chargeable profits.

Further, Section 3A of the LBATA allows a Labuan company to choose whether it should be taxed under the ITA or LBATA. However, the choice cannot be revoked once it is made. Under the ITA, the tax payable on your company’s net profit is 24 percent. As the ITA does not tax capital gains and foreign-sourced income, there is no change in the way dividends, royalties, interest, and capital gains are taxed. Therefore, only non-trading entities are likely to go for the taxation option as under the LBATA they are not required to pay any tax.

The main benefit of opting for taxation under the ITA is that you can take advantage of the Double Taxation Agreement (DTA) that Malaysia has entered into with over 70 countries. The 14 countries that have excluded Labuan companies from the DTA are Germany, India, Japan, Australia, the UK, the Netherlands, Luxembourg, Sweden, Seychelles, Indonesia, Chile, South Korea, South Africa, and Spain.

In order to qualify for entry into Malaysia’s DTA network, it is essential to ensure that your company’s management and control are exercised in the country. It, therefore, makes sense to locate your regional operational headquarters in Labuan.

You will need to inform the Inland Revenue Board (IRB) on your preferred option for taxation under the ITA within three months of the starting of the assessment year’s basis period. The option would then be valid for the assessment year as well as the subsequent years. Once you communicate the option to the IRB, you will have to make sure that you adhere to all of the provisions under the ITA. This includes complying with the need to furnish the estimated tax payments per year, following administrative procedures, payment of taxes in installments, and settlement of your company’s tax liability by the seventh month after the closure of financial accounts, among others.

If you want guidance for lodging your Labuan company’s ITA tax election, QX Trust is here to help you. Call us at +60 18 228 9533, WhatsApp to us at + 60 3 9212 6940, or mail to us at consultant@qx-trust.com.