Malaysia – Recent Labuan Tax Changes.

18 March, 2020

 

Recent changes to the Labuan tax laws have seen new regulations introduced to enhance the reputation and credibility of the tax regime in Labuan. The changes are welcomed as Malaysia seeks to implement the minimum standards under the Base Erosion and Profit Shifting (BEPS) Action Plan which sets out strategies and standards for best practices in tax. This alert sets out a quick summary of the main changes thus far.

 

Amendments under the Finance Act 2018

 

The Labuan Business Activity Tax Act 1990 (“LBATA”) was amended via the Finance Act 2018, which came into force on 27 December 2018. Key changes under the LBATA are as follows:

 

• The definition of “Labuan business activity” was amended to remove Malaysian ringgit restrictions or restrictions on dealing with Malaysian residents.
• New economic substance requirements for Labuan entities were introduced. Section 2B(1)(b) of the LBATA requires Labuan entities, for the purpose of the Labuan business activity, to have (i) an adequate number of full time employees in Labuan, and (ii) an adequate amount of annual operating expenditure in Labuan.
• Income derived from royalty or other income derived from an intellectual property right shall not enjoy LBATA tax, and is now subject to tax under the Malaysian Income Tax Act 1967.
• Labuan entities carrying on a Labuan trading activity no longer have the option to elect to pay tax of RM20,000. This means that all Labuan entities that carry on a Labuan trading activity and comply with the relevant economic substance requirements shall be subject to tax at the rate of 3% on its chargeable profits.
• A Labuan entity that does not carry on a Labuan business activity, or in carrying on a Labuan business activity, does not have the adequate number of full time employees in Labuan, or adequate amount of annual operating expenditure in Labuan, will be subject to tax under the Malaysian Income Tax Act 1967.
• A Labuan entity continues to be able to make an irrevocable election to pay tax under the Malaysian Income Tax Act 1967.

 

The full article can be found from Zicolaw's site here.

 

For more information, please contact:

 
Wei Min Chua, Director, Zaid Ibrahim & Co (a member of ZICO Law)