It is important for businesses operating in Labuan to be
aware of local regulation and the increased emphasis on
Internationally and domestically as tax laws evolve, there is an
increasing requirement for companies to have commercial substance
within a specific jurisdiction, rather than using the location
solely for transactions that reap a tax benefit.
A company's accounts can be prepared in accordance with any
accepted international accounting standards – such
as the IFRS. And, while accounts can be prepared in locations other
than Labuan, a copy of the management accounts and associated
documents must be available in-country.
Management accounts must be prepared, however no other accounts
require auditing except for the following: activities requiring
licensing by the Labuan Financial Services Authority (such as
leasing, banking and insurance) and/or Labuan entities that elect
to be taxed at 3% of their audited net profit.
Labuan entities have two options for tax rates. They can either
be taxed at 3% of their audited net profit, or alternatively, at a
fixed tax rate of MYR20,000 per annum. While an option must be
selected, a company is not locked into their decision, at the start
of each calendar year a Labuan entity can switch from one rate to
the other depending on preference.
Tax in Labuan is straightforward, there are no rules governing
the deductibility of expenses or capital allowances. For entities
opting to be taxed at MYR20,000, there is no requirement to file
audited nor management accounts. And, if your business is
investment holding there is no tax liability other than the
requirement for annual filing.
Labuan entities will continue to be exempt from withholding tax.
There are also exemptions for transactions between Labuan entities
with Malaysian residents for leasing and insurance activities. For
example, if a foreign lessor leases an aircraft to a Malaysian
carrier through a Labuan SPV, the Labuan SPV's lease rentals
are eligible to be taxed under the Labuan rates. As previously
outlined, this is either 3% or MYR20,000, as opposed to the normal
onshore/non-Labuan Malaysian tax rate of 25%.
What this means for your business?
Businesses that have parent company overseas may need to
relocate certain functions to Labuan to fulfill the commercial
substance requirement despite efficiencies of undertaking such
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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