It is important for businesses operating in Labuan to be aware of local regulation and the increased emphasis on substance.
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 functions centrally.
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.