BBS PRO TALK VOL 1
SIGNIFICANT CHANGES TO LABUAN TAX REGIME
The new government of Malaysia has, on 2 November 2018, released its 2019 budget. The Budget seeks to invigorate the economy and implement institutional reforms to strengthen fiscal administration, manage government debt and raise government revenue.
Among the proposed changes are aimed at promoting competitiveness of Labuan as an international financial hub while complying with internationally agreed standards.
This Alert specifically summarizes the key changes to the Labuan tax regime which shall take effect on 1 January 2019.
1) LABUAN BUSINESS ACTIVITY
Previously, any Labuan entity would only be regarded as carrying out Labuan business activities if the following conditions are met:
- Such activities are carried out in, through and from Labuan;
- Transactions are carried out in a currency other than Ringgit Malaysia (i.e. foreign currency); and
- Transactions are carried out with non-residents or other Labuan entities.
Section 2(1) of the Labuan Business Activity Tax Act 1990 (LBATA) has been amended to allow Labuan entities to carry on activities in Ringgit Malaysia and/or Malaysian residents.
2) FLAT TAX ELECTION
In the old regime, Labuan entity carrying on a Labuan trading activity is taxed at the rate of 3% of the net profits as per the audited accounts. As an alternative, the Labuan entity may also make an election to be taxed at a fixed sum or RM 20,000.
Of late, Section 7 of the LBATA has been amended to abolish the election to be taxed at RM 20,000.
3) INCOME FROM INTELLECTUAL PROPERTY ASSETS
Income generated from intellectual property (IP) assets held by a Labuan entity will now be subject to corporate income tax under the Income Tax Act (ITA) 1967, instead of the LBATA pursuant to the amendment to Section 4 of the LBATA.
4) SUBSTANTIVE CONDITIONS
Generally, there were no specific substance requirements applicable to Labuan companies, in the exception for Labuan leasing business whereby Labuan Financial Services Authority has issued a guideline on the establishment and operations for its leasing companies.
Following the amendment to Section 2B(1)(b) of the LBATA, Labuan entities undertaking Labuan business activities are subject to substantive conditions as prescribed by the Minister of Finance. A more detailed list of the substantive conditions will be issued in a separate News Alerts.
HOW WOULD THE CHANGES IMPACT YOU?
The tax revamp would mean that Labuan entities may now transact with Malaysia residents and in any currency, including Ringgit Malaysia. This change would bring about wider and greater business expansion to Labuan entities.
However, following the abolishment of election to be taxed at a fixed sum of RM20,000, Labuan companies carrying out a Labuan trading activity will be taxed at 3% of the net audited profits.
Whereas, Labuan entities especially those IP holding companies with streams of IP income would be greatly impacted from the tax perspective.
In addition, Labuan entities undertaking Labuan business activity now are required to meet certain economic substance tests to benefit from the Labuan tax regime. For some, this requirement may mean additional costs and ultimately alter the existing corporate structure.
In view of the changes which take effect from 1st January 2019, entities would need to review their existing business models and corporate structure to make the best out of the legislative changes and to reassess the impact brought about by the significant changes.
Should you require any clarification or our professional assistance, please do not hesitate to contact us. We do what we are best at while leaving you and your management team to focus on what you do best.