Labuan: Offshore Legal and Tax Regimes
Tax Treatment of Offshore Operations
See Domestic Corporate Taxation for the general principles of Malaysian corporate taxation, which also apply to offshore entities when they pay tax.
The Labuan Offshore Business Activity Tax Act 1990 (as amended in 2004) provides for the reduction or complete exemption of income tax in respect of certain business activities carried on by offshore companies in Labuan.
Chargeable profits derived by an offshore company from an offshore trading activity are subject to tax at a rate of 3%.
Alternatively, an offshore company which carries on an offshore trading activity may, within three months from the commencement of any calendar year, elect to be charged to tax of M$20,000 for that year of assessment.
An offshore company which carries on an offshore non-trading activity is exempt from income tax altogether.
The Income Tax Act 1967 applies to any activity other than offshore business activity carried on by an offshore company, ie they pay normal taxes.
The following income is traditionally exempt from tax in the hands of a Malaysian or foreign recipient:
- a dividend received by, or received from an offshore company;
- distributions received from an offshore trust by the beneficiaries;
- royalties received by a non-resident or another offshore company;
- interest received from, or by, an offshore company under certain circumstances and amounts received from an offshore company for providing services.
No withholding tax is applicable to items of income specifically exempt from tax.
Stamp duty for the transfer of shares and preparation and filing of Memorandum and Articles of Association by an offshore company has been waived.
A number of other tax privileges were available at the time of writing:
- 65% of income from offshore entities from the rendering of legal, accounting, financial or secretarial services, including that of a trust company as defined in the Labuan Trust Companies Act, 1990 is exempted from tax.
- Income earned from renting a "qualifying asset" to an offshore company in Labuan is exempt from tax for an amount of up to 50% of the income received for a period of 5 years. Thus a developer can expect to only pay tax on 50% of the income received from a building rented out to offshore companies.
- 50% of the housing and regional allowances given to residents working in the public sector and offshore companies in Labuan are exempted from tax.
- Second tier dividends declared out of dividends received from an offshore company by a domestic company are exempted from tax.
- Distributions made by an offshore trust are not subject to income tax in the hands of the beneficiary.
- Royalties paid by an offshore company to a non-resident person or another offshore company are not subject to income tax and hence are not subject to withholding tax.
- Interest paid by an offshore company to a nonresident person or another offshore company is not subject to income tax. However, where the interest accrues to a banking, finance company or insurance business carried on by the nonresident person in Malaysia, that interest will be subject to income tax as part of business income.
- Interest paid by an offshore company to a resident person, other than a person carrying on a banking, finance company or insurance business in Malaysia, is not subject to income tax.
- Technical or management fees paid by an offshore company to a nonresident or another offshore company is not subject to income tax.
In May 2007, it emerged that the Malaysian Finance Ministry was working with the financial authorities of Labuan to establish a new tax structure aimed at attracting more companies to the Labuan International Offshore Financial Centre (IOFC).
Speaking at the release of the Labuan Offshore Financial Services Authority (Lofsa) annual report for 2006, Tan Sri Dr Zeti Ahktar Aziz, Bank Negara Governor and Lofsa chairman, said that new tax initiatives would be included in the 2008 budget, due to be announced in September 2007, along with new company forms to better cater for the requirements of offshore investors.
"With the new incentives, LOFSA will be able to compete with other offshore centres in the Asia-Pacific region and the world," Zeti told reporters.
“We want to be competitive and relative to other offshores as the environment is changing very significantly," she added.
In September 2007, the measures were unveiled by the Prime Minister.
Abdullah stated in his 2008 budget speech that in future, companies registering in the Labuan offshore sector would have the option of having their offshore business income taxed under the Income Tax Act 1967, in addition to under the Labuan Offshore Business Activity Tax Act 1990.
"In the light of greater global competition, we need to ensure that Labuan remains competitive as an international offshore financial centre. Given that investors in Labuan undertake a wide range of financial services, a flexible tax regime is necessary," the Prime Minister explained.