Labuan: Offshore Legal and Tax Regimes
Malaysian External Investment
"The Malaysian Satay" was the name given to a corporate structure which has traditionally involved the ownership of a foreign subsidiary by a resident Malaysian holding company which is in turn 100% wholly owned by an offshore Labuan parent corporation. In this structure, reduced rates of foreign withholding tax obtainable through double tax treaties (Malaysia has more than 60, although not all are in force) are not compromised by the offshore status of Labuan; yet the income once in the hands of the Malaysian parent can be passed on without further tax to the Labuan holding company.
If the foreign subsidiary were owned directly by a resident Malaysian company with no offshore Labuan connection then domestic Malaysian taxes will have to be paid; if the foreign subsidiary were owned directly by a Labuan holding company, no Malaysian taxes will be paid, but an increasing number of treaty partners are denying treaty benefits to Labuan companies.
Foreign Direct Investment in Malaysia and Korea
Whilst foreign corporations traditionally require government permission if they are to own shares in a Malaysian company this requirement has usually been waived where the Malaysian company is to be 100% owned by a Labuan company which is in turn 100% owned by foreigners. Foreign ownership rules had previously deterred foreign companies from owning Malaysian corporations.
Dividends and other income earned by foreign investors in Malaysia can usually be extracted through Labuan without taxation.
The interposition of a Labuan company by investors into Korea and other regional target markets has benefits because income can be routed through Malaysia or Labuan in order to take advantage of double taxation treaties and the absence of taxation between Malaysia and Labuan. This route has been much used by investors into Korea: it is said that more than a third of Labuan companies are used as holding companies for Western investment into Korea.
A Labuan company selling in China may take advantage of the treaty between Malaysia and the PLC so as to avoid the representative office in the PLC being regarded as a PE.