Pioneer
Status
The 'Malaysian
Satay' is the name given to a corporate structure which
involves 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.
(Malaysia has sovereign control over Labuan, an island
lying 10 kilometers off the coast of the Eastern Malaysian
province of Sabah and which in 1989 the central government
designated as an offshore financial haven). Malaysian
tax rules greatly favor such a structure with the consequence
that that the "Malaysian Satay" is now becoming a major
vehicle in international tax planning.
It should
be noted that direct ownership of a foreign subsidiary
by a resident Malaysian company with no offshore Labuan
connection or alternatively the direct ownership of
a foreign subsidiary by an offshore Labuan company with
no resident Malaysian connection does not confer the
level of fiscal benefits which apply to the deployment
of the "Malaysian Satay" corporate structure.
For a country
to be an attractive location in which to establish a
holding company 4 criteria must be satisfied:
- Incoming
dividends remitted by the subsidiary to the holding
company must either be exempted from or subject to
low withholding tax rates in the subsidiary jurisdiction;
- Dividend
income received by the holding company from the subsidiary
must either be exempted from or subject to low corporate
income tax rates in the holding company jurisdiction;
- Profits
realized by the holding company on the sale of shares
in the subsidiary must either be exempted from or
subject to a low rate of capital gains tax in the
holding company jurisdiction;
- Outgoing
dividends paid by the holding company to the ultimate
parent corporation must either be exempt from or subject
to low withholding tax rates in the holding company
jurisdiction.
By these
criteria the "Malaysia Satay" is a fiscally
attractive vehicle. Thus:
Withholding Taxes on Incoming Remittances
Double
taxation treaties are the usual means by which withholding
taxes can be reduced or altogether eliminated on dividends
remitted from a foreign subsidiary to a holding company.
For example the double taxation treaty between Holland
and Malaysia provides for no withholding taxes to be
deducted on dividends, interest or royalties remitted
from a Dutch subsidiary to a resident Malaysian holding
company.
The greater
a country's network of double taxation treaties the
greater its leverage to reduce withholding taxes on
incoming dividends. An elaborate network of double taxation
treaties is thus a key factor in the ability of a territory
to develop as an attractive holding company jurisdiction.
Malaysia has more than 60 double taxation treaties in
place.
See Malaysian
Double Tax Treaties for a listing and analysis of
these treaties.
(N.B. If
the foreign subsidiary is owned directly by the offshore
Labuan company with no resident Malaysian holding company
interposed, then the standard rate of withholding taxes
(usually 25%) may be levied on dividends, loan interest
and royalties remitted from the foreign subsidiary jurisdiction
given that as an offshore territory Labuan may not be
considered part of Malaysia for double taxation treaty
purposes and given that double taxation treaties are
usually the only means by which withholding taxes can
be reduced on remittances flowing from the foreign subsidiary
jurisdiction. Alternatively if the foreign subsidiary
was owned directly by a resident Malaysian company with
no offshore Labuan connection then although the situation
might be favorable with respect to withholding taxes
levied in the foreign subsidiary jurisdiction, in respect
of other taxes (see below) such an entity would be denied
the fiscal advantages enjoyed by the "Malaysian
Satay" corporate structure).
In 2005,
some of Malaysia's trading partners started to question
the application of their double tax treaties with Malaysia
to holding company structures involving Labuan.
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Corporate
Income Tax on Dividend Income Received
Like Hong
Kong, corporate income tax in Malaysia follows the "territorial
principle" with the consequence that income remitted
to but earned outside Malaysia by a resident Malaysian
corporation is exempt from corporate income tax in Malaysia
irrespective of whether the income is:
- Dividend,
interest or royalty Income received by a resident
Malaysian holding company from a foreign subsidiary;
or
- Trading
income earned by a resident Malaysian company from
trading activities conducted abroad.
In accordance
with the generally accepted fiscal principle governing
dividend transfers between resident parent and resident
subsidiary corporations, income distributed by the resident
Malaysian holding company to the Labuan offshore parent
corporation is free of corporate income tax in the hands
of the Labuan entity (with the exception of royalty
income which is taxed at 3% in Labuan).
(N.B. If
the foreign subsidiary was owned by a resident Malaysian
corporation with no offshore Labuan connection then
remittances flowing from the resident Malaysian corporation
would be subject to 10% withholding taxes in respect
of capital gains, royalty or loan interest income. Accordingly
the "Malaysian Satay" corporate structure
is to be preferred to ownership of a foreign subsidiary
by a Malaysian company with no Labuan connection).
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Capital
Gains Tax on the Sale of Shares
Capital
gains made by a "Malaysian Satay" (a resident
Malaysian holding company wholly owned by an offshore
Labuan parent corporation) on the profitable sale of
its shareholding in a foreign subsidiary are free of
all taxes in Malaysia.
(N.B. Capital
gains made by a resident Malaysian holding company with
no offshore Labuan connection on the profitable sale
of its shareholding in a foreign subsidiary are not
subject to Malaysian capital gains tax but are subject
to a 10% withholding tax when distributed to shareholders.
Accordingly the "Malaysian Satay" corporate
structure is to be preferred to ownership of a foreign
subsidiary by a Malaysian company with no Labuan connection).
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Withholding
Taxes on Outgoing Remittances
Dividends,
royalties or loan interest paid by a Malaysian holding
company to its Labuan parent company are exempt from
any withholding taxes in accordance with the generally
accepted fiscal practice governing remittances made
between resident subsidiary and parent corporations.
Remittances from the offshore Labuan parent corporation
to its shareholders are totally exempt from withholding
taxes because Labuan is an offshore jurisdiction which
does not levy withholding taxes on any transaction.
(N.B. By
comparison a Malaysian company with no Labuan connections
is subject to the following withholding tax rules:
- Dividends
representing foreign source income are exempt from
withholding taxes in Malaysia when distributed;
- Royalties,
loan interest or capital gains realized by a resident
Malaysian corporation on the profitable sale of its
shareholding in a foreign subsidiary are subject to
a standard rate 10%-15% withholding tax on distribution
to its non-Labuan shareholders (unless those shareholders
are resident in a country which has a double tax treaty
with Malaysia under which withholding taxes are reduced
from the standard rate).
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The
"Malaysian Satay" V Danish Holding Companies
Since Denmark
is currently the benchmark holding company jurisdiction
which other holding company jurisdictions seek to emulate
a comparative assessment of the 2 jurisdictions is a
useful exercise:
- Withholding
Taxes on Incoming Dividends:
In terms of reducing withholding taxes on incoming
dividends Denmark is considered to have 2 distinct
advantages over Malaysia namely:
- Where
the foreign subsidiary is resident in an EU territory
all remittances flowing to an EU parent corporation
which has held at least 15% (10% from 2009) of
the subsidiary shares for 12 months prior to the
distribution are under EU law free of withholding
taxes. Since this directive can only apply to
an EU member state such as Denmark it puts Danish
holding companies at a distinct advantage over
their Malaysian counterparts where the subsidiary
corporation is an EU resident entity.
- When
the foreign subsidiary is not resident in an EU
territory (such that the EU Parent-Subsidiary
directive does not apply) the only means of reducing
withholding taxes levied on incoming dividends
remitted by the foreign subsidiary to the holding
company is through double taxation treaties. Denmark
has significantly more double taxation treaties
in place than Malaysia, meaning that in this respect
Denmark has considerably more scope than Malaysia
for the reduction of withholding taxes on incoming
dividends. Thus in respect of withholding taxes
levied in the foreign subsidiary jurisdiction
on outward bound remittances, the Danish holding
company enjoys significant advantages over the
"Malaysian Satay".
-
Corporate Income Tax on Incoming Dividends:
In Denmark dividend income received by a Danish
holding company from a foreign subsidiary is exempted
from corporate income tax provided that the Danish
holding company meets the "participation
exemption criteria" in that for a minimum
period of 12 months prior to the dividend distribution
it held at least 20% of the shares of the foreign
subsidiary (which subsidiary must not be deemed
a "financial company").
By comparison the "Malaysian Satay"
is not governed by any "participation exemption
rules" specifying a minimum shareholding
or time limit if fiscal benefits are to apply.
Provided the dividend income is from a non-Malaysian
source it is free of corporate income tax in Malaysia.
(N.B. By way of exception 3% corporate income
tax is levied in Labuan on royalty income received
from the resident Malaysian corporation).
Thus in respect of corporate income tax levied
on incoming dividends the "Malaysian Satay"
enjoys significant advantages over its Danish
counterpart.
- Capital
Gains on the Sale of Shares:
A Danish holding company is exempt from any capital
gains tax on the profitable sale of shares in
a foreign subsidiary provided that it has held
the foreign subsidiary's shares for a minimum
period of 3 years prior to the disposal and the
foreign subsidiary is not deemed a "financial
company".
By comparison the "Malaysian Satay"
is not governed by any participation exemption
rules specifying a minimum shareholding or time
limit if fiscal benefits are to apply. The "Malaysian
Satay" does not pay any capital gains tax
in Malaysia on the disposal of shares in a foreign
subsidiary irrespective of the size or duration
of its shareholding. (N.B. If the foreign subsidiary
had been owned by a resident Malaysian company
with no Labuan connection then 10% withholding
tax is applied on any distributions made by the
Malaysian company which represent capital gains
from the sale of shares in a foreign subsidiary).
Thus in respect of capital gains tax levied on
the profitable sale of shares in a foreign subsidiary
the "Malaysian Satay" enjoys significant
advantages over its Danish counterpart.
- Withholding
Taxes on Outgoing Dividends:
In Denmark no withholding taxes are deducted from
outgoing dividends irrespective of the existence
or non-existence of a double taxation treaty and
provided the ultimate foreign parent corporation
holds at least 20% of the shares in the Danish
holding company for a minimum period of 12 months.
Where the "Malaysian Satay" corporate
structure is deployed no withholding taxes are
deducted on remittances made by either:
A resident Malaysian Company: to an offshore Labuan
company in accordance with the generally accepted
fiscal practice that remittances made between
resident entities are exempt from withholding
taxes;
An offshore Labuan Company: to its shareholders
given that Labuan is an offshore jurisdiction
which does not levy withholding taxes on any transaction.
Thus in respect of withholding taxes on outgoing
remittances the "Malaysian Satay" enjoys
significant advantages over its Danish counterpart.
(N.B. If the foreign subsidiary was owned by a
resident Malaysian corporation with no offshore
Labuan connection then remittances flowing from
the resident Malaysian corporation would be subject
to 10% withholding taxes in respect of capital
gains, royalty or loan interest income. Accordingly
the "Malaysian Satay" corporate structure
is to be preferred to direct ownership of a foreign
subsidiary by a Malaysian company with no Labuan
connection).
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