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Labuan: Double Tax Treaties

Introduction

In pursuit of foreign investment, Malaysia has signed many double tax treaties, of which more than 60 are in force, mostly having low rates of withholding tax on outgoing payments. Details are given below for some of these treaties. Several more treaties are under negotiation.

All Malaysian tax treaties follow the OECD model treaty with some modifications; however the US treaty provides reciprocal exemption to international shipping and air transportation businesses only.

In many cases, Malaysian tax treaties include 'tax sparing' provisions, whereby a dividend that is distributed out of profits which have been exempted from tax under Malaysian tax incentive regimes is deemed to be have been paid out of profits that have been subject to tax. This enables the recipient to claim a tax credit on the exempt dividend in his home country.

There are no anti-treaty shopping provisions in the treaties.

Although Labuan, as an integral part of the state of Malaysia, gains the benefit of the country's tax treaties, which were largely signed before Labuan's offshore regime came into existence, some countries have specific or general anti-avoidance legislation which excludes Labuan offshore entities from treaty benefits.

Asian countries on the whole, however, have accepted Labuan in treaty-based tax planning, largely no doubt because they are all themselves hungry for inward investment.

South Korea however has agitated for Labuan to be excluded from a revised version of its Malaysian tax treaty.

The Korean tax authorities believed that many of the firms which they have accused of avoiding tax on capital gains were doing so through offices registered in Labuan.

Relations between the two sides deteriorated still further when in June 2006, the South Korean Ministry of Finance and the Economy (MOFE) revealed that tax would be imposed on gains made by investors based in Labuan from that July, as part of the country's efforts to cut down on tax avoidance by foreign investors.

In 2010, an additional clause to the Labuan Offshore Business Activity Tax Act was added that will enable the island to adopt the internationally-agreed Organization for Economic Cooperation and Development standard for the exchange of information for tax purposes in double taxation agreements (DTAs).

It provides power to the Director General of Inland Revenue to call for information from any person as he may require for the purpose of compliance with any DTAs entered into by the government of Malaysia. It allows the disclosure of any information on a DTA to any authorised agent of the government with whom Malaysia’s government has made such an agreement, and upon a request from a tax authority of any government of any country outside Malaysia.

Furthermore, any person may request for an advance ruling from the Director General of Inland Revenue on the application of any provision of the Tax Act to a particular type of arrangement. Subject to certain qualifications, a ruling issued under this proposed section is binding on the person who requested for such ruling and on the Director General of Inland Revenue.

The following are some of the countries which have double-tax treaties with Malaysia (some further treaties have been signed and await ratification):

  • Albania
  • Australia
  • Austria
  • Bahrain
  • Bangladesh
  • Belgium
  • Canada
  • China
  • Croatia
  • Czech Republic
  • Denmark
  • Egypt
  • Fiji
  • Finland
  • France
  • Germany
  • Hungary
  • India
  • Indonesia
  • Ireland
  • Italy
  • Japan
  • Jordan
  • Korea
  • Kuwait
  • Lebanon
  • Luxembourg
  • Malta
  • Mauritius
  • Mongolia
  • Morocco
  • Namibia
  • Netherlands
  • New Zealand
  • Norway
  • Pakistan
  • Papua New Guinea
  • Philippines
  • Poland
  • Romania
  • Russia
  • Saudi Arabia
  • Seychelles
  • Singapore
  • South Africa
  • Spain
  • Sri Lanka
  • Sweden
  • Switzerland
  • Taiwan
  • Thailand
  • Turkey
  • United Arab Emirates
  • United Kingdom
  • Uzbekistan
  • Vietnam

 

 

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