Recent Changes to Labuan Tax Regime
What are the key changes of Labuan’s new tax regime? They include abolishment of flat tax rate, changes in income tax exemption, and taxable intellectual property income.
The Labuan International Business Financial Centre (IBFC) has put the new tax framework into effect from 1 January 2019 for regulatory compliance subsequent to the introduction of new international tax standards by the Organization for Economic Co-operation and Development (OECD).
Labuan Tax Key Changes
The necessary amendments made to the Labuan Business Activity Tax Act 1990 (LBATA) are as below:
1. The abolishment of MYR 20,000 flat tax
Labuan entities that undertake trading activities can no longer elect to pay tax at the fixed rate of MYR 20,000 and are instead charged 3% on net profits from their Labuan business activities for each year of assessment. Meanwhile, Labuan entities that undertake non-trading activities continue to be exempted from tax under LBATA regulations.
2. Income from Intellectual Property (IP)
Any income from intellectual property rights is now subject to 24% tax under the Malaysian Income Tax Act (ITA) 1967.
3. Permission to deal with Malaysian residents and transact in Ringgit currency
Labuan entities can now conduct businesses with Malaysian residents and our currency, whereas these could only previously be done in Labuan, using a foreign currency with a non-resident or another Labuan entity. Prior to this amendment, Malaysian residents could claim full tax deductions on these payments to Labuan entities. Now, there are some restrictions on these deductions.
Types of Payment | Maximum Amount Deductible |
Interest Payment | 67% |
Lease Rental | 67% |
Other Payments | 3% |
General Reinsurance Premiums | 100% |
4. The introduction of new Economic Substance Rules (ESR)
Labuan entities are required to fulfil some criteria of the ESR in order to enjoy the respective tax rates.
5. Economic substance requirements
According to the new LBATA requirements, Labuan entities undertaking business activities are required to have a minimum number of employees and annual operating expenditures.
- Labuan holding companies engaging in purely equity holding activities do not require any full-time employees but a minimum annual expenditure of MYR 20,000*.
- Labuan holding companies engaging in non-pure equity holding activities require 1 full-time employee and a minimum annual expenditure of MYR 20,000*.
- Labuan companies that engage in legal, accounting and administrative services require 2 full-time employees and a minimum annual expenditure of MYR 50,000*.
*or equivalent in any foreign currency.
Note: What is a Pure Equity Holding Company vs a Non-Pure Equity Holding Company?
- Pure Equity Holding Company refers to a company that holds equity participations and mainly earns dividends and capital gains.
- Non-Pure Equity Holding Company refers to a company that holds various assets that earn different incomes, such as interests and dividends from external sources.
6. Changes in personal income tax exemption
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- 100% exemption on Non-Malaysian directors’ fees is extended until the year of assessment of 2025.
- Whereas those that are no longer continued, are: -
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Despite these changes, Labuan IBFC still continues to upkeep its reputation as one of the most attractive mid-shore jurisdictions for foreign companies who are interested in penetrating the Asian market.
Tricor Labuan is a full-fledged licensed Labuan Trust Company (License No. LT0034) with a highly experienced team of dedicated professionals handling license applications. We provide complete "one-stop" solutions through pre-assessment, planning, structuring and advisory on establishment for your Labuan set-up, ensuring that you receive bespoke services from us to meet your business needs as well as continuity in your operations.
Contact us now or drop us an enquiry form to start setting up your own Labuan entity. Tricor Labuan Team will be here to assist you.
Email: [email protected] | Phone: +603 2783 9191 (Labuan Division)
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