New minimum requirements for Labuan companies to enjoy Labuan tax rates and limitation of tax deductions on payments to Labuan companies
1. New minimum requirements for Labuan companies
The Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 were issued on 31 December 2018 and came into operation on 1 January 2019. These set out a number of minimum requirements for Labuan companies.
Consequence of non-compliance
Failure to adhere to these minimum requirements will result in the Labuan company being deemed not to be carrying out a Labuan business activity. As a result, the company will be subject to higher tax rates as the Income Tax Act 1967 will apply, not the Labuan Business Activity Tax Act 1990.
New requirements specified
The requirements concern the minimum number of full- time employees and minimum amount of annual operating expenditure for numerous Labuan businesses as specified in the PDF.
2. Limitation of Tax Deductions on payments to Labuan companies
The 2019 Budget proposed that if a Malaysian resident made a payment to a Labuan company, 3% of that expenditure could be tax deductible.
The publication of the Income Tax (Deductions not allowed for payment made to Labuan company by resident) Rules 2018, on 31 December 2018, provided further guidance and clarification. These rules, as specified by the Minister of Finance, stated that 33% of the amount of interest and lease rental payments, and 97% of the amount of other payments are not allowed for deduction, effective 1 January 2019.
Pascal Brinkmann, LL.M. (Stellenbosch)