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As you are aware, the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 (“Regulations”) were gazetted on 31 December 2018 and introduced new requirements for Labuan entities which are subjected to the Labuan tax regime.  These include having an adequate number of full time employees in Malaysia and an adequate amount of annual operating expenditure in Malaysia.

Consequently, the Labuan Investment Committee (“LIC”), which comprises representatives of the Ministry of Finance (“MOF”), Labuan Financial Services Authority (“LFSA”) and the Malaysian Inland Revenue Board (“MIRB”), was formed in 2019 to recommend policies on substantial activity requirements and monitor the enforcement of such policies.  Following various implementation issues in relation to the new Labuan tax regime, the LIC has decided to revise the conditions of the Labuan substantial activity requirements as approved by the MOF.

In addition, amendments to the non-deductibility rates (“ND Rates”) in the Income Tax (Deductions Not Allowed for Payment Made to Labuan Company by Resident) Rules 2018 (“ND Rules”) in respect of payments made to Labuan companies are also currently underway.

The above changes are deemed to have come into operation on 1 January 2019, subject to the release of the gazetted regulations/rules.

We have summarised the salient points of the above Labuan developments, as follows:-

1.      Revised Substantial Activity Requirements

(a)    Moderating the existing substantial activity requirements (i.e. the minimum number of full time employees and annual operating expenditure required) for the following Labuan entities:-

(i)     Labuan banks and investment banks including Labuan Islamic banks and investment banks;

(ii)    Labuan (re)insurers including (re)takaful operators;

(iii)   Labuan captive insurers or captive takaful;

(iv)   Labuan insurance brokers or takaful brokers;

(v)    Labuan leasing company or Labuan Islamic leasing company; and

(vi)   Holding company i.e. a Labuan entity that undertakes activities other than pure equity holding activities.

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(b)    Expansion of the list of Labuan entities that are subjected to substantial activity requirements to include Labuan entities that undertake pure equity holding activities 1 and Labuan entities that carry out administrative, accounting and legal services including backroom processing, payroll services, talent management, agency services, insolvency related services and management services;

1  Labuan entities that undertake pure equity holding activities must comply with the requirements for management and control as well as the minimum annual operating expenditure, but need not comply with the requirement for a minimum number of full time employees. Specific rules will be issued in relation to these entities.

(c)    Labuan entities that are dormant, struck off, in the process of winding up or under liquidation which do not derive any source of income are not required to comply with the substantial activity requirements and will also be exempted from having their accounts audited for the purpose of fulfilling the Labuan Business Activity Tax Act 1990 (“LBATA”)’s requirements; and

2.      Revision to the ND Rules for Payments Made to Labuan Companies

The LFSA has released a circular dated 23 December 2019 detailing revised ND rates, as shown below:

No.

Type of Payment

ND Rates (% of the amount of payment)

Current

Revised

 

1

Interest payments

33

25 (including all payments relating to financing e.g. commission, facility & upfront fees)

 

2

Lease rentals

33

25

 

3

Other payments

97

97

 

The non-application of the ND Rules to payments made by a resident general insurer to a Labuan (re)insurer pursuant to Sections 60(5)(b)(ii) and 60(7) of the Income Tax Act, 1967 (“ITA”) shall remain.  In addition, the amended ND Rules will not be applicable to transactions between:

  1. A Labuan International Commodity Trading Company and Malaysian residents;
  2. Labuan entities that have opted to pay tax under the ITA and Malaysian residents; and
  3. Labuan entities that are paying taxes under the ITA and Labuan entities that are paying taxes under the LBATA.

In light of the aforementioned Regulations, we have summarised the tax treatment of a Labuan entity with effect from Year of Assessment 2020 below:-

tax

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Should you have any questions or require further clarification, please do not hesitate to contact any of our Executive Directors, Directors, Associate Directors or Managers whom you are accustomed to dealing with or who are responsible for the tax affairs of your organisation at the following telephone numbers for respective offices:

For more information on our core service offerings, please contact:

Petaling Jaya Office

Tai Lai Kok
Executive Director –
Head of Tax and Head of Corporate Tax
ltai1@kpmg.com.my
+ 603 7721 7020

Long Yen Ping
Executive Director –
Head of Global Mobility Services yenpinglong@kpmg.com.my
+ 603 7721 7018

Bob Kee
Executive Director –
Head of Transfer Pricing
bkee@kpmg.com.my
+ 603 7721 7029

Ng Sue Lynn
Executive Director –
Head of Indirect Tax
suelynnng@kpmg.com.my
+ 603 7721 7271

Soh Lian Seng
Executive Director –
Head of Tax Risk Management
lsoh@kpmg.com.my
+ 603 7721 7019

Nicholas Crist
Executive Director –
Corporate Tax
nicholascrist@kpmg.com.my
+ 603 7721 7022

Dato’ Leanne Koh
Executive Director – 
Corporate Tax
leannekoh@kpmg.com.my
+ 603 7721 7026

Neoh Beng Guan
Executive Director – 
Corporate Tax
bneoh@kpmg.com.my
+ 603 7721 7025

Ong Guan Heng
Executive Director – 
Corporate Tax
guanhengong@kpmg.com.my
+ 603 7721 7027

Chang Mei Seen
Executive Director – 
Transfer Pricing
meiseenchang@kpmg.com.my
+ 603 7721 7028

Ivan Goh
Executive Director – 
Transfer Pricing
ivangoh@kpmg.com.my
+ 603 7721 7012

 

 

 

Evelyn Lee
Executive Director –
Penang Tax
evewflee@kpmg.com.my
+604 238 2288 (ext. 312)

Regina Lau
Executive Director –
Kuching Tax
reglau@kpmg.com.my
+6082 268 308 (ext. 2188)

Titus Tseu
Executive Director –
Kota Kinabalu Tax
titustseu@kpmg.com.my
+6088 363 020 (ext. 2822)

Ng Fie Lih
Executive Director –
Johor Bahru Tax
flng@kpmg.com.my
+607 266 2213 (ext. 2514)

Crystal Chuah Yoke Chin
Tax Manager –
Ipoh Tax
ycchuah@kpmg.com.my
+605 253 1188 (ext. 320)