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The Labuan Investment Committee (“LIC”) has issued the LIC Pronouncement 3-2020 dated 11 March 2020 clarifying the following matters:

1. Substantial Activity Requirement for Pure Equity Holding Entities receiving Interest Income arising from Placement of Dividend Monies or Proceeds from Disposal of Shares

In respect of a Labuan entity that meets the criteria as a pure equity holding entity, the receipt of interest from the placing of dividend monies or proceeds from disposal of shares with financial institutions which do not constitute a “commercial activity” will still be regarded as a pure equity holding activity.

Based on the Revised Substantial Activity Requirements as previously approved by the Minister of Finance, 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 in Labuan of RM20,000, but need not comply with the requirement for a minimum number of full time employees. The above changes are subject to the release of the gazetted regulations.

2. Definition of Holding Company for Labuan Substantial Activity Requirements

The definition of holding company for Labuan substantial activity requirements is based on the Organisation for Economic Co-operation and Development’s Holding Company definition under the Base Erosion Profit Shifting Action 5 2015 Final Report on “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”. The holding company regime can be broadly divided into 2 categories:

(a) Companies that hold a variety of assets and earn different types of income (e.g. interest, rent and royalty); and

(b) Companies that hold equity participations and earn only dividends and capital gains.

A Labuan entity that undertakes an activity under (a) above, will be deemed to be undertaking a non-pure equity holding activity and is required to comply with the substantial activity requirements of having 1 full time employee and annual operating expenditure of RM20,000 in Labuan.  The “full time employee” for a non-pure equity holding entity can be an employee at any level, as long as the functions and job scopes are dedicated to serve the business operations of the Labuan non-pure holding entity.

Our earlier Tax Whiz on “Labuan Developments” and the LIC Pronouncement 3-2020 can be accessed via the above links.

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.

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