Latest Developments Relating to Labuan Tax Regime Latest Developments Relating to Labuan Tax Regime Latest Developments Relating to Labuan Tax Regime

The Labuan Business Activity Tax (Requirements for Labuan Business Activity) 2018 (Amendment) Regulations 2020 ("Amendment Regulations") have been gazetted on 24 December 2020, to revise the substantial activity requirements for Labuan entities listed in the Labuan Business Activity Tax (Requirements for Labuan Business Activity) 2018 ("Labuan Regulations"). The Amendment Regulations are deemed to have come into operation on 1 January 2019.

The revised substantial activity requirements are consistent with the Labuan Investment Committee ("LIC")'s decisions set out in its "Pronouncement 2-2019" dated 11 December 2019 and the "Clarification to Pronouncement 2-2019" dated 20 December 2019.

In addition to the revisions, the other notable points in the Amendment Regulations are as follows:

1. The substantial activity requirements should be complied with in respect of a basis period for a year of assessment ("YA");
2. Insertion of deemed related company provisions; and
3. Removal of Labuan International Commodity Trading Companies ("LITC") from the original list in the Labuan Regulations.

The removal of LITC from the original list suggests that a revision of substantial requirements for LITC proposed earlier would be covered in a separate Order / Regulations although these have yet to be issued.

The LFSA's "Circular on Addition to the Revised Substance Regulations" dated 21 January 2020 proposes that the list in the Labuan Regulations be amended to include "other trading activity". The other activities covered would be administrative, accounting, and legal services including backroom processing, payroll services, talent management, agency services, insolvency related services and management services. This proposal is not included in the Amendment Regulations.

The Income Tax (Deductions Not Allowed for Payment Made to Labuan Company by Resident) Rules 2018 (Amendment) 2020 ("Amendment Rules") has been gazetted on 24 December 2020. It gives effect to the proposal set out in the LFSA's Circular dated 23 December 2019 in respect of the revision to the ND rates for interest and lease rental payments made to a Labuan Company (as defined).

The revised ND rates are as follows:

As the revision of ND rates is deemed to have come into operation on 1 January 2019, a Company which has filed its Tax Returns for YA 2019 and YA 2020 may revise its tax computations and submit amended Tax Returns in order to apply the revised ND rates. The revision must be made within five years after the end of the year the Amendment Rules are published in the Gazette i.e. by 31 December 2025.

In addition, the Amendment Rules define "Labuan Company" as a Labuan entity referred to in paragraph 2B(1)(a) of the Labuan Business Activity Tax Act 1990. This is in line with the Finance Act 2020 in respect of amendment made to Section 39(1)(r) of the Income Tax Act 1967. This amendment comes into operation on 1 January 2021.

The Amendment Regulations, Labuan Regulations, Amendment Rules and the relevant pronouncements and circulars can be accessed via the above links.

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.

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.

Tai Lai Kok
Executive Director
Head of Tax 

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