Located off the coast of Sabah in East Malaysia, Labuan was designated an international financial centre with a mid-shore jurisdiction in 1990 offering a wide range of business and investment structures facilitating cross-border transactions, business dealings and wealth management needs. These unique qualities offer sound options for regional businesses going global or global businesses looking at penetrating Asia’s thriving markets. In 2008, its name was changed to Labuan International Business and Financial Centre (Labuan IBFC).
The jurisdiction has moved beyond banking, capital markets, leasing and insurance to also include private company, partnerships, trusts, foundations and an international shipping registry, among others. There are two types of companies in Labuan trading and non-trading/holding, incorporated under the same law but with different taxes and audit requirements. But a recent sudden revision in the tax regulations have sent distress signals to the business community in Labuan. In this article, we will focus on these amendments and their impact on the Labuan entities.
But first let us understand the several factors that made Labuan IBFC attractive to the international business community.
Labuan IBFC’s jurisdiction adheres to international standards and it follows the best practices in financial services as set by the government. It includes the regulatory requirements established by the Organisation of Economic Co-operation and Development (OECD). A company listed under Labuan IBFC will be tax compliant as Malaysia has adopted OECD international standard of transparency.
Labuan IBFC implements a simple tax framework under the Labuan Business Activity Tax Act 1990, which covers Labuan business activity carried on by a Labuan entity in, from or through Labuan.
A unique 3% tax rate is charged on the yearly assessment of the net audited profits of the company carrying on a trading activity.
In the instance of a Labuan entity carrying on a non-trading activity, no tax will be applied for that assessment year. A Labuan non-trading activity is defined as activity relating to the holding of investments in securities, stocks, shares, loans, deposits or any other properties situated in Labuan and held by a Labuan entity on its own behalf while a Labuan trading activity includes banking, insurance, trading, management, licensing, shipping operations or any other activity.
Labuan company registration if properly structured, is a legitimate tax-exempt way of conducting business in the areas of offshore banking, insurance, trust and fund management and investment holding. Furthermore, as part of Malaysia, a Labuan company can access the double tax treaties Malaysia has signed with a range of countries.
In November 2018, the Finance Minister announced several revisions in the 2019 budget.
While the list provided by this regulation seems mostly affecting Labuan licensed entities, the definition of “Labuan business activity” is broad and invite the following questions:
Following the recent amendments in the Labuan Tax Legislation, the relevant authorities have issued and put forward the following clarifications.
All Labuan Entities will be subjected to a tax rate of 24% for Assessment Year 2020 (earnings from January 1st to December 31st, 2019) except for the following:
To read more on this, please click on the link: https://www.labuanibfc.com/
These changes would impact the more general trading business that are not listed on the regulation such as eCommerce, consultancy services, import /export, etc.
Since these activities are not in the list requiring the substance:
The figure below provides a glimpse into how the tax numbers are going to change drastically if this new regulation is ultimately implemented:
In light of this situation, the Association of Labuan Trust Companies have appealed against the implementation of this revised tax regulation, but as of now it is unknown what the government is going to decide. So, we can only wait and watch.
But if this change is ultimately implemented, the Labuan jurisdiction will lose its best feature for all international entrepreneurs and digital nomads.
So, what are the options for the international businesses looking to incorporate a mid-shore company with a more favourable tax rate?
It is advisable to relocate and incorporate your business in the most suitable jurisdiction with the best option in terms of lower tax rates, ease of doing business, the currency for transactions, banking options, etc.
According to a recent survey, the best countries currently to incorporate a remote based company are Singapore, Malta, Andorra, Cyprus, Hong Kong, Estonia among few others.
Each of these jurisdictions will have its own laws, tax requirements, wealth building and management, regulatory compliances, etc. Hence it is absolutely vital to rely on experts who can handle this and educate you on how to go about it. They can find the best option for you which grants you the lowest tax rates and a more stable and trustworthy business environment so that you can maximise your income without any added complexities to your business.
At LinkFacility, our team of experts can assist you with tailor-made end to end solutions for incorporating your business.
Please click on the following links for further reading on this subject:
Nima is the legal affairs expert and co-founder of LinkFacility. Her decade long experience as a banker for the Credit Agricole in Djibouti, East Africa, helped Nima accrue invaluable insights about the challenges in emerging economies related to business set-up, commercial and jurisdictional risks. At LinkFacility, she shares her indelible know-how of the world of global entrepreneurship with a solution-driven mindset, analytical attitude and a globalist outlook. Having lived, studied and worked in 6 countries across 4 continents, she blends her solid financial background with legal insights from both emerging and developed markets to tailor make solutions for businesses from an international standpoint. While formulating entrepreneurship solutions, Nima approaches business risk management with due diligence, rigorous compliance standards and a thorough knowledge of the regulatory framework of the target market. Nima is a double degree Honours graduate of Bachelor of Law (L.LL) and a Juris Doctor (J.D.) with a specialisation in International Law from the University of Ottawa, Canada.
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