Economic Substance requirements included in Labuan tax returns

Companies in Labuan will be required to file their corporate tax returns by the end of July (extended from end of May due to the COVID-19 pandemic).

Within the tax forms will be additional declarations that confirm whether or not the company is adhering to Economic Substance requirements.

Economic Substance is the extent to which a company or organisation has operational and economic activity in a country. For example, if the company has an office, transactions, employees, local expenses and other infrastructure then it is deemed to have substance.

Following recommendations from the Organisation for Economic Co-operation and Development (OECD) on Base Erosion and Profit Shifting (BEPS), Economic Substance has increased in importance and many jurisdictions have had to take steps to ensure companies adhere to minimum standards.

If firms fail to show adequate Economic Substance, they may not be granted a license to operate in that jurisdiction, or their license will not be renewed. In Labuan, however, substance requirements are not usually linked to the license, but only to the tax payable.

Substance requirements for Labuan depend on the activity of the Labuan entity. There are specific requirements for licensed entities such as banks, insurance brokers, and fund managers etc, and requirements for unlicensed activities such as a “holding activity” or “pure holding activity” as well as certain “trading activities”. In Labuan, the requirements are focused on the activity of every entity, and all types of entities (companies, foundations, partnerships, trusts etc.) are treated equally.

Those that do not show sufficient economic substance will be taxed at a rate of 24% (as opposed to the Labuan rate which stands at 3%, or no tax for entities with a “non-trading activity”). Importantly, though, fund managers and certain other licensed entities that do not show economic substance, while they will be taxed at a higher rate, will not lose their licence, unlike other jurisdictions.

In Labuan the declaration on whether an entity has complied with the substance requirements or not has now been included in the updated tax returns for Labuan entities. There is no separate reporting on substance.

For more information on Economic Substance and the filing of tax returns, contact Alpadis Group