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News - Labuan Budget 2019 – key changes in the tax landscape

Labuan Budget 2019 – key changes in the tax landscape

Published on: Mar 20, 2019

Singapore and Hong Kong were not the only financial centres that announced their annual budgets recently. The Labuan Budget 2019 announcement, which came late last year, saw a number of changes to the Labuan tax regime (LBATA), which are in line with Malaysia’s desire to comply with prevailing international standards and to reduce Labuan’s use as a tax evasion destination.

One change is the abolishment of the option to pay tax at a flat rate. The option of paying a flat rate of MYRM 20,000 per year was abolished and will no longer be available for the Year of Assessment 2019 (payable in 2020). Previously, Labuan entities with a "Trading Activity" had the option to pay 3% tax on profit, or pay a flat rate of RM 20,000 per year. Now, the option has been removed and Labuan entities performing a "Trading Activity" will be automatically subject to tax at the rate of 3% on its net profits as reflected in its audited accounts.

Consequently, Labuan entities with a "Trading Activity" are now required to appoint an auditor and have their financial statements audited. That said, Labuan entities performing "Non-Trading Activities" continue to be exempt from tax and there is no requirement for such Labuan entities to maintain audited accounts.

Furthermore, new "economic substance" requirements have been put in place. Previously, the LBATA did not specifically require a Labuan entity to have economic substance. However, under this regulation, now Labuan entities undertaking a "Labuan Business Activity" will need to have "economic substance", such as an adequate number of full time employees and an adequate amount of annual operating expenditure.

If you need further information or assistance, please do not hesitate to contact Alpadis Group. Our Labuan office will be able to advise on your substance requirements and other matters and develop bespoke solutions to ensure you are aligned with existing regulatory and taxation needs.

Terminology

  • "Trading Activity" is defined to include banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a "Labuan non-trading activity".
  • "Non-Trading Activity" is defined to mean an activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties situated in Labuan by a Labuan entity on its own behalf.
  • A "Labuan Business Activity" is defined to include Trading and Non-Trading activities. Please note that the definition of Labuan Business Activity has changed to include Trading and Non-Trading activities carried out in or from Labuan not only in a foreign currency with non-residents of other Labuan entities but also in Malaysian ringgit and with Malaysian residents.