Labuan – Recent Developments

The Labuan tax regime has undergone a major revamp to be in line with Action 5 of the Base Erosion and Profit Shifting (BEPS) initiative. A summary of the key changes1 is as follows:

1. Labuan entities can now undertake transactions with Malaysian residents
2. There is no longer any restriction on transactions conducted in Ringgit Malaysia
3. However, the election to pay tax of RM20,000 for a year of assessment is no longer available
4. Substantial activity requirements must be met in order to be eligible for the preferential treatment under the Labuan Business Activity Tax Act 1990 (LBATA)
5. Income from intellectual property (e.g. royalty) will now be taxed under the Income Tax Act 1967 (ITA)

¹ (i), (ii), (iv) and (v) took effect from 1 January 2019.
(iii) took effect from the year of assessment 2020.

In addition, with effect from 1 January 2019, there is restriction on allowable expenditure incurred by residents in respect of transactions with Labuan entities. Based on a Circular issued by the Labuan Financial Services Authority (LFSA) dated 23 December 2019, there are changes to the non-deductibility (NR) rules, subject to the issuance of gazetted regulations.