Labuan — How can you benefit from this regime?

MARCH 27 — The mention of Labuan brings images of an island getaway with serene beaches and a duty-free paradise.

But unbeknownst to many, Labuan is also a financial centre established since 1990 to cater to the international business and financial sectors.

A comprehensive set of legislations have been enacted covering financial services and securities (both conventional and Islamic), foundations, trusts and limited liability partnerships, as well as the Labuan Business Activity Tax Act 1990 which governs the taxation of Labuan entities.

Over the years, the promoted activities in Labuan have evolved and at present, Labuan focuses on these core areas: holding companies, captive insurance, leasing, Islamic financing structures, public and private funds, foundations and wealth management.

The most appealing feature of the Labuan tax regime is the attractive tax of 3 per cent on net audited profits, provided substance requirements (prescribed minimum headcount and operational expenditure in Labuan) are met throughout the relevant basis period.

For investment holding companies, income from investments is exempted from tax, subject to meeting the prescribed substance requirements. However, the pitfall to note is that, where there is a failure in meeting the prescribed substance requirements, the Labuan entity will be taxed at 24 per cent on net audited profits.

Besides the favourable tax rate, Labuan entities also enjoy stamp duty and withholding tax exemptions as well as liberal exchange controls. The low cost of doing business in Labuan is another plus point.

A revamp of the Labuan tax regime was made in 2019 as a measure to comply with the initiatives by the Organisation for Economic Co-operation and Development (OECD) to combat Harmful Tax Practices.

This resulted in the narrowing of the scope of business activities qualifying for the 3 per cent tax, as well as the introduction of substance requirements in Labuan. Eligible activities comprise regulated financial services and other licensed activities, besides investment holding.

Recently, the list of eligible activities was expanded to include treasury services such as intra-group financing/factoring, liquidity and cash management as well as in-house investment/financial advisory services. A company management license issued by the Labuan Financial Services Authority is required to undertake these activities.

The Labuan regime can also be used for wealth management and succession planning purposes.

A Labuan foundation usually functions as an investment holding entity for assets endowed in the foundation by the founder and may comprise assets in or outside Malaysia.

An incorporated Labuan foundation is a separate legal entity from the founder and may exist in perpetuity. This is contrasted against a Labuan trust structure, where the trust assets are held in trust by the trustee for a definite lifespan.

For wealth preservation and succession, a Labuan foundation can be designed to carry on the wishes and intentions of the founder. Assets endowed in a foundation can be passed on to the next generation without the need of a probate which may be time consuming and subject to legal tussles. Being a separate legal entity, the endowed assets are legally owned by the foundation, and is protected from any lawsuits against the founder or family disputes.

For others, a Labuan foundation can be used as a vehicle to further charitable causes. With the ability to hold Malaysia and non-Malaysian assets in currencies other than Malaysian Ringgit, a Labuan foundation is ideal for charitable causes within and outside Malaysia.

The founder can delegate the power to administer the foundation to an appointed council and a management team so that the charitable activities can be managed by appointed professionals.

Once the foundation’s objectives are met, the foundation can be dissolved, and any remaining assets can thereafter be distributed to the beneficiaries.

A clear understanding of the Labuan tax regime is necessary to fully benefit from the available tax benefits.

There are certain requirements that need to be fulfilled whilst certain income is excluded from the Labuan tax regime, for example, income from real estate located in Malaysia (with the exception of those located in Labuan) and intellectual property income.

It is advisable to seek advice from tax professionals before embarking on any Labuan structure to ensure proper planning and implementation to mitigate any unforeseen tax risks.


Source: Malay Mail

About the author:

Mah Wen Jian
Managing Consultant of Tricor Taxand Sdn Bhd

For more information, please contact:

Celine See
Tricor Services (Malaysia) Sdn Bhd
Director, Business Development

Tel: +6 03 2783 9191
Email: [email protected]

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