Revised Substance Regulations
New Labuan Business Activity Tax (Requirements for Labuan Business Activity Regulations 2018) introduced in 31 December 2018 in relation to the substantial activity requirements came into effect on 1 January 2019 in relation to the tax filing for Year Assessment 2020.
The key changes to the Labuan Tax Framework include the following:
u Removal of the RM20,000 tax election; Labuan entities are taxed at 3% of audited net profits; and
u Prescribed Labuan entities to fulfil substantial requirements to qualify for Labuan Business Activities Tax Act (LBATA)’s tax incentives by having
Minimum 2 full-time employees (FTE) and
Minimum RM50,000 annual operating expenditure (OPEX) to be spent in the Centre.
Full time employee means that the employee is employed by the Labuan entity to serve the entity in Labuan. This can be evidenced by, but not limited to, the employment contract, organisational chart of the Labuan office and etc.
Expenses that qualify as part of the annual operating expenditure in Labuan are expenses incurred by Labuan entities in Labuan island (e.g. invoices and receipts issued in Labuan). This includes defraying payments, professional and statutory fees e.g. salaries, lease rental, service providers’ fees, licence fees to Labuan FSA etc.
Pursuant to the Substance Regulations, the substance requirements policy is a “game-changer” to Labuan IBFC. Shifting away from paper structures, the scoped-in Labuan entities would need to have an operational office in Labuan to enjoy the LBATA’s preferential tax treatment.
Under the new regulations, Labuan entities are expected to have a physical office for the full-time employees. They would have dedicated physical office, e.g., dedicated entrance, office signage etc.
If you have any enquiries or need clarification, please contact Bestar RW William.