2021 Labuan Tax Regulations in Full Implementation by the Government of Malaysia


Just recently, the Government of Malaysia issued Labuan Business Activity Tax Requirements Regulations 2021 to overtake the previous gazette of Labuan Business Activity Tax Regulations 2018. Other Trading Entity (OTE) has been reinstated as Code 23 and enjoy the tax benefits under Labuan Business Activity Tax Act (LBATA). Such can enjoy a 3% preferential tax rate under LBATA (if fulfilled the ESR requirements).

Interested parties can find more information at https://offshorecompanyspecialist.com/labuan-company-set-up-formation/

The new regulations have indicated the ruling commence data with the recent key highlights and changes, including the addition of OTE under Item 20 of First Schedule in the gazette and the introduction of control and management conditions for Labuan entities performing on pure equity holding activities.

The establishment of the economic substance requirements under the Labuan tax rule in 2019 came with many uncertainties and ambiguities that subsequent guidelines and legislation aimed to clarify.

That warn Labuan tax developments like the taxation of Labuan entities who carry out other trading activities, the updated substance requirements for equity holding companies, stamp duty implications for instruments relating to a Labuan entity, and the newest amendments to legislation through the Labuan Business Activity (Requirements for Labuan Business Activity) Tax Regulations 2021 and Income Tax (Exemption) (No.11) Order 2021.

The new 2021 regulations further amend the guidelines about the economic substance requirements for Labuan entities. Therefore, effectively revoking and replacing the Labuan Business Activity Tax Regulations 2018.

To this day forward, there will be Reduced Economic Substance Requirements for Labuan entities commencing pure equity holding activities. Previously, the 2018 Regulations had obliged all Labuan holding firms, including all Labuan PEH Entities, to have at least two full-time workers in Labuan and an annual operating expenditure of RM 50,000 in Labuan.

Under the new 2021 Regulations, every Labuan PEH Entity is exempted from that requirement to have full-time workers in the region. Further, the minimum OPEX needed in Labuan is minimized from RM 50,000 to RM 20,000.

There will also be New Management and Control Requirements for PEH Entities that came into effect from January 1, 2021. Even though Labuan PEH Entities are no longer needed to have full-time workers in the region, the Labuan Financial Services Authority has published a directive obliging all such entities to guarantee that management and control are practiced.

Hence, the new 2021 Regulations laid out the particular criteria to facilitate management and control in Labuan.

Considering the constant modifications in policies and legislation relating to the Labuan tax regime, it is essential for Labuan entities to continuously assess their activities over the corresponding requirements from time to time. Also, a detailed and thorough evaluation of their current holding transactions and structures is encouraged to ensure the structure stays compliant with the current laws and prevent any unfavourable Malaysian tax consequences.

MCS Corporate Services Inc. is well-placed to help foreign business owners navigate the complicated Labuan tax landscape. For further details and to discuss what those developments might mean, please contact Dr. Steven by calling him at +6018 777 7938 or visiting their website.

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