The Labuan business activity comprises trading and non-trading trading activities.
Section 2B of the Labuan Business Activity Tax Act 1990 (LBATA) provides that a Labuan entity carrying on a Labuan business activity must comply with specific substance requirements to benefit from the 3% preferential tax rate:-
- To employ an adequate number (ranging from two to four, depending on the type of activity) of full-time employees in Labuan;
- To incur an adequate amount of annual operating expenditure (ranging from RM50,000 to RM3 million depending on the type of activity) in Labuan; and
- Any condition about control and management in Labuan (in relation to Labuan non-trading activity only, effective from 1 January 2021).
The Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 [P.U. (A) 423/2021], which has revoked Regulations 2018, specify the minimum number of full-time employees and annual operating expenditure in respect of a Labuan entity carrying on a Labuan trading activity and Labuan non-trading activity in Schedule 1 and Schedule 2, respectively.
The required minimum number of full-time employees and annual operating expenditures for the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 remain the same compared to Regulations 2018; the only change is the addition of a new category (item 20) for Labuan entities that engage in certain business activities, which are detailed below:
- administrative services
- accounting services
- legal services
- backroom processing services
- payroll services
- talent management services
- agency services
- insolvency related services
- management services other than Labuan company management.
These requirements under Regulations 2021 come into effect retrospectively from 1 January 2019.
Labuan entities that do not meet the substance requirements are taxed at 24% of their chargeable profits for the YA.
According to section 2B(1B), the term "chargeable profits" is defined as "shall be net profits as reflected in the audited accounts in respect of such Labuan business activity..." This would include capital gains and other forms of income that would otherwise be exempt from taxation under the ITA, such as foreign sourced income, dividends, unrealised profits or gains, etc. [Such businesses might, in theory, opt to be taxed according to the ITA rather than the LBATA, as this is permitted by section 3A of the LBATA]
Guidelines on Prescribed Labuan Business Activities for Non-Licensed Trading Entities in the Labuan International Business and Financial Centre (LIBFC)
In light of those above, the Labuan Financial Services Authority (LFSA) issued, on the 24th of January 2022, the Guidelines on Prescribed Labuan Business Activities for Non-Licensed Trading Entities in LIBFC.
These Guidelines are issued under section 4A of the Labuan Financial Services Authority Act 1996 (LFSAA) to clarify the Labuan business activities as prescribed in item 20 of the First Schedule of the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 [P.U.(A) 423/2021] (Regulation).
Any Labuan financial institution defined in Section 2(1) of the Labuan Financial Services Authority Act 1996 that engages in any Labuan business activity prescribed in Item 20 of the First Schedule of the Regulations is subject to the Guidelines.
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