Labuan is an established offshore financial center that attracts foreign investors through a taxation regime that offers clear advantages for certain types of activities. One of the tax benefits also refer to an exemption from the withholding tax under certain cases. Below, our Labuan company formation agents list the main provisions regarding the Labuan withholding tax and also give you more information about the tax regime in general.
If you have further questions, or are in need of specialized assistance to open an offshore company in Labuan, please reach out to our agents for personalized assistance.
What is the treatment of the Labuan withholding tax?
One of the main advantages concerning taxation in this financial center is the fact that withholding tax is only applies in certain cases. Our team lists some of the most important aspects concerning this tax below:
- – the Labuan withholding tax is only subject to those who are not Malaysian residents;
- – in addition to this, the withholding tax on dividends and interest payments made to non-resident companies is subject to a 15% rate;
- – the withholding tax on royalties is subject to a 10% rate;
- – Malaysia has signed double tax agreements (that can impact the manner in which the withholding tax applies) with more than 70 countries worldwide.
Investors interested in knowing more about the double tax avoidance treaties signed by Labuan can reach out to our specialists for more detailed information on how these apply to different types of income, including dividend payments. As a federal territory of Malaysia, Labuan has access to most of the double tax avoidance treaties signed by Malaysia (over 70), however, some of the signatory states do not recognize that Labuan is part of the same treaty network, given the fact that it is an international business and financial center. These countries are the United Kingdom, Germany, the Netherlands, Spain, Sweden, Luxembourg, Australia, Chile, Indonesia, India, Japan, Seychelles, South Africa and South Korea. Our team can give you details about the Labuan withholding tax and how it applies if you are an investor from one of these countries.
What is the applicable tax regime in Labuan?
Labuan is a federal territory of Malaysia located in the South China Sea in the east of the mainland. Investors willing to open a Labuan offshore company should know that Labuan started implementing a new tax framework, which brought changes to a number of issues, such as the elimination of a previous tax ceiling. We summarize some of the most important changes below:
- No more flat tax rate: before the implementation of the changes, companies in Labuan engaged in trading activities were able to select to pay a flat tax; now, the tax rate is calculated at 3% of the net profits derived from the activities in Labuan;
- Income from intellectual property rights is subject to tax, therefore, the rate is 24%;
- Business entities can no longer claim full tax deductions for payments made to a Labuan legal entity, they only have the option to claim partial deductions according to the type of payment (for example, 67% for lease rentals and interest payments and 3% for other types of payments).
The Labuan withholding tax regime is of interest, however, investors who choose to work with our team of company formation specialists can find out more about the general tax regime applicable in 2021.
What are the main Labuan business activities?
Companies in Labuan are categorized into two types: trading and non-trading companies. The first type is involved in activities such as trading and banking, management and shipping and all other business activities that are not considered non-trading ones. Companies that are not involved in commercial activities, instead are concerned with holding activities or investments in shares, stocks or securities are considered non-trading companies.
The most important distinction between these activities is that a Labuan non-trading activity is subject to zero percent tax while a trading company is subject to the aforementioned 3% tax on net profits.
Other conditions for companies in Labuan
The latest substance requirements for Labuan companies also refer to the minimum number of full-time employees as well as annual spending. For example, only Labuan holding companies that are involved in purely equity activities are exempted from having to have full-time employees. Other companies need to have one full-time employee and a minimum annual expenditure of 20,000 ringgit.
If you wish to know more about the taxation regime, including the Labuan withholding tax, please contact our offshore company formation specialists.