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VAT in Labuan

VAT in Labuan

VAT in Labuan, or the sales and service tax (SST) does not apply in the same manner in which it does in Malaysia, as this Federal Territory is subject to a preferential taxation regime. In fact, this regime is one of the main reasons why investors are interested in Labuan offshore company formation.

In Labuan, the SST only applies for some types of activities, namely the ones related to the imports in the oil and gas sector. Companies here have access to a exemption policy from the service tax on the services they import in Labuan (subject to certain conditions and limitations, as described below by our agents).

The main tax advantages for investors who choose to open a company in Labuan include a low, 3% tax rate applicable to income derived from trading activities. This means that companies that engage in non-trading activities, such as holdign companies, are not subject to the tax at all. Moreover, as described in this article, the sales and services tax is not a concern for investors, whether they open a trading or a non-trading company in Labuan.

Information about the tax structure in Labuan, an important offshore jurisdiction, can be offered by our team of Labuan company formation agents.

Is the SST applicable in Labuan?

Just like most important jurisdictions worldwide, Labuan has a preferential tax structure, meaning that there are no taxes imposed for Labuan companies. The SST in Malaysia does not apply in Labuan and it does not disturb the offshore activities in this province. 

Investors who wish to open a company in Labuan should note that the SST is applicable only to the import of petroleum. This is an important distinction as companies involved in all other activities are not subject to this sales and service tax.

A special exemption policy exempts qualifying Labuan companies from the service tax on the services they import here. The companies that benefit from this are financial service providers and trust and holding companies incorporated in Labuan. The exemption under the law apply to imported taxable services such as accounting, IT services, management services or consulting services, which was valid from 1 September 2019 to 31 August 2020. After this period, companies in Labuan will need to pay the tax on imported taxable services.

One of our agents can provide more details on the SST Treatment in Designated Areas.

What is the SST?

The sales tax in Malaysia is a type of tax that is levied on goods imported into the country that are subject to this regime as well as to goods that are manufactured in the country by a taxable entity. This tax is not charged on the goods that are subject to an express exemption. Also, certain manufacturing activities are subject to exemptions under the orders from the Ministry of Finance. It is important to note that the Government only collects the sales tax at the level of the manufacturer.

The service tax is applied to taxable services offered in Malaysia by a registered taxable person. It is not imposed on imported services and registration is subject to the taxpayer having exceeded a certain threshold in terms of the value of taxable services he has provided in 12 months. Any taxable person who offers certain taxable services is required to have special licenses, under the Service Tax Act. These are for food and beverage businesses, for hotels and clubs, gaming activities, legal and accounting activities, and many others. Companies in Labuan are not necessarily subject to the same licensing requirements. Interested taxpayers can reach out to our agents for more details.

For the purpose of the sales and service tax, a taxable person or entity is described in the following manner:

  • – a person who manufactures taxable goods;
  • – liable to register according to the threshold: 500,000 RMN in case of manufacturers and subs-contractors.
  • – registered with the tax authorities under the Sales Tax Law either mandatory or voluntary.

One of our Labuan company formation agents can provide investors with more information on the mandatory and voluntary registration for this tax. This registration may be of interest to Labuan companies involved in certain types of activities. You can reach out to our agents for more details.

Foreigners interested in setting up a Labuan trust company and the taxes involved are recommended to talk to one of our advisors and ask for information in this matter. We can also provide details about the regime applicable to other investment vehicles in Labuan.

What are the SST rates in Malaysia in 2024?

The standard service tax in Malaysia is 6% and the rates for the sales tax are 10% or 5%. There are certain categories of goods that are exempt from this tax and among these we can mention unprocessed food and vegetables, live animals, certain types of machinery, antibiotics, some chemicals and some materials used for the production of goods.

Under the applicable legislation, the following individuals are exempted from the sales tax:

  1. Schedule A: these are local authorities, inland clearance depots or duty-free shops, among others.
  2. Schedule B: the manufacturers of certain non-taxable goods; they are exempt from this tax on the purchase of raw materials, components, and packages used in the manufacturing activities.
  3. Schedule C: registered manufacturers who are exempt from tax on the purchase of raw materials and components used for the manufacturing of the taxable foods. 

Investors who wish to open a company in Labuan in 2024 and need to better understand how the sales tax and the services tax are applied can reach out to us for more details. We can help you with additional information on the types of services that fall under the scope pf the service tax and the applicable exemptions. Below, you can read more about taxation in general.

Additional information about taxation in Labuan 

Labuan has a different, preferential taxation regime compared to Malaysia. As already mentioned, the SST does not apply to most of the companies and it is not applicable to a category of businesses that are of the highest interest to foreign investors: the Labuan offshore company. However, certain issues are to be taken into consideration about the applicable taxation framework in this Federal Territory. Below, our agents highlight the main tax details:

  • – 3%: this is the corporate tax rate in Labuan, as a percentage of audited net profit; the flat rate fee for companies had been abolished.
  • – 33%: this is the non-deductible rate for interest payment and lease rentals.
  • – 97%: this is the non-deductible rate for other types of expenses.
  • – 50%: this is the tax exemption in the case of foreign staff occupying managerial positions. 
  • – exemption: in case of the withholding tax and stamp duty. 

Another important issue to be noted about taxation benefits in Labuan is that companies may obtain a certificate of residence in order to enjoy the provisions of the double taxation agreements. 

Labuan maintains its duty-free status and companies operating here enjoy more cost-effectiveness compared to operating from Malaysia. 

Understanding the taxation principles in both Malaysia and Labuan, as its Federal territory, are important for foreign investors who are interested in doing business in the region.

Doing business in Labuan statistics

Labuan is a popular jurisdiction for investors who are interested in setting up financial services companies. This sector is a well-developed one and investors enjoy both a good business regime and environment easy access to the Malaysian market as well as other surrounding areas.

Companies in the financial sector are licensed. Below, we present a set of statistical data for the year 2018, issued by the Financial Services Authority in Labuan:

– 42: the number of licenses issued for reinsurance companies in the second quarter of the year;

– 9: licenses issued for life insurance for Labuan companies in the second quarter;

– 13: licenses for general insurance issued for companies in Labuan in Q2;

– 3: number of licenses issued both in Q1 and Q2 2018 for insurance managers.

Businessmen who want to invest in the insurance, reinsurance or banking industries in 2024 must know that by mid 2023 there were a total of 70 banking institutions operating in Labuan. The reinsurance sector has also rapidly expanded compared to the data for 2018, as, by mid 2023, there were 237 companies operating as reinsurance providers.

A reason to invest in the financial sector in Labuan in 2024 is that the region has some of the best credentials, when comparing the total number of businesses, licensed companies, and assets under management held by such businesses. In the Asia-Pacific region, Labuan stands as the 3rd most attractive country, after Singapore and Hong Kong.

It stands out as the main destination for reinsurance companies, as the country had, by mid 2023, 230 companies, compared to Singapore (180) and Hong Kong (163).

If you would like to know more about the taxes in Malaysia or if you would like to register an offshore in Labuan, please feel free to contact our team of Labuan company formation agents.

Please mind that, with concern to the taxation of businesses, the Labuan tax authorities have enabled new regulations related to the tax regime of dormant companies. If you own a company that is dormant you should know the tax rules applied in 2024.

The law refers to Labuan dormant companies which are regulated under the Labuan Business Activity Tax Act 1990. According to the new regulations, a dormant company in 2024 must have one of the following 3 basic characteristics.

The 1st is to not have any business operations since the date of incorporation, the 2nd one is to have had operations at some point but in the present moment (2024), the company is no longer active, and the 3rd rule is to not have significant accounting transactions in the financial year before the change of ownership.