The Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021
[P.U.(A) 423/2021] (“the New Regulations
”) were gazetted on 22 November 2021 and are deemed to have come into operation on 1 January 2019
, with the exception of regulation 3 (discussed below) which is deemed to have come into operation on 1 January 2021.
The New Regulations revoke the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018
[P.U.(A) 392/2018] as amended by the Labuan Business Activity Tax (Requirements for Labuan Business Activity) 2018 (Amendment) Regulations 2020
[P.U.(A) 375/2020)] (collectively “the Revoked Regulations
As in the case of the Revoked Regulations, the New Regulations set out the requirements relating to the minimum amount of annual operating expenditure in Labuan and the minimum number of full time employees in Labuan that have to be fulfilled by a Labuan entity in order to be subject to a tax rate of 3% for a Labuan trading activity1
or 0% for a Labuan non-trading activity2
under the Labuan Business Activity Tax Act 1990 (“the Act
Also as in the case of the Revoked Regulations, if a Labuan entity does not fulfil the minimum operating expenditure or the minimum employment requirements specified in the New Regulations for a basis period for a year of assessment, the Labuan entity will be subject to tax at the rate of 24% of its chargeable profits for that year of assessment under the Act.3
The New Regulations are substantially similar to the Revoked Regulations save in the following respects:
1. Regulation 3
Regulation 3 of the New Regulations, inter alia
, requires a Labuan entity that undertakes pure equity holding activities4
to comply with the following in relation to its control and management in Labuan:
(a) a meeting of its board of directors is to be convened in Labuan at least once a year;
(b) its registered office is to be situated in Labuan;
(c) its secretary appointed under the Act is to be resident in Labuan; and
(d) its accounting and business records including the minutes of meeting of its board of directors are to be kept in Labuan.
2. Changes to Labuan business activities
Unlike the Revoked Regulations which has only one Schedule that sets out the minimum employment and the minimum annual operating expenditure requirements in relation to a Labuan entity that carries on a Labuan business activity (i.e. trading or non-trading), the New Regulations have two Schedules - the First Schedule which sets out the aforesaid requirements in relation to a Labuan entity carrying on a Labuan trading activity
, and the Second Schedule which sets out the aforesaid requirements in relation to a Labuan entity carrying on a Labuan non-trading activity
The business activities under the New Regulations are the same as those under the Revoked Regulations except
that nine types of business activities, namely administrative services, accounting services, legal services, backroom processing services, payroll services, talent management services, agency services, insolvency-related services and management services other than that of a Labuan management company under item 17 of the First Schedule of the New Regulations, are now required to have at least two full time employees in Labuan and to have a minimum annual expenditure in Labuan of RM50,000 under item 20 of the First Schedule of the New Regulations. The business activities under this item 20 were not specifically provided for under the Revoked Regulations.
3. Related companies
The provisions that define related companies for the purposes set out in the First Schedule and the Second Schedule of the New Regulations that were previously included in the Schedule of the Revoked Regulations are now set out as regulation 4 of the New Regulations. The provisions remain the same as in the Revoked Regulations and provide as follows:
(a) a company shall be deemed to be related to another company if any of the criteria set out in Section 4 of the Labuan Companies Act 1990
Sections 4(1) of the Act. Section 2(1) of the Act states that a “Labuan trading activity” includes banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a Labuan non-trading activity.
Section 9(1) of the Act. Section 2(1) of the Act states that a “Labuan non-trading activity” means an activity relating to the holding of investments in securities, stocks, shares, loans, deposits or any other properties situated in Labuan by a Labuan entity on its own behalf.
Section 2B(1A) of the Act.
As a general rule, a “pure equity holding company” is one that holds equity participations and earns only dividends and capital gains; if a Labuan company meets the criteria as a pure equity holding company, its receipt of interest from placing of dividend monies or proceeds from disposal of shares in financial institutions which do not constitute “commercial activity” will still be regarded as a pure equity holding company (see: Labuan Investment Committee (LIC Pronouncement 3-2020 dated 11 March 2020.))
Section 4 of the Labuan Companies Act 1990 provides that a corporation is related to another corporation where the first-mentioned corporation is (a) the holding company of the other corporation; or (b) the subsidiary of the other corporation; or (c) is a subsidiary of the holding company of the other corporation.