New Regulations Gazetted for Requirements relating to Labuan Business Activities

25 November 2021

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 1990^⁵ is satisfied; and

(b) companies are deemed to be in the same group where:

two or more companies are related in the manner set out in paragraph (a) above;

a company is so related to another company which is itself so related to a third company;

the same person holds more than 50% of the shares in each of two or more companies; or

each of two or more companies is so related to at least one of two or more companies to which subparagraph (iii) above applies.

4. First Schedule and Second Schedule of the New Regulations

For ease of reference, reproduced herewith are the First Schedule and the Second Schedule of the New Regulations that set out the minimum employment and the minimum annual operating expenditure requirements for the types of Labuan trading and Labuan non-trading activities set out in the respective schedules:

FIRST SCHEDULE

(1)	(2)	(3)	(4)
No.	Labuan entity carrying on a Labuan trading activity	Minimum number of full time employees in Labuan	Minimum amount of annual operating expenditure in Labuan (RM)
1.	Labuan insurer, Labuan reinsurer, Labuan takaful operator or Labuan retakaful operator	3	200,000
2.	Labuan underwriting manager or Labuan underwriting takaful manager	4	100,000
3.	Labuan insurance manager or Labuan takaful manager	4	100,000
4.	Labuan insurance broker or Labuan takaful broker	2	100,000
5.	Labuan captive insurer or Labuan captive takaful –
	(a) Labuan first party captive insurer or Labuan first party captive takaful; or	2	100,000
	(b) Labuan third party captive insurer or Labuan third party captive takaful	3	100,000
6.	Labuan bank, Labuan investment bank, Labuan Islamic bank or Labuan Islamic investment bank	3	200,000
7.	Labuan trust company	3	120,000
8.	Labuan leasing company or Labuan Islamic leasing company which has–
	(a) not more than 10 related Labuan leasing companies or Labuan Islamic leasing companies;	2 for each group of companies	100,000 for each Labuan leasing company or Labuan Islamic leasing company
	(b) 11 to 20 related Labuan leasing companies or Labuan Islamic leasing companies;	3 for each group of companies	same requirement as stated above
	(c) 21 to 30 related Labuan leasing companies or Labuan Islamic leasing companies; or	4 for each group of companies	same requirement as stated above
	(d) more than 30 related Labuan leasing companies or Labuan Islamic leasing companies	1 additional employee for each group of companies for each increase of 10 related Labuan leasing companies or Labuan Islamic leasing companies	same requirement as stated above
9.	Labuan credit token company or Labuan Islamic credit token company	2	100,000
10.	Labuan development finance company or Labuan Islamic development finance company	2	100,000
11.	Labuan building credit company or Labuan Islamic building credit company	2	100,000
12.	Labuan factoring company or Labuan Islamic factoring company	2	100,000
13.	Labuan money broker or Labuan Islamic money broker	2	100,000
14.	Labuan fund manager	2	100,000
15.	Labuan securities licensee or Labuan Islamic securities licensee	2	100,000
16.	Labuan fund administrator	2	100,000
17.	Labuan company management	2	100,000
18.	Labuan International Financial Exchange	2	120,000
19.	Self-regulatory organisation or Islamic self-regulation organisation	2	120,000
20.	Labuan entity that carries on any one or more of the following business activities: (a) administrative services; (b) accounting services; (c) legal services; (d) backroom processing services; (e) payroll services; (f) talent management services; (g) agency services; (h) insolvency related services; (i) management services other than Labuan company management under item 17	2	50,000

SECOND SCHEDULE

(1)	(2)	(3)	(4)
No.	Labuan entity carrying on a Labuan non-trading activity	Minimum number of full time employees in Labuan	Minimum amount of annual operating expenditure in Labuan (RM)
1.	Labuan entity that undertakes investment holding activities other than pure equity holding activities	1	20,000
2.	Labuan entity that undertakes pure equity holding activities	Exempted under P.U.(A) 177/2020	20,000

Comments

The New Regulations are substantially the same as the Revoked Regulations except in two respects:

First, nine new types of business activities are now required to comply with the minimum number of full time employees in Labuan and the minimum amount of annual operating expenditure in Labuan requirements set out in item 20 of the New Regulations; and

Second, in addition to complying with the minimum number of full time employees in Labuan and the minimum amount of annual operating expenditure in Labuan requirements set out in item 2 of the Second Schedule of the New Regulations, a Labuan entity which undertakes pure equity holding activities is further required to comply with the control and management requirements set out in Regulation 3 of the New Regulations.

It is highlighted that a Labuan entity that undertakes (i) investment holding activities other than pure equity holding activities, or (ii) pure equity holding activities are now categorised as a Labuan entity which carries on a Labuan non-trading activity. Taxpayers may want to seek clarification from the tax authority in respect of their tax compliance related matters since the New Regulations are deemed to have come into operation on 1 January 2019.

The New Regulations are welcomed as the First Schedule and Second Schedule provide greater clarity in relation to the types of business activities carried on by a Labuan entity. However, the New Regulations still fail to provide a ‘catch-all’ category for other business activities which do not fall squarely within the First Schedule or the Second Schedule. The Labuan entity which is carrying on a business activity which is not prescribed in the First Schedule or Second Schedule of the New Regulations continue facing the same dilemma – not having a status for tax compliance purposes.

Alert prepared by Desmond Liew (Senior Associate) of the Tax Practice and Faith Chan (Associate) of the Corporate Practice of Skrine.

¹ 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.

² 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.

³ Section 2B(1A) of the Act.

⁴ 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.))

⁵ 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.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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New Regulations Gazetted for Requirements relating to Labuan Business Activities