As tax information begins to flow efficiently between tax authorities and with government in various jurisdictions, it is essential for businesses involving in cross border transactions to set up their structures with a proper business purpose together with the correct commercial substance. Labuan IBFC, with a number of unique features and attractive tax system, is highly suitable and has the ideal business environment for trading companies to navigate the new tax landscape.

    A. Example of a typical trading company structure



B. Purpose And Commercial Substance
Labuan business activity” under the Labuan Business Activity Tax Act 1990 (“LBATA”) means business activities carried out by a Labuan entity in, from or through Labuan in business currency other than Malaysian currency carried out with non-resident or with another Labuan entity.

With on-going mechanisms in place to exchange tax information, it is important to set up the trading company with a proper business purpose and together with the correct commercial substance.

Purpose The establishment of the company or arrangement of transaction structure is not aimed solely at utilizing tax treaty. It is also not to be set up as a “Conduit company” for the purpose of avoiding tax or transferring profits.
Substance Examples of commercial substance:
  • Local office in Labuan
  • Local knowledgeable directors
  • Board meetings held in Labuan from time to time where key business decisions are being made
  • Bank account in Labuan
  • Sufficient capitalization
  • Accounting, secretarial and other compliance activities of the Labuan Company are carried out in the island
  • Operational substance - Employees or directors performing various trade functions eg. Procurement, supply chain, finance, accounting and other activities relating to trade, are being performed out from the Labuan office

    C. Why Labuan IBFC?
  • Labuan IBFC’s tax system is simple, clear and straightforward. To enjoy Labuan tax structure, a Labuan trading company merely has to demonstrate that the Labuan business activities has been carried out based on provisions in LBATA
  • Minimum tax on Labuan trading company upon election annually :
    • 3% of net profits as per audited accounts; OR
    • RM20,000/-
  • Possible to establish tax residency in Malaysia by demonstrating that its ‘highest level of control’ is exercised in Malaysia, Labuan in particular in this case. Being tax resident in Malaysia, the Labuan trading company may possibility avoid the pitfall of being a dual-resident company and potentially taxable in more than one jurisdictions
  • Access to Double Tax Agreements between Malaysia and over 70 countries
  • Labuan is a sophisticated financial centre where it is possible to create substance in real terms. A Labuan trading company has the ability to maintain local office, employ local staff and access to local support services at a relatively low cost
  • Strategically situated in the Asia Pacific region and sharing a common time zone with many large Asian cities
  • Withholding tax exemption on payments made to non-residents
  • No stamp duty on all instruments relating to offshore business activities including share transfer
  • No import duty / sales tax / capital gain tax
  • No foreign exchange controls
  • 50% tax abatement for expatriate professionals and managers employed under Labuan companies
  • 100% exemption for director’s fees received by non-citizen directors of Labuan companies
D. Features of Labuan Trading Company
The most popular and commonly used vehicle for carrying out trading activities in Labuan is a company limited by shares. All Labuan companies are governed by the Labuan Companies Act 1990 and this Act requires the engagement of services of a Labuan IBFC registered trust company to act as its incorporation agent.

Kensington Trust Labuan Limited is a licensed trust company in Labuan and is able to assist with the establishment and administration of your company.

Share Capital
Permitted Currencies Any foreign currency except Ringgit Malaysia
Standard currency US$
Minimum issued capital One (1) in any denomination in foreign currency
Authorised capital N/A
Par / Nominal value  N/A

Director
Minimum One (1)
Corporate directors Allowed
Local directors requirements Optional but recommended for commercial substance purpose
Location of meeting Anywhere but for commercial substance purpose, it is highly recommended to hold meetings in Labuan, physically and/or originated from Labuan, if via tele-conference meeting
Minimum numbers of meeting Per Articles of Association
Publicly accessible records No

Shareholders
Minimum One (1)
Bearer shares No
Corporate shareholders Allowed
Local shareholders requirements No
Location of meeting Anywhere
Minimum numbers of meeting One (1) annually
Publicly accessible records No

Company Secretary
Minimum One (1)
Requirements A resident secretary who must be a Trust Officer of a trust company OR a Labuan / Malaysian domestic company wholly-owned by the Labuan trust company

Registered Office
Requirements Principal office of a trust company in Labuan

Accounts
Records Kept in Labuan
Preparation of accounts Yes
Audit requirements and filing Optional, but required for Labuan companies opting to pay tax at 3% p.a. on the audited net profits and also, licensed companies
Publicly accessible records No

Annual Requirements
Annual Return Not later than 30 days from the anniversary date of incorporation of the Labuan company
Annual Government Fee On or before the anniversary date of incorporation of the Labuan company
Tax Filing Annual tax return needs to be filed with the Malaysian Director General of Inland Revenue by 31 March of that year of assessment. Normally, an extension of time for filing is allowed by the Inland Revenue.

Taxation
Trading activities RM20,000/- OR 3% of net audited profits
Non-trading activities Nil
Trading and Non-trading activities RM20,000/- OR 3% of net audited profits
Others No withholding tax, no capital gain tax, no stamp duty on offshore instruments

General
Legal System Common Law
Corporate Redomiciliation Yes

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The information in this document is not advice of any kind but general information only and should not be relied on as legal advice. Kensington Trust Group recommends seeking professional advice on legal or tax issues affecting you before relying on it. While Kensington Trust Group tries to ensure that the content of this document is accurate, adequate or complete, it does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. Kensington Trust Group does not assume legal liability for any loss suffered as a result of or in relation to the use of this document. To the extent permitted by law, Kensington Trust Group excludes any liability for negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this document.