B18 LABUAN

INTRODUCTION
The federal territory of Labuan is a group of tropical islands off the coast of Sabah and was established on 1 October 1990 as an international offshore financial centre (i.e. Labuan IOFC). In a rebranding exercise, the name was changed to Labuan International Business and Financial Centre (Labuan IBFC) in January 2008 to reflect the jurisdictions growing international status. To enhance the competitiveness of the Labuan International Business and Financial Centre (Labuan IBFC) in the offering of a wider range of financial products and services (conventional and Islamic) as well as the continued maintenance of Labuan IBFCs status as a well regulated centre, amendments were made to 4 existing Labuan laws; and 4 new Acts (the Labuan Acts) which came into effect from 11 February 2010.

Amendments
Labuan Offshore Business Activity Tax Act 1990 (now also known as the Labuan Business Activity Tax Act 1990) Labuan Offshore Financial Services Authority Act 1996 (now also known as the Labuan Financial Services Authority Act 1996) Labuan Offshore Trusts Act 1996 (now also known as the Labuan Trusts Act 1996) Labuan Offshore Companies Act 1990 (now also known as Labuan Companies Act 1990)

New legislation
Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 Labuan Foundations Act 2010 Labuan Islamic Financial Services and Securities Act 2010 Labuan Financial Services and Securities Act 2010 Approved Labuan trading activities include banking, insurance, trading, management, licensing, shipping operations or any other activity which are not Labuan non-trading activities. Labuan non-trading activities mean activities relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties by a Labuan entity on its own behalf. Prior to 11 February 2010, Labuan activities did not include any shipping operations in or out of Malaysia other than charter of ships on a bareboat basis. Labuan activities are required to be carried out with persons not resident in Malaysia, and in foreign currencies, although there are some exceptions for banks, insurance companies and Labuan entities carrying on the business of Labuan leasing or money-broking. Transactions in Malaysian Ringgit are permitted only for purposes of defraying administrative and statutory expenses, or for acquisition of shares or other securities in a Malaysian company by a Labuan entity.

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Due to amendments made to the Labuan Acts, several definitions have been revised or deleted. One of the most notable amendments is the deletion of the definition of an offshore company and the insertion of a new definition for a Labuan company. The Income Tax Act 1967 and Stamp Act 1949 have been accordingly updated to reflect an offshore company as a Labuan company. Also as part of the national financial liberalisation package announced by the Prime Minister in April 2009, effective from 1 June 2009, a Labuan Company defined as a "Labuan Holding Company" (LHC) may apply to the Labuan FSA to open an operational and management office in Kuala Lumpur. A LHC that has been approved to co-locate must make an irrevocable election to be taxed under the Income Tax Act 1967. In addition, the following entities are also allowed to have co-located offices in any part of Malaysia: (a) Labuan bank (effective from 19 January 2010); (b) Labuan insurance and takaful licensee (effective from 1 March 2011).

TAXATION SYSTEM Labuan entities

Preferential tax treatment is given to Labuan entities incorporated or registered under the Labuan Companies Act 1990, Labuan trusts/Islamic trusts, Labuan foundation/Islamic foundation and Labuan limited/limited liability partnership undertaking Labuan business activities. Non-Labuan business activities carried on by a Labuan entity are subject to normal Malaysian income tax at the rate of 25% and are not eligible for any Labuan related tax concessions such as: 1. A Labuan entity carrying on a Labuan trading activity for the basis period for a Y/A can enjoy the preferential tax rate of 3% of its audited net profits or elect to pay tax of RM20,000 for a Y/A. 2. Income derived from a Labuan non-trading activity for the basis period for a Y/A is exempt from tax for that year of assessment. 3. A Labuan entity may make an irrevocable election to tax its income from Labuan business activity under the Income Tax Act 1967 (ITA 1967), instead of the Labuan Business Activity Tax Act 1990 (LBATA 1990).

Individuals
Individual residents in Labuan are subject to tax under the principal Act, the ITA 1967. Thus, income accruing in or derived from Malaysia is taxable. Foreign sourced income received in Malaysia by a resident individual is tax-exempt. The rate of tax ranges from 0% to 26% for resident individuals and a flat rate of 26% for non-resident individuals. Expatriates employed in a managerial capacity in Labuan by offshore companies or trust companies are granted an exemption of 50% of their income from such employment up to Y/A 2010, provided the employment is exercised in Labuan. Non-citizen individuals acting in the capacity of a director of an offshore company are exempted from payment of income tax in respect of directors fees received from Y/A 2007 until Y/A 2010. A citizen of Malaysia is exempted from the payment of income tax on 50% of the gross housing and Labuan Territory allowances received by that citizen from exercising an employment in Labuan with the Federal or State Government, a statutory body or an offshore company from Y/A 2006 until Y/A 2010.
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Capital gains
For a Labuan entity carrying on a Labuan trading activity, capital gains are reflected as part of the net profits and hence subject to 3% tax. However, if election is made, the liability is restricted to RM20,000. Capital gains arising from sale of shares in a Labuan company by the shareholders are not taxable assuming that the shareholders do not have a business presence in Malaysia and are not investment dealers.

Withholding taxes
Royalties, interest, and technical or management fees paid by an offshore company to a non-resident person or another offshore company are exempted from income tax and thus not subject to withholding tax. However, rental of moveable property paid to a non-resident person does not enjoy this exemption, with the exception of offshore banks or offshore companies carrying out leasing business. Any interest paid by a Malaysian resident to offshore banks in Labuan is not subject to withholding tax. Payments for other gains and losses under S. 4(f) of the Income Tax Act 1967 made by an offshore company to a non-resident have also been exempted from income tax and therefore not subject to withholding tax.

Indirect taxes
There are no indirect taxes (such as sales taxes, service taxes and custom duties) since Labuan enjoys free port status.

Stamp duty
Offshore companies are exempted from stamp duty on all instruments which are made in connection with offshore business activities. The sale of shares in offshore companies and the Memorandum and Articles of Association of an offshore company are also exempted from stamp duty.

Fund for Tax Refund

The fund for tax refund on excess of tax paid shall be paid from the fund established under S. 111B of the Income Tax Act 1967.

OTHER INCENTIVES
1. Dividends paid by an offshore company in respect of income derived from an offshore business activity and distributions made by an offshore trust are not subject to tax in the hands of the recipients. In addition, if the recipient is a company incorporated under the Companies Act 1965 and resident in Malaysia, the recipient may pay tax exempt dividend to its shareholders. 2. Any person, including Labuan trust companies providing qualifying professional services (such as legal, accounting, financial and secretarial services) to an offshore company are granted 65% abatement of their statutory income for Y/A 2005 to Y/A 2010. 3. Any zakat which is paid by a Labuan entity in the basis period for a Y/A will be granted a tax rebate, subject to a maximum of the tax charged, that is 3% of net profits, or RM20,000 upon election. Any excess of tax rebate over the tax charged will not be refunded to the Labuan entity or be made available as a credit to set-off against the tax liability for that Y/A or any subsequent Y/A.
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TAX TREATY ARRANGEMENTS

Labuan has no tax treaties with any contracting state and relies on Malaysias treaty partners to recognise the Labuan legislation as part of the Malaysian tax regime. Currently, Labuan has been specifically excluded from Double Tax Agreements with Australia, Chile, Indonesia, Japan, Luxembourg, Netherlands, South Africa, Spain, Sweden, the Republic of Seychelles and the United Kingdom. Additionally, the new MalaysiaGermany Double Tax Agreement has specifically excluded Labuan where the Labuan entity continues to be taxed under Labuan legislation. While there is no mention of Labuan being excluded from the Double Tax Agreements of Switzerland and South Korea, there may be an unwritten practice of the Swiss Tax Authorities to exclude Labuan from access to treaty rates and the Ministry of Finance and Economy of South Korea has announced that they will deny investor access to the rates of the withholding tax rates under the treaty. Section 22A of Labuan Business Activity Tax Act 1990 provides for disclosure of information in respect of double tax agreements to a duly authorised servant or agent of the Government with whom such arrangements have been made where such information is required to be disclosed under such arrangements and upon request from any tax authority from any Government of any territory outside Malaysia. It is proposed in Finance (No. 2) Bill 2011 that the aforesaid Section 22A of the Labuan Business Activity Tax Act 1990 on disclosure of information in certain circumstances be widened to cover tax information exchange arrangements with non-treaty countries. tax information exchange arrangements means an arrangement between the Government of Malaysia and the Government of any territory outside Malaysia under Section 132A of the Income Tax Act 1967.

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