Recent Tax Development in Labuan as Announced in Budget 2019
2 November 2018 (Friday), the Minister of Finance of Malaysia Mr Lim Guan Eng delivered the 2019 Budget in the Malaysia Parliament titled “A Resurgent Malaysia, A Dynamic Economy, A Prosperous Society”. In 2019 Malaysia budget, there are several key changes to the existing Labuan tax regime, namely the most significant changes being:
Abolishment of the flat tax election
Currently, a Labuan entity carrying on a Labuan trading activity is taxed at 3% of net audited profits. However, the Labuan entity can make an election to be taxed at RM20,000 instead.
It is now announced that the election to be taxed at RM20,000 be abolished. As a result, Labuan companies carrying out a Labuan trading activity will be taxed at 3% of net audited profits.
Abolishment of certain restrictions to the “Labuan business activity” definition
Labuan entities carrying out Labuan business activities (comprising Labuan trading activities or Labuan non-trading activities or both) are subject to tax under the Labuan Business Activity Tax Act 1990 (LBATA).
In general, a Labuan entity would be regarded as carrying out Labuan business activities if the following conditions are met:
• Such activities are carried out in, through and from Labuan;
• Transactions are carried out in a currency other than Ringgit Malaysia (i.e. foreign currency); and
• Transactions are carried out with non-residents or other Labuan entities.
It is now announced that the Labuan entities be allowed to carry on activities in RM and/or with Malaysian residents, that is removing restrictions on trading Malaysia Ringgit and removing restrictions on transactions between Labuan and Malaysian residents
It may be well noted that with the abolishment of ceiling tax of RM 20,000, this means that all Labuan company may be subjected to compulsory audit.