Guidelines on the tax treatment of Labuan entities with dormant status

Guidelines on the tax treatment of Labuan entities with dormant status

The Labuan Investment Committee (LIC) was established to recommend policies on substantial activity requirements in Labuan and monitor the enforcement of such requirements. Under the LIC Pronouncements 1-2019 (dated 19 June 2019) and 2-2019 (dated 11 December 2019), it was provided that Labuan entities which are dormant or struck off (including those under winding up proceedings or a liquidation process), which do not derive any source of income (see Tax Alert No. 23/2019):

• Do not need to comply with the substantial activity requirements
• Are exempted from statutory audit requirements for the purpose of fulfilling the Labuan Business Activity Tax Act 1990 (LBATA) requirements (however, if such companies require an audit pursuant to any non-tax regulations / rules, such regulations / rules would need to be complied with accordingly.)

The IRB has now published on its website the guidelines issued on 31 October 2022, to provide clarification on the meaning of “dormant” for the purposes of the above LIC Pronouncements and the implications of a dormant company commencing business operations. The guidelines are deemed to be effective from YA 2020. 

A Labuan entity is considered dormant, if it: 

a)    has never commenced operations since the date of its incorporation

b)    has previously been in operation or carried on business but has now ceased operations or business; or

c)     does not have any significant accounting transactionNote for one financial year before the occurrence of substantial change in its equity shareholding (i.e., 50% or more).

Note:

This means that there is no entry recorded in the company’s accounts other than the minimum expenses for compliance with stipulated statutory requirements. The minimum expenses referred to are filing of the company’s annual return under the Labuan Companies Act 1990, the secretarial fee for filing of the company’s annual return, the tax filing fee and the audit fee. 

A Labuan entity is not considered as dormant if it owns shares, real properties, fixed deposits or other similar investments, including where it derives income such as rents, interests, etc. (if any) by virtue of the mentioned ownership. 

Substance requirements 

The Guidelines clarify that if a Labuan entity resumes operations, the substantial requirements must be complied with until the last date of the accounting period. The following example was provided:

Extract from Example 3 of guidelines

Tvios (Labuan) Ltd. was established on 1 March 2021 and carries on business activities as a leasing company. The accounting period for the company is 1 March 2021 to 28 February 2022. Tvios (Labuan) Ltd. did not conduct any business activities until 1 December 2021. At the end of the accounting period, its net profit as per the audited accounts was RM300,000.  

Based on the facts, Tvios (Labuan) Ltd. is deemed as a dormant company for the period 1 March 2021 until 31 August 2021. As the operation of the business commenced on 1 September 2021, it must comply with the substantial requirement of a sufficient number of full-time employees in Labuan from 1 September 2021. Meanwhile, the requirement for an adequate amount of annual operating expenses of Labuan entities must be complied with before or no later than 28 February 2022.

Submission of tax return under LBATA

The Guidelines reiterate that a Labuan entity which is dormant or in the process of liquidation is still required to file a Form LE1 together with the audited accounts (if any) or management accounts.