Updates on Labuan entities

Updates on Labuan entities

A.    Exemption Orders and Amendment Orders

The following Exemption Orders and Amendment Orders were gazetted in 2013 and 2017 respectively (see Tax Alert No. 8/2013 and Tax Alert No. 13/2017):

(a)  (i)  Labuan Business Activity Tax (Exemption) Order 2013 - gazetted on 21 March 2013

       (ii) Labuan Business Activity Tax (Exemption) 2013 (Amendment) Order 2017 – gazetted on 30 May 2017

The above provide a 100% income tax exemption to an LICT company on income derived from the trading of physical products and related derivative instruments in relation to liquefied natural gas (LNG) with non-resident companies in any currency other than Malaysian currency. The exemption shall be for a period of three consecutive years commencing from the first year of the LICT’s operation and is effective from YA 2013.

Following the above, the Labuan Business Activity Tax (Exemption) 2013 (Amendment) Order 2021 [P.U.(A) 484] was gazetted on 27 December 2021. The Amendment Order provides that the requirement for the trading activity to be undertaken “with non-resident companies in currency other than Malaysian currency” for the exemption to apply, has been removed.

The Amendment Order is deemed to have come into operation on 1 January 2019. 

(b)  (i)  Labuan Business Activity Tax (Exemption) (No. 2) Order 2013 - gazetted on 21 March 2013

       (ii) Labuan Business Activity Tax (Exemption) (No. 2) 2013 (Amendment) Order 2017 - gazetted on 30 May 2017

The above exempts an LICT company from the election to pay a fixed tax of RM20,000 on income derived from qualifying activities (as defined). The election was previously provided for under Section 7(1) of the Labuan Business Activity Tax Act 1990 (LBATA), which has since been deleted from the LBATA pursuant to the Finance Act 2018.

Following the above, the Labuan Business Activity Tax (Exemption) (No. 2) 2013 (Revocation) Order 2021 [P.U.(A) 483] was gazetted on 27 December 2021. With this, the above-mentioned exemption is revoked effective from YA 2020, as it is no longer relevant.

B.    Substantial activity requirements for an LICT company

As highlighted in an earlier alert, the substantial activity requirements for an LICT company were removed from the Labuan Business Activity Tax Act (Requirements for Labuan Business Activity Tax) 2018 (Amendment) Regulations 2020, which were gazetted on 24 December 2020. Thereafter, the Labuan Investment Committee (LIC) issued LIC Pronouncement 4-2020 dated 9 February 2021 to clarify that the substantial activity requirements for LITC companies would be regulated under a separate gazette order which would be released in due course (see Tax Alert No. 4/2021).

Following the above, the Labuan Business Activity Tax (Requirements for Labuan International Commodity Trading Company) Regulations 2021 [P.U.(A) 482/2021] were gazetted on 27 December 2021. The Regulations provide that:

(a)   An LICT company, which is a Labuan entity carrying on a Labuan business activity, shall in the basis period for a YA fulfill the following requirements:

(i) Have at least three full-time employees, and
(ii) Have annual operating expenditure of at least RM3 million

(b)  Where an LICT company does not have more than five related companies carrying on qualifying activities, that LICT company shall:

(i) Have at least three full-time employees, which includes at least two full-time employees in its business operational office in Labuan, within the group of companies
(ii) Incur an annual operating expenditure of at least RM3 million in Malaysia, which includes at least RM100,000 incurred in Labuan for each company

(c)   Subject to Point (b) above, where an LICT company has more than five related companies carrying on qualifying activities, the LICT company shall have an additional full-time employee in its business operational office in Labuan for every addition of up to five related companies in its group of companies.

The requirement in Point (a) above is deemed to have been operational from 1 January 2019 to 31 December 2020, whereas the requirements in Points (b) and (c) above are deemed to have come into operation on 1 January 2021.

The following terms have been defined in the Regulations:

i.     Qualifying activity

Trading of physical products and related derivative instruments in relation to:

- Petroleum and petroleum-related products including LNG
- Minerals
- Agriculture products
- Refined raw materials
- Chemicals
- Base minerals, or
- Coal

ii.    Global Incentives for Trading (GIFT)

The programme of incentives for an LICT company to use Malaysia as its international trading base to undertake a qualifying activity

iii.   LICT company

A Labuan company which:

- Is incorporated or registered under the Labuan Companies Act 1990 (LCA)
- Is licensed under Section 92 of the Labuan Financial Services and Securities Act 2010
- Maintains a registered office in Labuan but is allowed to establish its business operational office anywhere in Malaysia, and
- Undertakes a qualifying activity under the GIFT programme

iv.   Related companies

Companies that are deemed to be related to each other in accordance with Section 4 of the LCA

C.   Extension of time (EOT) for the submission of tax returns for LICT companies for YA 2020 and YA 2021

Following the gazettement of P.U.(A) 482/2021 above, the IRB’s Labuan Branch has issued a letter dated 30 December 2021 to the Association of Labuan Trust Companies (ALTC), stating that LICT companies will be given an EOT up to 31 January 2022 to submit their ITRFs for YA 2020 and YA 2021. The payment of taxes must be made at the time of filing, pursuant to Section 11 of the LBATA.

As highlighted in an earlier alert, the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 were gazetted on 22 November 2021 (see Tax Alert No. 23/2021). The Regulations stipulate that a Labuan entity that undertakes pure equity holding activities will be required to hold a board of directors (BOD) meeting in Labuan at least once a year, in order to comply with the management and control requirements which are part of the Labuan substance requirements. Other requirements must also be met.

Following the above, the IRB’s Labuan Branch has issued a letter dated 28 December 2021 to the ALTC, stating that a pure equity holding Labuan entity which fulfill the requirements below will not be required to hold its BOD meeting in Labuan:

(i) The directors are unable to convene the meeting in Labuan due to COVID-19 travel restrictions from their country of origin and/or COVID-19 travel restrictions which prevent them from entering Labuan
(ii) Meetings are held via an electronic medium (e.g., virtual meeting, teleconferencing etc.)

The concession applies only to Labuan entities affected by COVID-19 travel restrictions. The letter also states that the Labuan entities will not be required to submit any documents to the IRB unless required for compliance monitoring purposes. In cases of non-compliance, taxes will be imposed as per Section 2B(1A) of the LBATA (i.e., 24% on chargeable profits).