Guide to Make Labuan Your Profit Centre
How do you retain your profit in Malaysia through Labuan Company and yet be fully compliant?
Case Study 1: Malaysia Financial Services Company
One of our Malaysia clients finds it much easier and felt a lot more assured that his trading profit earned in Labuan is more beneficial than having his trading profits flows into his Hong Kong offshore company. Before he switch to using Labuan as a profit center, he operated his trading through his Hong Kong Offshore company. However, there are 2 unfavourable situations that prompted him to move his trading company to Labuan.
- The implementation of Common Reporting System (CRS) and increased compliance requirements by the authority, have resulted in difficulties in operating and in some cases, opening bank account in Hong Kong.
- Before his move from Hong Kong Offshore to Labuan mid shore center, all his trading profits are kept outside of Malaysia. As the income is kept overseas, this may unduly attract the attention of the Malaysia Tax Authority. So keeping the profits in Hong Kong means that there is a certain degree of uncertainty.
After moving its trading business from Hong Kong to Labuan, the trading transactions are done through the Labuan company. With all its profits declared and the low tax paid to the Labuan Inland Revenue Board, the company has great certainty that there shall not be any sudden checks by the Authority. The company is more assured that all the profits kept in Labuan is unlikely to be suspected as “black money”.
Case Study 2: China Electronic Trading Company
One of our Chinese clients is in the business of distribution of electronic items in ASEAN countries and targeting Malaysia in particular. He faces 2 options to start his business here in Malaysia. He could start a local Malaysia company or a Labuan company for his business. He chose to use a Labuan company because he can get the benefits of a Labuan company such as no tax for on director’s fees, no withholding tax, DTAs (Double Taxation Agreements), etc, while he can still trade with Malaysians.
In his case, using Labuan Company, it’s of great advantageous to his business. First of all, there is no requirement for the Labuan company to have trading license when it transacts with Malaysians. This is not the case for a local company where a wholesale-retail license is from the Ministry of Trade is required.
The other advantage is that of tax savings. If he had chose to use a local Malaysia company, the tax rate of 24% of the net profits for all transactions with Malaysia and international markets. With a Labuan company, transactions with Malaysian is taxed at 24% while earnings from international transactions is tax at 3% only. Therefore, a single Labuan entity allows the business owner to save on taxes on his international transactions.
In summary, with a Labuan entity, he is able to enjoy the tax benefits of Labuan, while still be able to trade effectively with Malaysians, without having to apply for trading licenses and save money on tax.
Why creating a substance is important for your business?
As the world become more globalised and cross border activities boomed, countries around the world are collaborating with one another to ensure that offshore entities are making their fair share of contributions to the appropriate jurisdiction where they are set up. These entities benefited hugely from being in an offshore jurisdiction but many are not and have not been contributing to the local authority in terms of tax and other annual spending. This has prompted the creation of Automatic Exchange of Information (AEOI) and kicked off effectively in 2018.
The purpose of AEOI is to reduce the possibility of tax evasion. It will enable governments to recover tax revenue lost to non-compliant taxpayers, and will further strengthen international efforts to increase transparency, cooperation, and accountability among financial institutions and tax administrations.
Therefore, it is not advisable for companies in Labuan IBFC, to avoid paying tax and operate without any compliance to local authorities. In fact, it is crucial for companies to have commercial substance in place to justify their business activities in, through and from Labuan. The key is that companies must be able to tax proof of its economic substance. [Read: What is substance and how to adopt it?]
A progressive compliance framework in place in Labuan jurisdiction
Unlike jurisdictions such as Seychelles, BVI, and many others where offshore companies do not have any compliance, all Labuan entities have to perform yearly compliance on tax filing and annual return. Zero compliance may attract tax scrutiny under the AEOI and BEPS frameworks. With the introduction BEPS collaboration framework to reduce tax avoidance among corporations, all jurisdictions are required to have some form of compliance. This strict requirement of compliance on all Labuan entities by Labuan FSA, is one of the key reason that has made Labuan a whitelist jurisdiction.
In 2010, the Labuan FSA has put in place a strong legislation with many revamped guidelines. The guidelines are put in place to help companies to overcome all compliance requirements and to meet the standard set up by OECD. Since this overhaul, Labuan IBFC is categorized as a whitelist jurisdiction by OECD. One key testimony to the status is that Labuan companies are recognized by Hong Kong, Singapore and Australia for listing in their exchanges.
In 2019, Labuan FSA has put in place new legislation to strengthen the CRS requirements for the Labuan industry players. Please click here for more!
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