| Offshore
Legal And Tax Regimes |
Forms of Offshore Operation
Offshore
operations may take place within the following forms:
Click
on any of the forms for a description of its legal basis.
The annual fee for an offshore company is RM2,600, while
for a foreign offshore company the fee is RM5,300.
BACK TO TOP
Tax Treatment of Offshore Operations
See
Domestic Corporate Taxes for the
general principles of Malaysian corporate taxation, which
also apply to offshore entities when they pay tax.
The
Labuan Offshore Business Activity Tax Act 1990 (as amended
2004) provides for the reduction or complete exemption of
income tax in respect of certain business activities carried
on by offshore companies in Labuan.
Chargeable
profits derived by an offshore company from an offshore trading
activity are subject to tax at a rate of 3%.
Alternatively,
an offshore company which carries on an offshore trading activity
may, within three months from the commencement of any calendar
year, elect to be charged to tax of M$20,000 for that year
of assessment.
An
offshore company which carries on an offshore non-trading
activity is exempt from income tax altogether.
The
Income Tax Act 1967 applies to any activity other than offshore
business activity carried on by an offshore company, ie they
pay normal taxes.
The
following income is exempt from tax in the hands of a Malaysian
or foreign recipient:
- a dividend
received by, or received from an offshore company;
- distributions
received from an offshore trust by the beneficiaries;
- royalties
received by a non-resident or another offshore company;
- interest
received from, or by, an offshore company under certain
circumstances and amounts received from an offshore company
for providing services.
No
withholding tax is applicable to items of income specifically
exempt from tax.
Stamp
duty for the transfer of shares and preparation and filing
of Memorandum and Articles of Association by an offshore company
has been waived.
A
number of other tax privileges were available at the time
of writing:
- 65% of income
from offshore entities from the rendering of legal, accounting,
financial or secretarial services, including that of a
trust company as defined in the Labuan Trust Companies
Act, 1990 is exempted from tax.
- Income
earned from renting a "qualifying asset" to an offshore
company in Labuan is exempt from tax for an amount of
up to 50% of the income received for a period of 5 years.
Thus a developer can expect to only pay tax on 50% of
the income received from a building rented out to offshore
companies.
- 50% of
the housing and regional allowances given to residents
working in the public sector and offshore companies in
Labuan are exempted from tax.
- Second
tier dividends declared out of dividends received from
an offshore company by a domestic company are exempted
from tax.
- Distributions
made by an offshore trust are not subject to income tax
in the hands of the beneficiary.
- Royalties
paid by an offshore company to a non-resident person or
another offshore company are not subject to income tax
and hence are not subject to withholding tax.
- Interest
paid by an offshore company to a nonresident person or
another offshore company is not subject to income tax.
However, where the interest accrues to a banking, finance
company or insurance business carried on by the nonresident
person in Malaysia, that interest will be subject to income
tax as part of business income.
- Interest
paid by an offshore company to a resident person, other
than a person carrying on a banking, finance company or
insurance business in Malaysia, is not subject to income
tax.
- Technical
or management fees paid by an offshore company to a nonresident
or another offshore company is not subject to income tax.
BACK TO TOP
Tax-Efficient Structures Involving Labuan
Malaysian External
Investment
Malaysian
External Investment
"The
Malaysian Satay" is the name given to a corporate structure
which involves the ownership of a foreign subsidiary by
a resident Malaysian holding company which is in turn 100%
wholly owned by an offshore Labuan parent corporation. In
this structure, reduced rates of foreign withholding tax
obtainable through double tax treaties (Malaysia has more
than 60, of which around 50 are in force) are not compromised
by the offshore status of Labuan; yet the income once in
the hands of the Malaysian parent can be passed on without
further tax to the Labuan holdincompany.
If
the foreign subsidiary were owned directly by a resident
Malaysian company with no offshore Labuan connection then
domestic Malaysian taxes will have to be paid; if the foreign
subsidiary were owned directly by a Labuan holding company,
no Malaysian taxes will be paid, but an increasing number
of treaty partners are denying treaty benefits to Labuan
companies.
Foreign
Direct Investment in Malaysia and Korea
Whilst foreign corporations require government permission
if they are to own shares in a Malaysian company this requirement
is waived where the Malaysian company is to be 100% owned
by a Labuan company which is in turn 100% owned by foreigners.
Foreign ownership rules had previously deterred foreign
companies from owning Malaysian corporations. Currently
the only legal requirement is that details of the foreign
ownership of the Labuan corporation be filed with the Government
within 12 months of the structure being set up.
Dividends
and other income earned by foreign investors in Malaysia
can be extracted through Labuan without taxation.
The
interposition of a Labuan company by investors into Korea
and other regional target markets has benefits because income
can be routed through Malaysia or Labuan in order to take
advantage of double taxation treaties and the absence of
taxation between Malaysia and Labuan. This route has been
much used by investors into Korea: it is said that more
than a third of Labuan companies are used as holding companies
for Western investment into Korea.
A
Labuan company selling in China may take advantage of the
treaty between Malaysia and the PLC so as to avoid the representative
office in the PLC being regarded as a PE.
BACK TO TOP
Offshore Tax Treatment Of Foreign Employees
A
non-Malaysian citizen employed in Labuan in a managerial capacity
would have been exempt from payment of tax on up to 50% of
his employment income until 2004; this concession has been
extended a number of times, so it is worth checking the current
tax status of overseas employees before the decision on whether
to live and work in Labuan is made.
BACK TO TOP
Offshore Activities
An
Offshore Company (or an Offshore Foreign Company) is only
permitted to carry on business in, from or through Labuan.
An Offshore Company may not:
- carry
on business with a resident of Malaysia except as permitted
by the Offshore Banking Act 1990;
- carry on
the business of Banking or Insurance or such similar business
unless it is licensed so to do under the Offshore Banking
Act 1990 or the Offshore Insurance Act 1990;
- carry
on business in the Malaysian currency except for defraying
its administrative and statutory expenses;
- carry
on business of shipping or petroleum operations in Malaysia
or carry on business as a trust company.
The Offshore Companies
Act was amended recently to allow Malaysians to own offshore
companies, as well as to permit foreign-owned offshore companies
to invest in Malaysia subject to certain conditions.
Manufacturing
activities are normally carried out by companies incorporated
under the Malaysian Companies Act. An activity which is neither
offshore trading nor offshore non-trading will be subject
to tax under the regular tax regime.
Offshore
insurance and banking businesses are permitted to maintain
a marketing office in Kuala Lumpur until the Government decides
that the management office should be relocated in Labuan.
An
Offshore Company is not treated as carrying on business with
residents of Malaysia if:
- it makes
or maintains deposits with a person carrying on business
in Malaysia;
- it makes
contact with professional advisers carrying on business
in Malaysia;
- it prepares
and maintains books and records in Malaysia; it acquires
or holds any lease or property for operational purposes
or accommodation of its employees;
- it holds
directors’ or members’ meetings within Malaysia;
- it holds
shares, debt obligations, or other securities in a company
incorporated under the Offshore Companies Act 1990 or
in a domestic company, or holds shares, debts obligations
or other securities for the purposes of a transaction
entered into in the ordinary course of a money-lending
business.
BACK TO TOP
Employment and Residence
To
facilitate offshore activities in Labuan, a liberal immigration
policy has been adopted. Multiple entry visas are issued to
expatriates who have been granted employment permits to work
with offshore companies in Labuan.
The
normal Malaysian rules, which are softened in many situations
in Labuan, are as follows:
Any
person who wishes to enter Malaysia to take up employment
with a Malaysian company or firm must apply for an employment
pass from the Department of Immigration.
Employment
passes are issued for a specified period, usually two to three
years, and are renewable for an additional two to three years.
Employment
passes are granted on a case-by-case basis, generally for
positions that require special technical knowledge or expertise
not available locally or for positions that cannot be filled
by local Malaysian citizens.
To
obtain employment passes, expatriates must have a valid passport
from their home country, a contract from their employer, a
cover letter and three passport-size photos, which may be
black and white or color.
The
employer of an expatriate must submit an application to the
Department of Immigration and await a decision, which may
take one month. After the employer receives a letter of approval,
it must submit the passport of the employee and pay for the
employment pass and the levy. The levy is applicable only
to expatriates earning RM 2,500 or less per month or to expatriates
holding employment passes valid for less than two years.
Licensed
manufacturing companies that wish to hire expatriates must
present copies of their manufacturing licenses. Service companies
with foreign equity of more than 30% must seek the approval
of the Foreign Investment Committee before hiring expatriates.
Companies engaged in construction and project management must
register with the Construction Industry Development Board
before hiring expatriates. Companies engaged in the retail,
trade, wholesale and direct-sales sectors that have foreign
equity of more than 30% must seek the approval of the Committee
on Wholesale and Retail Trade before hiring expatriates.
It
is illegal to work without a valid employment pass; therefore,
a foreign national may not work in Malaysia until he or she
has received a work permit and all other necessary documents.
To
obtain an extension, expatriates must submit new applications
for extension three months before the expiration of their
passes.
Expatriates
who have not completed their terms of contract but wish to
take up employment with other companies must leave the country
for six months before taking up new employment.
In
2003, the Malaysian government decided to make it easier for
companies to hire skilled foreigners, allowing for automatic
approvals to be granted for the recruitment of highly skilled
workers where there is no available local expertise.
From
June 2003, the government further relaxed rules on employing
expatriates, granting that manufacturing companies with foreign
paid-up capital of at least US$2m be automatically permitted
ten expatriate positions, with those to include five key posts.
Under the amended rules, expatriates could be employed for
up to ten years for executive posts and five years for non-executive
posts.
Manufacturing
companies with foreign paid-up capital of US$200,000–2m,
meanwhile, were permitted automatic approval for up to five
expatriate posts, including at least one key post.
BACK TO TOP
|
