In April 2009, Malaysia (Labuan) was added
to the Organization of Economic Cooperation and Development's
new 'blacklist' of jurisdictions which had not committed
to implementing the internationally agreed standard in
The list, was published on April 2, following
the G20 London Summit and was issued at the same time
as a communique by government leaders which set out the
major economies' vision of the future global regulatory
and economic landscape. "We stand ready to deploy
sanctions to protect our public finances and financial
systems," read the communique, presented by British
Prime Minister Gordon Brown, which went on to declare
that: "The era of banking secrecy is over."
In response to the 'blacklisting' Malaysia
said it was committed to internationally-agreed tax standards
and should not be categorized with jurisdictions that
The Prime Minister Datuk Seri Najib Tun
Razak explained on April 2, 2009, that Malaysia had sent
a statement to the OECD leaders to reaffirm its commitment
to subscribe to the OECD standard for the effective exchange
of information (EOI).
Najib, who is also Finance Minister, was
responding to reports that Malaysia and its offshore jurisdiction,
Labuan International Business and Financial Centre (IBFC),
has been categorized as “jurisdictions which have
not committed to the internationally-agreed tax standards.”
“We should not be in that category
as – in practice – we have been committed
to OECD requirements. Our statement to OECD leaders earlier
this week was to re-affirm this," he remarked, adding:
“I understand that the list is a
progress report or status report of jurisdictions which
have not committed to the internationally-agreed tax standards.”
Najib also clarified that Labuan has never
been in any list of “tax havens” issued by
OECD and Malaysia has always been cooperative with competent
“At all times, Labuan IBFC, LOFSA
and Malaysian authorities have been co-operative with
competent authorities from other countries on tax matters
and financial crime, particularly money laundering."
“Our commitment is further evident
from the on-going efforts to tighten provisions of EOI
which are already in keeping with OECD requirements,”
Najib continued, going on to state:
“Certainly, we expect the OECD to
amend the list to put us in the category of jurisdictions
that have committed to the internationally agreed tax
In a statement, Labuan Offshore Financial
Services Authority (LOFSA) welcomed the approach by the
G20 and OECD to take measures to stamp out tax evasion.
LOFSA said since its inception, the jurisdiction has met
the highest international standards and has received positive
assessments by the International Monetary Fund (IMF) under
its Offshore Financial Sector Assessment Programme.
In addition, Labuan IBFC has been affirmed
as a “low-risk” jurisdiction for money laundering
by the Asia Pacific Group on Money Laundering which is
a division of the Financial Action Task Force and an associate
body of OECD.
LOFSA said existing EOI provisions have
already met OECD requirements. Efforts are also taken
to tighten them further through the legislative process.
Malaysia, as the world’s 19th largest trading nation,
has double-taxation agreements with 69 countries.
These agreements have specific terms on
the EOI which were in fact drafted by OECD. These terms
commit Malaysia to cooperate with regulators to eradicate
Malaysia has since been elevated to the
OECD's 'white list' of countries which have "substantially
implemented" the internationally agreed tax standard.
In February 2010, new laws which, it is
hoped, will substantially improve Labuan’s competitive
edge in international financial markets came into effect.
A total of four new acts, together with
radical amendments to a further four existing laws, will
completely change the way in which Labuan carries on its
financial services business. With the enactment of the
new laws, the Labuan Offshore Financial Services Authority
will be re-named the Labuan Financial Services Authority
Dato Azizan Abdul Rahman, the Director-General
of Labuan FSA said: “These far-reaching changes
cover all financial activities in Labuan International
Business and Financial Centre – from banking, insurance,
leasing and company incorporation right through to the
creation of Islamic financial products and services. Apart
from that, the changes have taken into consideration all
aspects so that we are ahead of accepted international
standards and practices.”
The new laws allow for the creation of
Labuan foundations, limited liability partnerships, protected
cell companies (insurance and mutual funds), shipping
operations, Labuan special trusts and financial planning
activities. These complement the existing available range
of products and services and aim to provide investors
with a wider choice of financial products to maximise
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Labuan 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 RM1,500, while for a foreign offshore company the fee
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Labuan Tax Treatment of Offshore Operations
The general principles of Malaysian corporate
taxation also apply to offshore entities when they pay
The Labuan Offshore Business Activity Tax
Act 1990 (as amended in 2004) provides for the reduction
or complete exemption of income tax in respect of certain
business activities carried on by offshore companies in
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
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 traditionally exempt
from tax in the hands of a Malaysian or foreign recipient:
- a dividend received by, or received from an offshore
- distributions received from an offshore trust by
- royalties received by a non-resident or another
- 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
- 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
- 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.
In May 2007, it emerged that the Malaysian
Finance Ministry was working with the financial authorities
of Labuan to establish a new tax structure aimed at attracting
more companies to the Labuan International Offshore Financial
Speaking at the release of the Labuan Offshore
Financial Services Authority (Lofsa) annual report for
2006, Tan Sri Dr Zeti Ahktar Aziz, Bank Negara Governor
and Lofsa chairman, said that new tax initiatives would
be included in the 2008 budget, due to be announced in
September 2007, along with new company forms to better
cater for the requirements of offshore investors.
"With the new incentives, LOFSA will
be able to compete with other offshore centres in the
Asia-Pacific region and the world," Zeti told reporters.
“We want to be competitive and relative
to other offshores as the environment is changing very
significantly," she added.
In September 2007, the measures were unveiled
by the Prime Minister.
Abdullah stated in his 2008 budget speech
that in future, companies registering in the Labuan offshore
sector would have the option of having their offshore
business income taxed under the Income Tax Act 1967, in
addition to under the Labuan Offshore Business Activity
Tax Act 1990.
"In the light of greater global competition,
we need to ensure that Labuan remains competitive as an
international offshore financial centre. Given that investors
in Labuan undertake a wide range of financial services,
a flexible tax regime is necessary," the Prime Minister
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Malaysian External Investment
"The Malaysian Satay" was the name given
to a corporate structure which has traditionally involved
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, although
not all 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 holding company.
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
Whilst foreign corporations traditionally
require government permission if they are to own shares
in a Malaysian company this requirement has usually been
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.
Dividends and other income earned by foreign
investors in Malaysia can usually 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
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.
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Labuan Offshore Tax Treatment Of Foreign
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.
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Labuan 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 to allow Malaysians
to own offshore companies, as well as to permit foreign-owned
offshore companies to invest in Malaysia subject to certain
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
- 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.
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Labuan 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
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
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
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
less than a designated amount 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
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
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.
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