In Malaysia, the Income Tax Act 1967 governs the imposition of income tax. However, in 1990 a separate tax act, the Labuan Business Activity Tax Act, was introduced to govern the imposition of tax on Labuan business activities carried out by Labuan entities. Under this act, Labuan entities could elect to pay a flat rate of RM20,000 or be subject a 3% tax rate. Those entities were not subject to the applicable tax rate under the Income Tax Act.

The Labuan Business Activity Tax Act has now been substantially revised following Budget 2019.

With effect from 1 January 2019, the core definition of 'Labuan business activities' has now been redefined as any Labuan trading or non-trading activity which is carried out in, from or through Labuan and is not a statutory offence. Activities need not be carried out in foreign currency nor "by a Labuan entity [that is] non-resident or with another Labuan entity".

The ministerial power to designate any activity carried out by a Labuan entity as a Labuan business activity provided for Section 2A(2) of the Labuan Business Activity Tax Act has been retained, but approval is no longer needed to carry out such activities in a Malaysian currency or with Malaysian residents.

Under the new Section 2B of the Labuan Business Activity Tax Act, Labuan entities that carry out business activities must maintain a certain number of full-time employees and operating expenditure, as prescribed by the minister.

The amendment to Section 4 of the Labuan Business Activity Tax Act clarifies that any income derived from royalty or an 'IP right' (as defined under the new Section 4(5) of the act) that is received as consideration for the commercial exploitation of that right is subject to 3% tax under the Income Tax Act rather than the Labuan Business Activity Tax Act.

Finally, Section 7 of the Labuan Business Activity Tax Act has been deleted. As such, Labuan entities can no longer elect to pay the RM20,000 flat tax rate; instead, they will be subject to 3% tax on chargeable profits from any Labuan business activity.

For further information on this topic please contact Goh Ka Im or Foong Pui Chi at Shearn Delamore & Co by telephone (+60 320 272 727) or email (kgoh@shearndelamore.com or foongpuichi@shearndelamore.com). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.

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