Tax Structure (Tax System)

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An offshore company must be incorporated or registered under the Offshore Companies Act 1990 to carry on offshore business activities in or from Labuan and to enjoy the preferential tax treatment under LOBATA. The LOBATA provides for the imposition, assessment and collection of tax on offshore business activities carried on by an offshore company in or from Labuan, effective from the year of assessment 1991. An offshore company includes an offshore trust created in Labuan.

(a) Offshore Companies

An offshore company carrying on an offshore trading activity (which includes banking, insurance, trading, petroleum operations, management activities, chartering and leasing of ships) for the basis period for a year of assessment will be taxed at a rate of 3% of its net profits or at a fixed rate of RM20,000 upon election by the company for that year of assessment payable to the Inland Revenue Department. An offshore company carrying on an offshore non-trading activity (which refers to an activity relating to the holding of investments in securities, stocks, shares, loans, deposits and immovable properties by an offshore company on its own behalf) for the basis period for a year of assessment is not subject to tax for that year of assessment.

(b) Companies other than Offshore Companies / Residents and Non-Resident Individuals

Companies operating in Labuan, incorporated or registered under the Companies Act 1965, are not recognised as offshore companies and do not enjoy the preferential tax treatment under the LOBATA. Such companies continue to be taxed under the Income Tax Act 1967. Tax incentives under the LOBATA are also not applicable to companies carrying on industrial and / or manufacturing activities but instead they may apply for incentives under the Promotion of Investments Act 1986. Non-resident and resident individuals in Labuan will continue to be taxed under the Income Tax Act 1967.

(c) Preferential Tax Treatment Accorded Under Income Tax 1967 and Stamp Act 1949

The preferential tax treatments are:

(i) Treatment on Dividends

Dividends received by an offshore company from a Malaysian resident company are not subject to income tax and no refund or set-off is given in respect of tax deducted from such dividends. Dividends paid by an offshore company out of income derived from an offshore business activity or out of exempt income is not subject to income tax in the hands of the recipient. Such dividends will be paid gross without any tax deduction at source.

(ii) Treatment on Distribution By Offshore Trust

Distribution made by an offshore trust is not subject t income tax in the hands of the beneficiary.

(iii) Treatment on Royalty

Royalty paid by an offshore company to a non-resident person or another offshore company is not subject to income tax and hence is not subject to withholding tax.

(iv) Treatment on Interest

Interest paid by an offshore company to a non-resident 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 a non-resident person in Malaysia, that interest will be subject to income tax as part of business income. Interest 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.

(v) treatment on Technical Or Management Fees

Technical or management fees paid by an offshore company to a non-resident or another offshore company is not subject to income tax.

(vi) Exemption from Stamp Duty

All instruments made in connection with an offshore business activity by an offshore company are not subject to stamp duty under the Stamp Act 1949.

(vii) Abatement of Tax for Professional Services

Income derived from qualifying professional services rendered to an offshore company in Labuan is exempted from tax up to an amount equivalent to 65% of the statutory income from that source. This incentive is applicable from the year of assessment 1997 to the year of assessment 2000.

(viii) Abatement of Tax for Business Relating to or Letting of a Qualifying Asset

Income derived from the carrying on of a business that relates to a qualifying asset or the letting of a qualifying asset in Labuan is exempted from tax up to an amount equivalent to 50% of the adjusted income from that source. This incentive is available if the construction project of a qualifying asset commenced before 1 October 1996.

(ix) Abatement of Tax for Employment

Income derived by a non-citizen individual from an employment exercisable in a managerial capacity of an offshore company in Labuan is exempted from tax up to an amount equivalent to 50% of the gross income from that employment. This exemption applies from year of assessment 1997 to year of assessment 2000.