The Inland Revenue Board of Malaysia (IRBM) has published Guidelines on Tax Treatment for Labuan Entities with Dormant Status ("the Guidelines") dated October 20, 2022, which will take effect in YA 2020.
The Labuan Investment Committee Pronouncements 1-2019 and 2-2019 concerning the compliance with substantial activities requirements and audited accounts by dormant companies for the purposes of the Labuan Business Activity Tax Act 1990 prompted the Labuan Investment Committee to issue these Guidelines.
These Guidelines elucidate:-
Labuan Entity with Dormant Status;
Substantive requirement
Responsibilities of Labuan Entity with Dormant Status
Labuan Entity with Dormant Status
1. Labuan entity is considered dormant if it:
has never commenced operations since the date of its incorporation;
has previously been in operation or carried on the business but has now ceased operations or business; or
it does not have any significant accounting transaction for one financial year before the occurrence of substantial change in its equity shareholding (i.e. 50% or more). This means there is no recording entry in the company accounts other than the minimum expenses for compliance with the stipulated statutory requirement. The minimum expenses referred to are as follows:
filing of the company’s annual return under the Labuan Companies Act 1990 to the Labuan Financial Services Authority (LFSA);
secretarial fee for the filing of the company’s annual return as per subparagraph (i);
tax filing fee;
audit fee; and
accounting fee.
Example 1:
NAT (Labuan) Ltd. was established on 01.03.2020.
However, NAT (Labuan) Ltd. is still not fully operational and only incurs expenses for filing an annual return of RM500 per year.
NAT (Labuan) Ltd. does not incur any expenses other than the expenses of filing such an annual return.
Therefore, NAT (Labuan) Ltd. is a dormant Labuan entity for the purposes of Act 445.
2. Labuan entity is NOT considered dormant if it owns shares, real properties, fixed deposits and other similar investments, including income such as rents, interest, etc. (if any) received under the mentioned ownership.
Example 2:
HCT (Labuan) Ltd. (year ended 31 December) is an investment holding company incorporated on 25.01.2005 under the Labuan Companies Act 1990.
A sole subsidiary of HCT (Labuan) Ltd., YMH Co. Ltd. completed its liquidation in November 2020.
HCT (Labuan) Ltd. plans to begin liquidation in the second quarter of 2021.
HCT (Labuan) Ltd. is not considered dormant in the year of assessment (YA) 2021 as it still holds shares in YMH Co. Ltd. until the company completes its liquidation in November 2020.
Substantive requirement
Labuan entities which are dormant or struck off, including those under winding up proceedings or under liquidation process, which do not derive any source of income need not comply with substantial activity requirements.
However, if Labuan entities resume operations, substantial requirements must be complied with until the last date of the accounting period.
Example 3:
Tvios (Labuan) Ltd. was established on 01.03.2021 and carries on business activities as a leasing company.
The accounting period for the company is 01.03.2021 – 28.02.2022. Tvios (Labuan) Ltd. did not conduct any business activities until 01.09.2021.
At the end of the accounting period, the net profit per the audited accounts was RM300,000. Based on the facts, Tvios (Labuan) Ltd. has been deemed a dormant company for a period from 01.03.2021 until 31.08.2021.
As the business operation commenced on 01.09.2021, it must comply with the substantial requirement of a sufficient number of full-time employees in Labuan from 01.09.2021.
Meanwhile, the requirement for an adequate amount of annual operating expenses of Labuan entities must be complied with before or no later than 28.02.2022.
Responsibilities of Labuan Entity with Dormant Status
The responsibilities of Labuan entities which are dormant under Act 445 are as follows:
Reference
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