Update to prescribed employee and annual operating expenditure requirements for Labuan companies
Section 2B of the Labuan Business Activity Tax Act 1990 (LBATA) provides that a Labuan entity carrying on a Labuan business activity must comply with certain substance requirements, i.e., the Labuan entity must have an:
- Adequate number of full-time employees in Labuan, and
- Adequate amount of annual operating expenditure in Labuan
in order to qualify for the preferential tax rates under the LBATA. A Labuan entity carrying on a Labuan business activity which does not comply with the substance requirements would be subject to tax at 24% on net audited profits.
The following were previously gazetted in relation to the above requirements, and were deemed to have come into operation on 1 January 2019:
- Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 [P.U.(A) 392/2018]
- Labuan Business Activity Tax (Requirements for Labuan Business Activity) 2018 (Amendment) Regulations 2020 [P.U.(A) 375/2020]
The Labuan Financial Services Authority (LFSA) had also issued multiple circulars setting out revisions, clarifications or positions in relation to the substance requirements.
Following the above, the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 [P.U.(A) 423] (new Regulations) were gazetted on 22 November 2021. The substance requirements set out in these new Regulations are outlined in Appendix I and Appendix II to this Alert.
The key updates are as outlined below:
(a) The new Regulations include the substantial activity requirements for Labuan entities that carry out the following types of services:
i) administrative
ii) accounting
iii) legal
iv) backroom processing
v) payroll
vi) talent management
vii) agency
viii) insolvency-related
ix) management
Please refer to Item 20 of Appendix I to this Alert.
(b) The new Regulations stipulate that a Labuan entity that undertakes pure equity holding activities will be required to adhere to the following, in order to comply with the management and control requirements which are part of the Labuan substance requirements:
- Its board of directors meeting is convened in Labuan at least once a year
- Its registered office is situated in Labuan
- Its secretary appointed under the Labuan Companies Act 1990 is a Labuan resident, and
- Its accounting and business records (including minutes of meeting) are kept in Labuan
This is in line with the Directive on Management and Control Requirements for Labuan Entities that Undertake Pure Equity Holding Activities (Directive) and Clarification on the Directive issued by the LFSA on 10 August 2020 and 10 September 2020 respectively (see Tax Alert No. 14/2020 and Tax Alert No. 16/2020).
With this, P.U.(A) 392/2018 is revoked. The new Regulations are deemed to have come into operation on 1 January 2019, except for Point (b) above which is deemed to have come into operation on 1 January 2021.
