New rules and regulations applicable to Labuan companies and transactions with. Labuan companies. EY Tax Alert

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1 Special Edition January Issue 01 EY Tax Alert New rules and regulations applicable to Labuan companies and transactions with Labuan companies Highlights Limitation of tax deductions on payments to Labuan companies Prescribed employee and annual operating expenditure requirements for Labuan companies This Alert discusses two important updates resulting from the Budget 2019 proposals. These updates, which will impact Labuan companies and any Malaysian resident transacting with Labuan companies, are discussed below. Limitation of tax deductions on payments to Labuan companies The new Section 39(1)(r) of the Income Tax Act 1967 (ITA) provides that a tax deduction will not be allowed on payments by Malaysian residents to Labuan companies, subject to any rules that may be prescribed by the Minister of Finance. Section 39(1)(r) is effective from 1 January The Income Tax (Deductions Not Allowed for Payment Made to Labuan Company by Resident) Rules 2018 [P.U.(A) 375], gazetted on 31 December 2018, came into operation on 1 January 2019 and set out the relevant rules relating to Section 39(1)(r). 1 EY Tax Alert No. 1/ January 2019

2 Pursuant to the Rules, the types of payment made by a Malaysian resident to a Labuan company that are disallowed a tax deduction pursuant to section 39(1)(r) are as follows: Type of payment Interest payment Amount not allowed for deduction 33% of the payment amount Lease rental 33% of the payment amount Other payments 97% of the payment amount. Malaysian resident companies transacting with Labuan companies will need to evaluate the impact of the above disallowance on their tax positions. The impact could be especially significant for residents making payments other than interest or lease payments to Labuan companies, as 97% of such expenses will be disallowed a tax deduction. Since Section 39(1)(r) is effective from 1 January 2019, companies will need to consider the impact that the disallowance of the relevant expenses will have on their tax estimates for the year of assessment 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 have an: a) Adequate number of full-time employees in Labuan; and b) Adequate amount of annual operating expenditure in Labuan The Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 [P.U.(A) 392], gazetted on 31 December 2018, came into operation on 1 January 2019 and provide further details on the above requirements. The minimum number of full-time employees and amount of annual operating expenditure are specified based on the business carried on by the Labuan entity, as follows: Labuan entity carrying on a Labuan business activity Minimum number of full-time employees in Labuan Minimum amount of annual operating expenditure in Labuan (RM) Labuan insurer, Labuan reinsurer, Labuan takaful operator or Labuan retakaful operator 4 150,000 2 EY Tax Alert No. 1/ January 2019 Special Edition

3 Labuan entity carrying on a Labuan business activity Minimum number of full-time employees in Labuan Minimum amount of annual operating expenditure in Labuan (RM) Labuan underwriting manager or Labuan underwriting takaful manager Labuan insurance manager or Labuan takaful manager Labuan insurance broker or Labuan takaful broker Labuan captive insurer or Labuan captive takaful Labuan International Commodity Trading Company Labuan bank, Labuan investment bank, Labuan Islamic bank or Labuan Islamic investment bank 4 100, ,000, ,000 Labuan trust company 3 120,000 Labuan leasing company or Labuan Islamic leasing company Labuan credit token company or Labuan Islamic credit token company Labuan development finance company or Labuan Islamic development finance company Labuan building credit company or Labuan Islamic building credit company Labuan factoring company or Labuan Islamic factoring company Labuan money broker or Labuan Islamic money broker Labuan fund manager Labuan securities licensee or Labuan Islamic securities licensee Labuan fund administrator Labuan company management Labuan International Financial Exchange Self-regulatory organization or Islamic selfregulatory organization 2 100, ,000 Holding Company 2 50,000 3 EY Tax Alert No. 1/ January 2019 Special Edition

4 Labuan entities which do not meet the substance requirements above will not be treated as carrying on a Labuan business activity and will be subject to tax under the ITA instead of the LBATA. At this stage, it is unclear whether any substance requirements will be imposed for Labuan entities carrying on activities other than those listed above. 4 EY Tax Alert No. 1/ January 2019 Special Edition

5 Contact details Principal Tax contacts Yeo Eng Ping Amarjeet Singh Global Compliance and Reporting Simon Yeoh Julian Wong Datuk Goh Chee San (based in Sabah) Janice Wong Julie Thong Lee Li Ming (based in Johor) Liew Ai Leng Koh Leh Kien Mark Liow (based in Penang) Linda Kuang (based in Kuching) People Advisory Services Tan Lay Keng Irene Ang Christopher Lim Business Tax Services Amarjeet Singh Farah Rosley Robert Yoon Wong Chow Yang Transaction Tax Services Yeo Eng Ping Sharon Yong International Tax Services Anil Kumar Puri Asaithamby Perumal Transfer Pricing Sockalingam Murugesan Vinay Nichani Hisham Halim Indirect Tax Yeoh Cheng Guan Aaron Bromley Financial Services Bernard Yap

6 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Tax Consultants Sdn. Bhd. All Rights Reserved. APAC no ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com