Taxation of a Labuan offshore company is governed by the Labuan Offshore Business Activity Tax Act 1990 or LOBATA 1990. An offshore company carrying on an offshore business activity shall be charged to tax in accordance with the provision of LOBATA 1990 for each year of assessment.[1] “Offshore business activity “means an “offshore trading” or an “offshore non-trading” activity carried on in or from Labuan in the currency other than Ringgit by an offshore company with non-residents or with another offshore company but does not include shipping operation.[2]

The term "offshore non-trading activity" refers to activity such as the holding of investments in securities, stock, shares, loans, deposits and immovable properties by an offshore company on its own behalf.[3] The term "offshore trading activity" includes banking, insurance, trading, management, licensing or any other activity which is not an offshore non-trading activity.[4]

With effect from the year of assessment 1996, petroleum operations are not regarded as an offshore business activity. The change is aimed at attracting oil exploration companies to use Labuan as a base for their regional oil exploration and other activities. Further, offshore companies that have been approved to invest in domestic Malaysian companies are allowed to hold the investments in Malaysian Ringgit. Such holding does not amount to dealing with Malaysian residents.

With effect from the year of assessment 1999, the definition of "offshore business activity" has been extended to cover income from transactions with Malaysian residents through money broking and offshore leasing activities. Further, other activities that involve the carrying on of activities with Malaysian residents or in Malaysian currency would now be subject to approval by the Minister of Finance.

Permitted investments in domestic companies in Malaysian currency are now included in the definition of "offshore business activity". So too charter of ships on a "bare boat" basis will now qualify as an "offshore business activity".

If an offshore company carries on an offshore trading activity, tax at the rate of 3% is imposed upon its chargeable profits[5] for the year of assessment.[6] Alternatively, this offshore company can elect to be assessed at a fixed rate of RM20,000 for a year of assessment.[7] When making an election, the offshore company will have to file statutory declaration in the prescribed form.

Where the flat rate of RM20,000 is chosen there is no need to file audited accounts. However the company should still maintain adequate financial records. An offshore company carrying on offshore business activities that does not have an accounting period for a year of assessment will have to pay RM20,000 and file a statutory declaration within three months from the commencement of the year of assessment.[8]

An offshore company carrying on offshore non-trading activity pays no tax.[9] Such an offshore company is still required to file a statutory declaration in the prescribed form.[10]

An offshore company carrying on an offshore trading activity must file a statutory declaration and return of profit within three months from the commencement of a year of assessment. However, the IRB has allowed extension and the filing is now made on or before 31st of May every year. Further extensions may be applied for on or before 30th April every year.

Election to pay RM20,000 can be made within 3 months from commencement of year of assessment. When exercising an election, the offshore company must file a statutory declaration in the prescribed form.

Where an offshore company carries on both an offshore trading activity and an offshore non-trading activity, it will be deemed to be carrying on an offshore trading activity. Thus the offshore company is liable to pay tax at the rate of 3% of its audited net profit or elect to pay RM20,000..

Any income derived by an offshore company from an activity which is not an offshore business activity will continue to be subject to the Income Tax Act 1967.

Tax rebate is granted to an offshore company for any zakat which is paid in the basis period for that year of assessment.[11]

The responsibility of tax compliance done by or on behalf of an offshore company lies jointly and severally with the manager, principal officer and resident director of an offshore company.[12]

Election to be taxed under the Income Tax Act

With effect from the year of assessment 2008, a Labuan offshore company may now elect to be taxed under the ITA 1967. The election must be irrevocable. Tax is to be paid under the ITA 1967 at the prevailing tax rate and the Labuan offshore company will be governed by all the provisions therein. At least in theory, this should enable the Labuan offshore company to access and benefit from all the Double Tax Treaties that Malaysia has signed with its 60 plus treaty partners. Since all the income of the Labuan offshore company is foreign sourced, this income when remitted to Labuan/Malaysia will be exempted from Malaysian Income Tax. Not only is the income of the Labuan offshore company tax exempt, it also exempts the shareholders of the Labuan offshore company from paying any income tax when they receive dividends from the Labuan offshore company.

Election procedure

The election must be made and furnished to the Director General of Inland Revenue [DGIR] within three (3) months after the start of the basis period for a year of assessment. For an offshore company where its basis period ends on a day in the Year of Assessment 2008, the election may be made and furnished before 1 August 2008. The election shall be effective for that basis period for a year of assessment (for which the election was made) and subsequent basis periods.

The LOBATA imposes tax on a preceding year basis. The ITA 1967 on the other hand imposes tax on a current year basis. Therefore, the accounting period for which the election is made may refer to a different year of assessment under those Acts.

An offshore company may make an irrevocable election in the prescribed Form 8 and submit the form to the following:

Inland Revenue Board of Malaysia

Labuan Branch

Unit E.004 & E.005

1st Floor, Podium Level

Kompleks Ujana Kewangan

Jalan Merdeka

87000 Wilayah Persekutuan Labuan

Compliance requirement

Upon election, an offshore company is required to comply with the provisions under the ITA 1967 in the year of assessment in which the election was made and for the subsequent years of assessment. Amongst others, an offshore company is required to:

i. file an estimate of tax payable, if any, by completing Form CP204 and furnish it to the DGIR not later than 30 days before the beginning of the basis period for that year of assessment;

ii. make payments by installment on a monthly basis, commencing from the 2nd month of the basis period for the year of assessment of which an estimate has been furnished;

iii. pay their final tax liability by the 7th month from the date following the close of the company's accounting period;

iv. keep documents for ascertaining chargeable income and tax payable; and

v. subject to tax audit.