In an effort to promote as well as develop Labuan as an International Offshore Financial Centre (IOFC), the regulatory body known as Labuan Offshore Financial Services Authority (LOFSA) was set up to spearhead and coordinate such efforts.
LOFSA will be expected to streamline the government machinery in the supervision of the offshore financial services industry. It will also undertake research and development as well as to draw plans for the further growth and efficiency of IOFC.
The major offshore operations that are administered by LOFSA include insurance, trust and fund management, banking, securities and incorporation/registration of the companies. Currently there are about 1600 offshore companies that have already set up operations in Labuan. The offshore companies that are located there include offshore banks, trust companies and insurance as well as insurance related companies.
This particular legislation offers a variety of incentives and they include;
Minimum Tax
Offshore trading activity that is carried out by offshore companies can either chooses to pay their taxes at a rate of 3% of the net audited profits or they can pay a fixed sum of RM20, 000 per year. As for an offshore company that is carrying on an offshore non-trading activity for the basis period of a year of assessment then they will not be subjected to tax for that particular year of assessment. A fixed rate of RM20, 000 will still be charged to an offshore company that has no basis period for a year of assessment for that particular year.
Abatement of Tax for Professional Services
Income that is derived from a person, the employee or the company from a qualifying professional service that has been rendered to an offshore company in Labuan will be exempted from paying tax that is up to amount equivalent to 65% of the statutory income from that particular source. This particular exemption is applicable from the Year of Assessment in 1992 to the Year of Assessment in 2000. In this context the term qualifying professional service means accounting, secretarial service, legal, financial as well as the services that are provided by a trust company which is defined in the Labuan Trust Companies Act 1990.
Abatement of tax for business that is related to or the letting of a qualified asset
Tax will be exempted up to an amount that is equivalent to 50% of the adjusted income of a person that is derived from the carrying on of a business that relates to a qualifying asset or the letting of a qualifying asset in Labuan. The exemption of the tax applies to a person that has undertaken the construction project of the qualifying asset themselves or has purchase the qualifying asset from the person that undertook the construction project of the asset.
This exemption will be applicable for a period of five consecutive years of assessment and it will commence from the year of the assessment in which the adjusted income first arises from that particular source. In such cases the total exemption that is given to both the person that constructed as well as the person that purchased the qualifying asset will not exceed the five years of assessment.
Abatement of Tax for employment
Tax will be exempted up to an amount of 50% of the gross income from that particular employment if the income was derived by a non-citizen individual from an employment that was exercised in a managerial capacity in an offshore company in Labuan. This particular exemption is applicable from the Year of Assessment in 1992 to the Year of Assessment in 2000.
Exemption from Tax
According to the Income Tax Act 1967 the following will be exempted effective from the Year of Assessment in 1991 and they include; The dividend that is received by an offshore company from a Malaysian resident company will not be subjected to income tax and no refund or set-off will be given in terms of the tax that was deducted from the dividend. Dividend that is paid by an offshore company out form the income that was derived from an offshore business activity or out from the exempted income will not be subjected to income tax in the hands of the recipient. These particular dividends will instead be paid gross without any tax deducted at the source. Distribution that is made by an offshore trust will not be subjected to income tax in the hands of the beneficiary. Royalty that is paid by an offshore company to a non-resident person or to another offshore company will not be subject to income tax and hence will also not be subjected to withholding tax. Interest that is paid by an offshore company to a non-resident person or to another offshore company will not be subject to income tax. However you should take note that is the interest accrues to a banking facility, a finance company or a insurance business that was carried on by a non-resident person in Malaysia then the interest will be subjected to the income tax as part of the business income. Interest that is paid by an offshore company to a resident person besides the person that is carrying on a banking, insurance business or finance company in Malaysia will not be subjected to income tax. Technical or management fee that is paid by an offshore company to a non-resident or to another offshore company will not be subjected to income tax.
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