Labuan

PODJETJA

Labuan

Labuan Double Tax Treaties

In pursuit of foreign investment, Malaysia has signed 62 double tax treaties, of which 50 are in force, mostly having low rates of withholding tax on outgoing payments. Details are given below for 34 of these treaties. A further 13 treaties are under negotiation.

All Malaysian tax treaties follow the OECD model treaty with some modifications; however the US treaty provides reciprocal exemption to international shipping and air transportation businesses only.

In many cases, Malaysian tax treaties include 'tax sparing' provisions, whereby a dividend that is distributed out of profits which have been exempted from tax under Malaysian tax incentive regimes is deemed to be have been paid out of profits that have been subject to tax. This enables the recipient to claim a tax credit on the exempt dividend in his home country.

There are no anti-treaty shopping provisions in the treaties.

Malaysia has recently concluded double tax treaties with Malta, Mongolia, Sudan, Islamic Republic of Iran, Saudi Arabia, Turkey, Jordan and Vietnam which have not been ratified to date.

Although Labuan, as an integral part of the state of Malaysia, gains the benefit of the country's tax treaties, which were largely signed before Labuan's offshore regime came into existence, some countries have specific or general anti-avoidance legislation which excludes Labuan offshore entities from treaty benefits.

Thus, the Netherlands, Switzerland and Sweden have excluded Labuan from their treaties. Asian countries on the whole have accepted Labuan in treaty-based tax planning, largely no doubt because they are all themselves hungry for inward investment. Changes are proposed in amendments to the Labuan Offshore Business Activity Act, introducing a higher rate of tax for companies taking advantage of treaties.

South Korea however has agitated for Labuan to be excluded from a revised version of its Malaysian tax treaty. In November, 2005, the chief administrators of the Korean National Tax Service (NTS) and the Malaysian Inland Revenue Board (IRB) held a meeting on the subject in Kuala Lumpur.

The Korean tax authorities believe that many of the firms which they have accused of avoiding tax on capital gains are doing so through offices registered in Labuan. In September, six foreign fund firms were landed with a total back tax bill of more than US$200 million by the Korean National Tax Service after an investigation which began earlier in the year.

According to the NTS, the funds evaded taxes by nominally basing themselves offshore, paying high rates of interest to their overseas affiliates, using illegal expenses and failing to report securities transactions in accordance with the law.

The following are some of the countries which have double-tax treaties with Malaysia (some further treaties have been signed and await ratification: check in case this has taken place):

    * Albania
    * Australia
    * Austria
    * Bangladesh
    * Belgium
    * Canada
    * China
    * Denmark
    * Finland
    * France
    * Germany
    * Hungary
    * India
    * Indonesia
    * Italy
    * Japan
    * Korea

* Mauritius
    * Netherlands
    * New Zealand
    * Norway
    * Pakistan
    * Papua New Guinea
    * Philippines
    * Poland
    * Romania
    * Russia
    * Singapore
    * Sri Lanka
    * Sweden
    * Switzerland
    * Thailand
    * United Kingdom
    * Zimbabwe

Labuan Table of Treaty Rates

This table lists the percentage rates of withholding tax on certain types of payment made between Malaysia and some of its treaty partners:

Country	Dividends	Royalties	Interest
Country	Paid from Malaysia	Paid from Malaysia	Paid from Malaysia
Albania	nil	nil or 10	nil or 15
Australia	nil	nil or 10	nil or 15
Austria	nil	10	nil or 15
Bangladesh	nil	nil or 10	nil or 15
Belgium	nil	10	nil, 10 or 15
Canada	nil	nil or 10	nil or 15
China	nil	10	nil or 10
Denmark	nil	nil or 10	nil or 15
Finland	nil	nil or 10	nil or 15
France	nil	nil or 10	nil or 15
Germany	nil	nil or 10	nil or 15
Hungary	nil	10	nil or 15
India	nil	nil or 10	nil or 15
Indonesia	nil	10	nil or 15
Italy	nil	nil or 10	nil or 15
Japan	nil	10	nil, 10 or 15
Korea	nil	nil or 15	nil or 10
Mauritius	nil	10	nil or 15
Netherlands	nil	nil or 10	nil or 15
New Zealand	nil	nil or 10	nil or 15
Norway	nil	nil or 10	nil or 15
Pakistan	nil	nil or 10	nil or 15
Papua New Guinea	nil	nil or 10	nil or 15
Philippines	nil	nil or 10	nil or 15
Poland	nil	nil or 10	nil or 15
Romania	nil	nil or 10	nil or 15
Singapore	nil	10	nil or 15
Sri Lanka	nil	nil or 10	nil or 15
Sweden	nil	nil or 10	nil or 15
Switzerland	nil	nil or 10	nil or 10
Thailand	nil	nil or 10	nil or 15
Russia	nil	10	nil or 15
United Kingdom	nil	nil or 10	nil or 15
Zimbabwe	nil	nil or 10	nil or 10

Labuan Other International Agreements

During 2003, attention was given to the international initiative against money laundering, with the introduction of the Anti-Money Laundering (Invocation of Part IV (No.2)) Order 2003. The provision relates to the reporting obligations of institutions licensed or registered to carry on, among others, offshore banking, insurance and trust company business.

Section 125A inserted into the Malaysian Penal Code, making it an offence to harbour or attempt to harbour any person in Malaysia or any person residing in a foreign state at war or in hostility against the King.

The Mutual Assistance in Criminal Matters Act 2002 (MACMA), which came into effect on 1 May 2003, was introduced to provide for mutual assistance in criminal and related matters between Malaysia and other countries.

The new section of the Penal Code and MACMA provides LOFSA with additional avenues for cooperation with other supervisory and regulatory authorities, locally and internationally, to increase compliance and improve security for the offshore industry.