There are two corporate tax legislations in Malaysia, namely the Income Tax Act, 1967 (“ITA”) and the Labuan Business Activity Tax Act 1990 (“LBATA”).
Income Tax Act, 1967 (“ITA”)
The ITA mainly applies to all domestic business entities in Malaysia, ranging from sole proprietorships, partnerships, private limited companies (Sdn Bhd) and public listed companies. Similar to tax computation in other jurisdictions like Hong Kong and Singapore, in general, the corporate income tax is imposed on income accruing in or derived in Malaysia. The current headline tax rate is 24% for resident company. With effect from YA2023, the first RM100,000 of chargeable income of a resident company is taxed at 15%, while subsequent income from RM100,001 to RM600,000 will be taxed at 17%, and any income in excess of RM600,000 is taxed at 24%. See below Table 1 for tax scale rates and the definition of a resident company for tax purposes.
Labuan Business Activity Tax Act 1990 (“LBATA”)
The LBATA is an independent piece of legislation which was introduced at the same time as Labuan Companies Act in 1990. LBATA was designed specifically for Labuan when it became an international financial services centre, granting the Labuan entities to benefit from low tax rates. The intention of this tax framework was purposefully made simple and to attract businesses to set up shops in the island.
In early 2019, the Labuan tax regulations had undergone critical changes, most notably where a Labuan company is not automatically eligible to pay tax under the LBATA. If the business activity falls under the trading category as listed in the Schedule, the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021, your Labuan company is entitled to pay 3% tax on net audited profit provided that the economic substance requirements (ESR) are complied with. However, if the business activity carried out is not in the Schedule, your Labuan company will be treated and assessed under the domestic ITA.
The mechanics of tax calculation under the LBATA is straightforward, tax rate is applied direct on the audited accounting profits/loss. Unlike the common tax computation in other jurisdictions such as Hong Kong, Singapore and Malaysia (domestic), LBATA does not recognise ‘taxable/non-taxable income’, ‘deductible/non-deductible expenses’ or ‘realised/unrealised gain or losses’. It simply assesses tax based on the company’s ability to meet the economic substance, and the tax calculation is based on the net audited profit/loss reflected in the audited financial statements.
The Difference between ITA and LBATA
Here’s what you need to know on the main differences between the two tax legislations. Mind you, both can be applied to a Labuan company, depending on the type of business activity it is carried on.
Get in touch with us if you wish to get more insights of the Labuan tax regulations and explore how you can benefit from the low tax rates using a Labuan company.
Please note that this write-up is not a tax, legal or accounting advice. Readers should consult own tax, legal and accounting advisors before engaging us. This write-up has been prepared for informational purposes only and is not to be relied upon as a professional opinion whatsoever. Please note that whilst considerable care has been taken to ensure the information contained within this write-up is accurate and up to date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information. The information given in this document is based on our present understanding of the current laws and regulations and may therefore be subject to change without notice.
Prepared by Team HMR Konsultan