A Guide to Labuan Economic Substance Requirement (ESR)

Economic Substance Requirements (ESR) for Labuan entities were introduced. Section 2B(1)(b) of the LBATA requires Labuan entities, for the purpose of the Labuan business activity, to have (i) an adequate number of Full Time Employees (FTE) in Labuan, and (ii) an adequate amount of annual Operating Expenditure (OPEX) in Labuan. Refer to the following to understand on your tax treatment based on the current ESR status.

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Requirements for Labuan business activity

A Labuan entity carrying on a Labuan business activity shall have the number of full time employees and the amount of annual operating expenditure—

in relation to a Labuan trading activity, as specified in the First Schedule; and
in relation to a Labuan non-trading activity, as specified in the Second Schedule,

in the basis period for a year of assessment.

Labuan Trading Activity (first schedule)

Labuan ESR 2021 PUA 423-2021 FIRST SCHEDULE.pdf

Labuan non-trading activity (second schedule)

Definition of holding company for Labuan substantial activity requirements is based on the OECD’s Holding Company definition under paragraph 86 of the Base Erosion Profit Shifting Action 5 2015 Final Report on “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance’’. The holding company can be broadly divided into two categories:

Pure Equity Holding

Definition - Companies that hold equity participations and earn only dividends and capital gains.

Non - Pure Equity Holding

Definition - Companies that hold a variety of assets and earn different types of income (e.g. interest, rents, and royalties), receive only non dividend income from the holding of investments such as bonds, sukuk, debt instruments, properties, securities or etc.

Labuan ESR 2021 PUA 423-2021 SECOND SCHEDULE.pdf

Control and management in Labuan for Labuan Pure Equity Holding

For the purpose of item 2 of Second Schedule, a Labuan entity carrying on a Labuan business activity shall comply with the conditions in relation to control and management in Labuan as follows:

meeting of the board of directors is convened in Labuan at least once a year;
the registered office of the Labuan entity shall be situated in Labuan;
the secretary of the Labuan entity appointed under the Labuan Companies Act 1990 [Act 441] shall be resident in Labuan; and
the accounting and business records including the minutes of meeting of the Labuan entity’s board of directors shall be kept in Labuan.

Dormant

Definition of “Dormant Company”:-

A company is considered dormant if it does not have any significant accounting transaction for one financial year before the occurrence of substantial change (i.e. 50% or more) in its equity shareholding. This means that there is no recording entry in the company accounts other than the minimum expenses for compliance with stipulated statutory requirement.

The minimum expenses referred to are as follows:-

(i) Filing of the company’s annual return to the Companies Commission of Malaysia;

(ii) Secretarial fee for filing of company’s annual return;

(iii) Tax filing fee;

(iv) Audit fee; and

(v) Accounting fee.

Situation of “Dormant Company”:-

The company has never commenced operations since the date of its incorporation; or The company has previously been in operation or carried on business but has now ceased operations or business.

*Note:

A company is not considered as dormant if it owns shares, real properties, fixed deposits and other similar investments; including income such as rents, interest, etc. (if any) received by virtue of the mentioned ownership.

Not listed under Labuan Business Activity

Business activity that not listed in Labuan Business Activity will be scoped-in into the Income Tax Act 1967 (ITA) instead of Labuan Business Activity Tax Act 1990 (LBATA).

Tax treatment

References

You may refer to this link to understand further on the Labuan Tax-Related Matters .