Labuan: Personal Taxation

On this Page:

- LABUAN RESIDENCE AND LIABILITY FOR TAXATION
- LABUAN INCOME TAX
- LABUAN SOCIAL SECURITY TAXES
- LABUAN INDIVIDUAL OFFSHORE TAXATION PRIVILEGES

NB: Labuan is part of Malaysia, and the national taxation regime applies to individuals working there, except for concessions explained below in Individual Offshore Taxation Privileges.

In the 2005 budget, it was announced that the sales and service taxes would be replaced with a single consumption tax, the goods and services tax (GST). This was scheduled to take place in January 2007, but as at January 2009, the GST had not been introduced.

The Goods and Services Tax Bill 2009 was tabled in Parliament for a first reading on 16 December 2009. It is expected that a GST of 4% will be implemented in some time in 2011

Changes to the corporate tax rate were also announced, and similar amendments to the tax regime for individuals were thought to be underway.

However, in September 2007, the Prime Minister disappointed individual taxpayers who were hoping for a cut in the 28% top rate of income tax by leaving income taxes on hold. The top rate has subsequently been cut to 26%.

Labuan Residence and Liability for Taxation

Residents are subject to tax on Malaysian-source income and on foreign-source income received in Malaysia (ie it is a territorial basis of taxation). Non-residents are subject to tax on Malaysian-source income only.

Individuals are considered resident in any of the following circumstances:

• They are physically present in Malaysia for 182 days or more during the calendar year;
• They are physically present in Malaysia for less than 182 days during a calendar year, but that time is connected to physical presence of at least 182 consecutive days in either the preceding or succeeding calendar year;
  • Periods of temporary absence are considered part of a period of consecutive presence if the absence is related to the individual's service in Malaysia, personal illness, illness of an immediate family member or personal trips of 14 days or less.
• They are in Malaysia during the calendar year for at least 90 days and have been resident or present in Malaysia for at least 90 days in any three of the four preceding years.
• They have been resident for the three preceding calendar years and will be resident in the following calendar year. This is the only case in which an individual is considered resident though not physically present in Malaysia.

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Labuan Income Tax

Gross income from employment includes wages, salary, remuneration, leave pay, fees, commissions, bonuses, gratuities, perquisites or allowances (in money or otherwise) arising from employment; directors' fees.

Employee benefits and amenities not convertible into money are included in employment income. The cost of leave passages for an employee and the employee's immediate family are also taxable, although the following items are exempt:

• Leave passage within Malaysia, up to three times in a calendar year; or
• One leave passage in a calendar year from Malaysia to any place outside Malaysia, up to a maximum amount designated by the authorities.

Income tax is payable on taxable income by residents at progressive rates up to 28%

There are a number of permissible deductions in calculating

• Interest on borrowings used to finance the purchase of income-producing property or investments;
• Donations of cash to the government, a local authority or an institution or organization approved by the tax authorities;
• A rebate is allowed to individuals once every five years for the purchase of a personal computer, which may not be used for business purposes;
• Foreign employees may claim a rebate for amounts spent to obtain employment passes, visit passes and work permits;
• Personal allowances for self and spouse;
• Medical expenses for parents, capped at an amount designated by the authorities;
• Expenses for disabled family members;
• Life insurance premiums/provident fund contributions, capped;
• Medical expenses for self, wife or child with serious disease, capped;
• Medical and educational insurance premiums, capped..

For non-residents, local source income is subject to withholding taxes at the following rates, at the time of writing:

• Use of movable property (ie rental income) 10%
• Technical advice, assistance or services 10%
• Installation services for the supply of plant, machinery and similar assets 10%
• Personal services associated with the use of intangible property 10%
• Royalties for the use or conveyance of intangible property 10%
• Services of a public entertainer 15%
• Interest 15%
• Contract payments to nonresident contractors 20%
• Other income 30%

Short-term visitors to Malaysia are exempt from income tax if their employment does not exceed:

• A period totaling 60 days in a calendar year;
• A continuous period or periods totaling 60 days spanning two calendar years; or
• A continuous period spanning two calendar years, plus other periods in either of the calendar years, totaling 60 days.

Under most of Malaysia's tax treaties, a business visitor to Malaysia for varying periods of up to 183 days is exempt from Malaysian income tax if the services performed are for, or on behalf of, a nonresident person and if the remuneration paid for the services is not directly deductible from the income of a permanent establishment in Malaysia.

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Labuan Social Security Taxes

No social security tax is levied in Malaysia, but employees are required to contribute to the Employees' Provident Fund (EPF).

The statutory rate of contribution is 23% of monthly wages at the time of writing, 12% paid by the employer and 11% by the employee. Employees' contributions are deducted at source. There is no maximum salary level.

Expatriates who earn above a certain amount per month are not required to contribute to the EPF, but may choose to do so in order to gain tax relief: contributions may be withdrawn if the employee leaves Malaysia permanently with no intention of returning, and there is no tax charge on withdrawal.

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Labuan Individual Offshore Taxation Privileges

The following income is exempt from tax in the hands of a Malaysian or foreign recipient, at the time of writing:

• a dividend received by, or received from an offshore company;
• distributions received from an offshore trust by the beneficiaries;
• royalties received by a non-resident;
• interest received from an offshore company under certain circumstances and amounts received from an offshore company for providing services.
• 65% of income from offshore entities from the rendering of legal, accounting, financial or secretarial services, including that of a trust company as defined in the Labuan Trust Companies Act, 1990 is exempted from tax.
• Income earned from renting a "qualifying asset" to an offshore company in Labuan is exempt from tax for an amount of up to 50% of the income received for a period of 5 years. Thus a developer can expect to only pay tax on 50% of the income received from a building rented out to offshore companies.
• 50% of the housing and regional allowances given to residents working in the public sector and offshore companies in Labuan will be exempted from tax.
• Second tier dividends declared out of dividends received from an offshore company by a domestic company are exempted from tax.
• Distributions made by an offshore trust are not subject to income tax in the hands of the beneficiary.
• Royalties paid by an offshore company to a non-resident person company are not subject to income tax and hence are not subject to withholding tax.
• Interest paid by an offshore company to a nonresident person is not subject to income tax.
• Interest paid by an offshore company to a resident person, other than a person carrying on a banking, finance company or insurance business in Malaysia, is not subject to income tax.
• Technical or management fees paid by an offshore company to a nonresident are not subject to income tax.
• A non-Malaysian citizen employed in Labuan in a managerial capacity would have been exempt from payment of tax on up to 50% of his employment income until 2004; this concession was extended a number of times, so it is worth checking the current tax status of overseas employees before the decision on whether to live and work in Labuan is made.

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