About Labuan Company’s Domestic Business in Malaysia
Here assuming, we establish a Labuan company and organise some points for those who are considering business activities in Malaysia.
|About Malaysia domestic business||Is it possible to conduct business activities in Malaysia using Labuan Company?|
|Is it possible to obtain Labuan work permit and work in Malaysia?|
We have received many of the above questions from clients who are considering establishing a Labuan company and moving to Malaysia, but in fact, these questions are very difficult to answer.
Business activities in Malaysia using Labuan Work Permit are extremely difficult
Since Malaysia is a country that adopts the rare 1 country 2 taxation system in the world, the Malaysian Company Law (Act.1965) and the Labuan Company Law (Act.1990) coexist (similar to China – Hong Kong relations) .
In this way, Labuan is a very special region with a different tax system in Malaysia, so first of all, it should be noted that the use of Labuan company is premised on transactions with foreign countries other than Malaysia. Kindly understand this point.
|Malaysian Company (Act.1965)||Labuan Company (Act.1990)|
|Paid up capital is less than 2.5 million RM [*]||17％ (Taxable income up to 500,000RM||Trading Activity||3%|
|Taxable income exceeds 500,000RM||24％|
|Paid up capital is more than 250 million RM||24％||Non Trading Activity||0%|
* Excluding cases where affiliated companies with paid up capital exceeding 2.5 million RM are within the group company.
|Malaysia Company（Act.1965）||Main trading target in Malaysia (onshore trading)|
|Labuan Company（Act.1990）||Main trading target outside Malaysia (offshore trading)|
In this way, because Labuan Company is a corporation that conducts offshore transactions (international transactions) by nature of business, business activities in Malaysia and transactions with Malaysian residents (including corporations) are prohibited in principle.
|Eg: Onshore trading:||When operating a Japanese restaurant in Kuala Lumpur|
|When take place a nail salon or piano class in Johor Bahru|
|When opening a duty-free shop in Labuan|
|→ In this case, business activities are being carried out in Malaysia, it will be onshore trading.|
|Eg: Offshore trading:||When importing wine and perfume from France and exporting to Japan or China|
|When doing online shopping and affiliate business for Japan using Labuan servers|
|→ In this case, since there is no business activity in Malaysia, it will be offshore trading.|
What is the essence of Labuan Work Permit?
As we already know, the Malaysian government has designated Labuan as a special economic zone, an offshore financial center has been established, and 1 country 2 taxation system.
However, unlike the initial assumption, Labuan itself did not receive much attention, so the Malaysian government granted a migration privilege for West Malaysia to the Labuan work visa to promote as new promotion.
As a result, the value of Labuan was reconsidered, the number of establishments of Labuan companies (entities) increased, and the number of Malaysian migrants using this structure is increasing year by year..
However, because Malaysia itself is not a tax haven (offshore), the government is very wary of being involved in the logic of the Labuan side and making the whole Malaysia a tax haven.
In this way, the essence of Labuan work permit in a complex double standard of 1 country and 2 tax systems is one word: “If you set up a company, you will be granted the right to live in Malaysia for the time being“.
This is because, if unconditionally admitting business activities in West Malaysia, Labuan has a very special form of corporate tax, which is a low tax rate. This is because a company will be established. This will make the whole Malaysia a tax haven.
(For example, consider the relationship between Hong Kong and China. If a Hong Kong company can do business in China, everyone will establish a Hong Kong company and no one wouldn’t want to establish a Chinese company. (The corporate tax rate is 16.5%, and the corporate tax in mainland China is 25%, so if China approves this method, the whole China will become tax haven)
Therefore, the Malaysian government has not officially approved the act of doing business activities in West Malaysia (Kuala Lumpur, Johor Bahru, Penang, etc.) (Ref: “Establishment of Marketing Office”).
For the reasons described above, it can be said that it is difficult to conduct business activities in Malaysia using a Labuan company.
* In order to use a Labuan company to conduct transactions with Malaysian residents (corporations) and apply the preferential tax rate of 3%, it is necessary to satisfy all the following business activity requirements (applicable from the 2019 law revision).
- The Labuan company will establish a business office (management office) on Labuan Island.
- The Labuan company employs full-time staff on Labuan Island.
- The Labuan company spends over MYR 50,000 annually on Labuan Island ( including 1.2. expenses above, company secretary expenses)
Use Labuan Work Permit as a tools of moving to Malaysia
On top of that, for those who are considering doing business in Malaysia, the Labuan work permit seems to be one of the most attractive options.
This is due to the following distinctive features (Ref: “Overview Labuan Work Permit”).
|Features of Labuan Work Permit||1) Cheaper than other Malaysia visas (MM2H visa etc. will require initial investment)|
|2) Issuing work permit faster than other Malaysian companies|
|3) Since it is not illegal entry in Malaysia, the environment such as the ground should be prepared with peace of mind.|
In addition to the above, the reason why the Labuan work permit is relatively easy to obtain is that the Visa is issued on the assumption that the Labuan Company itself conducts international transactions.
For example, in order to obtain a work permit for a Malaysian company, it is screened whether it is a person who can contribute to the national interest of the Malaysian federation, and businesses that take away Malaysian employment are naturally avoided. The same is true for Hong Kong and Singapore (especially Singapore tends to be onshore, restricting foreign workers’ EP (Employment Pass) issuance unless they increase their own employment).
Contrary to this, the Labuan company itself issued a work permit to foreigners on the condition that it does not conduct domestic transactions in Malaysia, and allowed migration to Malaysia, so the prerequisites are completely different in the first place.
|Work Permit for Hong Kong Company|
|Work Permit for Singapore Company|
|Work Permit for Malaysian Company|
|Work Permit for Labuan Company|
To be sure, obtaining a Labuan work permit and simply moving in will not change the situation in which doing business in Malaysia is prohibited in principle.
However, if it is assumed that a Malaysian company will be established in the future, why not consider using Labuan work permit as “Securing Immediate Residence Rights in Malaysia”?
How to use a Labuan company to conduct domestic business?
So how do you solve the problem of working while living in Malaysia, the ideal environment?
The following structure is explained for reference.
First of all, kindly consider that the definition of employment at Labuan is the meaning of whether or not it is an act of “receiving money from a Malaysian resident through the provision of services and services“. Think of a Labuan visa as an immigrant visa.
For this reason above, if a Labuan company is established and a domestic business (eg: nail salon, piano classroom, etc.) is conducted, it is unfortunately impossible to conduct transactions with residents in Malaysia (Taking a piano class as an example, a Malaysian company’s work permit is required for actions such as “renting a property and opening a piano class” or “directly contracting with a student”).
|①Provide technical services (provision) →||②Piano lesson provided (provision) →|
|← Payment of consultant fee (payment) ④||← Payment of monthly fee etc. (payment) ③|
If you take the piano classroom as an example as shown above, the flow is as follows:-
|Transactions with residents||① Your company (Labuan Company) makes a contract with a company that conducts music classes (Malaysia company)|
|② Your company (Labuan company) teaches students (Malaysia residents) piano as a technical service|
|③Students (Malaysia residents) pay a monthly fee to the company that conducts music classes|
|④ Your company (Labuan company) receive consultant fees from a company that conducts music classes (Malaysia company)|
According to the opinion of the Labuan authorities, “Piano lessons from Labuan company to Malaysian residents can be conducted only by the above method”.
Therefore, in the case of the above example, in order for the Labuan company to perform piano lessons, it is contracted with a company that offers a music school in Malaysia, etc., teaches the piano to students and receives fee in the name of consultant compensation. There seems to be nothing but to take this way.
* Kindly be aware that the definition of “resident” in the Malaysian Corporation Law is “Natural Persons and Corporations Residing in Malaysia”, so the above is a very gray zone trading scheme.
In addition, there are 3 points to keep in mind when conducting business with the above method.
|Notes on dealings with residents in Malaysia||① The corporate tax of Labuan Company will be changed from 3% to a maximum of 24%|
|②Consultant fees must be received in a currency other than Ringgit (USD, JPY, etc.)|
|③Transactions must be submitted to Labuan FSA within 10 days after trading.|
* If delayed, a fine of 500RM or 10,000RM will be imposed every day.
In our company, it is the opinion that it is never recommended “Because of establishing a Labuan company and conducting business activities in Malaysia, ①“ There is no tax merit ”, ②“ Accounting audit is also essential ”, and ③“ Legal compliance is extremely strict”.
Should you have any queries, please do not hesitate to contact us.