Labuan company’s Real Estate Investment and Taxation
When conducting Real Estate Investment, taxation methods are divided into 2 categories: “Income gain tax” and “Capital gain tax”.
This section summarises the main points regarding the tax system’s view when investing securities such as Real Estate and Condominium etc. under the name of Labuan Company.
In order to purchase real estate such as condominiums in Malaysia, in the case of foreigners, the property is generally more than 1 million Malaysian Ringgit (can be purchased even in less than 1 million MYR depending on the state) and approved by the state government at the time of purchase you need to get the procedure.
| State | Minimum purchase price for foreigners | MM2H holder |
|---|---|---|
| Selangor (Kuala Lumpur) | RM1,000,000～ | RM500,000～ |
| Selangor (excluding Kuala Lumpur) | The minimum price for the acquisition of property by foreign capital is based on the zone. RM1,000,000～ | The minimum price for the acquisition of property by foreign capital is based on the zone. RM1,000,000～ |
| Penang | RM1,000,000～ | RM500,000～ |
| Johor | RM1,000,000～ | Different for each case |
When conducting real estate transactions in Malaysia, there are 4 taxation methods: “property tax”, “income tax”, “registration stamp tax”, and “real estate transfer tax”. Kindly note that this rule also applies to Labuan company (entity).
See below for a summary of the tax system views when investing in real estate in Malaysia under the name of Labuan company.
Handling of property tax on real estate transactions
In Malaysia, property tax payment is required for owning the property. There are 2 types of property taxes: “Quit Rent” and “Assessment”.
| Property tax |
|
|
Handling of income tax (income gain tax) on real estate transactions
If you rent the acquired property and earn rent income, you must pay income tax. After deducting administrative expenses, property taxes, and other expenses from annual rent income (gross amount), rent income (net amount) is taxed as follows.
| Income tax (income gain taxation) |
* The income tax return for the previous calendar year can be made in April of the following year, and the refund application can be made in April of the following year. |
|
* Transactions under the name of Labuan Company is handled as residents of Malaysia.
Handling of registration stamp tax for real estate transactions
After completion of the property, a title of ownership transfer (Strata Title) is issued and the following registration stamp tax is levied.
| Registration stamp tax | ～ RM100,000 | 1% |
| RM100,001 ～ RM500,000 | 2% | |
| RM500,001 ～ | 3% |
Eg: When purchasing a property of 100,000 RM
| ～ RM100,000 | RM100,000 × 1% = RM1,000 |
|---|---|
| RM100,001 ～ RM500,000 | RM400,000 × 2% = RM8,000 |
| RM500,001 ～ | RM500,000 × 3% = RM15,000 |
| 合計 | RM24,000 |
* Rights are issued for unfinished properties 2 to 3 years after completion, and for used properties 6 months to 1 year.
Handling of property gain tax (capital gain tax) on real estate transactions
If you sell a property you own and generate a gain on sale (capital gain), you will be required to pay a gain on sale (capital gain tax).
| Holding period | Real Property Gains Tax：RPGT | ||
|---|---|---|---|
| Corporation | Individuals (Malaysian and permanent residents) | Individual (foreigner) | |
| Within 3 years from the acquisition date | 30% | 30% | 30% |
| 4th year | 20% | 20% | 30% |
| 5th year | 15% | 15% | 30% |
| 6th year and after | 5% | 0% | 5% |
* Labuan companies are “company” in the same way as Malaysia companies.
[Supplement: Tax system views when using REIT]
If you are investing in real estate using REIT (Real Estate Investment Trust) instead of direct investment in real estate, the tax system is the same as buying and selling stocks (Ref: “Labuan’s Securities Investment and Taxation”).
Real estate rental income is the main source of distribution for REITs. As an “Indirect Owner” of real estate, you can expect to earn monthly rent income (dividend income).
| Direct investment (purchase of real estate) | Indirect investment (Purchase of REIT) | |
| Vacancy risk | Relatively high | Low |
| Liquidity | Low | Relatively high |
By investing in many real estates, REITs can diversify vacancy risks, and the distribution tends to be paid relatively stably. Furthermore, since the real estate has been reduced (securitised), it can be said that it is a relatively highly liquid financial product that is more convertible than direct investment.
In addition, since the asset management company is a “company for real estate investment”, tax is exempted on condition that more than 90% of the profit for the year, which is obtained by subtracting various expenses from rent income, is distributed to investors (Investors will be able to obtain pre-tax profits as distributions).
As a result of the above transaction, Labuan Compamy is thought to be able to avoid taxation such as Real Property Gains Tax (RPGT).
* Kindly make a proper tax return based on the tax system in your country of residence.
* If you are investing in a property other than Malaysia, kindly check the tax system of the country you are investing in.
Should you have any queries, please do not hesitate to contact us.
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