Labuan Double Tax Treaties
DeltaQuest can assist you whether you are an individual or corporate entity in setting up a Labuan trust or Labuan foundation to achieve complete and comprehensive asset protection. For more information about Labuan double trust tax treaties, please read the information below. Alternatively, to establish a Labuan Trust or foundation please complete our Application Form, or if you require further information please Contact Us.
Labuan companies can benefit from all the double tax treaties signed by Malaysia. Malaysia has a comprehensive tax treaty regime and has concluded and signed some 63 tax treaties of which 48 are fully in force. Malaysia’s tax treaty policy aims at avoiding double taxation and encouraging foreign direct investment. The Malaysian tax treaties are modeled on the Organization for Economic Co-operation and Development’s model treaty with some modifications. It should be noted that Malaysia’s double tax treaty with the United States provides reciprocal exemption to international shipping and air transportation businesses only.
Typically, the tax treaties define a ‘permanent establishment’ as a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes a place of management, a branch, an office etc. Supervisory activities carried on in Malaysia in connection with an assembly, construction or installation undertaking for an extended period may create a deemed permanent establishment in Malaysia. In a number of tax treaties, substantial equipment located in Malaysia, used or installed by, for or under contract with an enterprise, may create a permanent establishment. It is therefore very important to review the terms of the tax treaty to ascertain the existence of a permanent establishment in Malaysia. Prima facie, the existence of a permanent establishment in Malaysia creates a potential tax liability.
One very important feature of Malaysian tax treaties is the provision of ‘tax sparing’. Under the tax sparing provisions, a dividend that is distributed out of profits which have been exempted from tax under the Malaysian tax incentive regime, is deemed to be have been paid out of profits that have been subject to tax. This is so as to enable a non-resident to claim a tax credit on the exempt dividend in his home country. Similarly, interest on an approved loan or approved royalty, which has been exempted from Malaysian tax, is deemed as having suffered tax in Malaysia. The ‘tax sparing’ provisions encourage direct foreign investments in Malaysia as the foreign investors effectively have a better return on their investment because of the potential tax credit they can get from their home authorities. As Malaysia has signed a number of tax treaties with Third World countries, Malaysian investors in these countries will enjoy the ‘tax sparing’ provisions when they remit dividends to Malaysia. This benefit has become somewhat academic as Malaysia exempts foreign-sourced income received in Malaysia by a resident company. Businesses, which are subject to a worldwide basis of taxation, may still find the tax sparing provisions useful.
The other articles in the tax treaties provide for the right of taxation by each treaty partner in respect of interest, royalty, dividends and technical fees (in some treaties).
International shipping and air transportation businesses are generally taxable in the country where the taxpayer is resident, and in some treaties the tax on the profits is reduced by 50%.
Capital gains derived from the alienation of immovable properties or capital represented by movable property are usually taxed in the state where the property is located.
Technical and managerial fees are subject to tax at 8% in the tax treaty with the United Kingdom effective from 1 January 1998.
Careful planning using Malaysia’s comprehensive tax treaties may give investors the advantage in doing business in Malaysia. Similarly, Malaysian investors venturing overseas may also benefit from the tax treaty provisions.
The tax authority has not yet considered anti-treaty shopping and there are no provisions to this effect. The following are some of the countries which have double-tax treaties with Malaysia (some further treaties have been signed and await ratification: please contact us for additional information): Albania, Australia, Austria, Bangladesh, Belgium, Canada, China, Denmark, Finland, France, Germany, Hungary, India, Indonesia, Italy, Japan, Korea, Mauritius, Netherlands, New, Zealand, Norway, Pakistan, Papua, New Guinea ,Philippines, Poland, Romania ,Russia, Singapore, Sri Lanka, Sweden, Switzerland, Thailand, United Kingdom, Zimbabwe .
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