On 20 October 2022, the Inland Revenue Board of Malaysia (IRBM) has issued a guideline providing clarification on the tax treatment of Labuan entities with dormant status under the Labuan Business Activity Tax Act 1990. Labuan entity is considered dormant if it:
- has never commenced operations since the date of its incorporation;
- has previously been in operation or carried on business but has now ceased operations or business; or
- it does not have any significant accounting transaction for one financial year before the occurrence of substantial change in its equity shareholding (i.e. 50% or more).
Labuan entity 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.
Labuan entities which are dormant or struck off, including those under winding up proceeding or under liquidation process, which do not derive any source of income need not comply with substance requirements. However, if Labuan entities resume operations, substance requirements must be complied with until the last date of the accounting period.
The guideline shall be deemed to be effective from the year of assessment 2020 and subsequent years of assessment.
