Tax Deduction Limits: Malaysia Payments to Labuan Entities
The Income Tax (Deductions Not Allowed For Payment Made to Labuan Company By Resident) Rules 2018 [P.U.(A) 375/2018], made under Section 39(1)(r) of the Income Tax Act, 1967 (“the Act”), prescribe the portion of payments made by Malaysian residents to Labuan entities that are not allowed as a deduction. These Rules were subsequently amended by the Income Tax (Deductions Not Allowed For Payment Made to Labuan Company By Resident)(Amendment) Rules 2020 [P.U.(A) 376/2020], which refine the disallowance rates and define the term “Labuan company”.
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Deduction Restriction (Effective 1 January 2021)
Pursuant to Section 39(1)(r) of the Act, the amount not allowed for deduction for the types of payments made by a resident to a Labuan company as specified in the table below:
|
No.
|
Type of payment
|
Amount not allowed for deduction
|
|
1.
|
Interest payment (including
payment in connection with financing in respect of commission, facility fee
and advance fee).
|
25%
|
|
2.
|
Lease rental
|
25%
|
|
3.
|
Other payments
|
97%
|
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Conclusion
From 1 January 2021, payment made by a Malaysian resident to Labuan entities are partially non-deductible at the prescribed rate, 25% for interest and lease rental and 97% for other payments which is revenue expenses. This treatment is consistent with the statutory framework under the Act and the definition of Labuan company under the Labuan Business Activity Tax Act 1990.
For further information, please visit the official website of the Inland Revenue Board of Malaysia at
https://www.hasil.gov.my/en
KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.
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