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Malaysia & Labuan
Company formation in brief
The Malaysia Companies Act provides for registration of entities of various organizational and legal forms, including those which may be attractive for a foreign investor, such as:
* Private Company Limited by Shares
* Private Unlimited Company
* Company Limited by Guarantee - a private limited liability company where a shareholder’s liability is limited only by the amount knowingly agreed by the shareholder
* Public Company Limited by Shares
Labuan, being part of Malaysia, has its own corporate law which provides for the registration in Labuan of an offshore company and an offshore limited partnership which are of practical interest to a foreign investor planning to have business in Malaysia.
Private Company Limited by Shares, Private Unlimited Company and Company Limited by Guarantee are characterised as follows:
* minimum capital for establishing a company is MYR2; (US$1 is approximately MYR4);
* maximum number of shareholders – 50; Physical persons and legal entities, residents and non-residents of Malaysia, may be shareholders;
* free share transfer to third parties is prohibited;
* if all shareholders are physical persons (residents or non-residents of Malaysia) and they are not more than 20, such companies may receive a preferential status of “exempt private company”;
* companies may issue loans to their directors and other companies where the directors have interest.
* companies are released from the need to submit a balance sheet statement of their operations in Malaysia.
Public companies may register on the stock exchange in Malaysia and allow shareholders to freely transfer shares to third parties. Maximum number of shareholders is unlimited minimum capital for establishing a company is MYR 20’000’000. Capital must be paid up upon registration. If the company is going to register on the stock exchange, it has to create an independent board of auditors, which will report to the registrar of companies in Malaysia.
Depending on the registered capital amount, all companies pay a registration fee in Malaysia. It varies from MYR 1’000 for capital smaller than MYR 100’000, up to MYR 70’000 for capital larger than MYR 100’000’000.
All Malaysian companies must have at least two directors and a secretary as well as a registered or larger office (depending on the type of activity). Physical persons and legal entities, residents and non-residents of Malaysia, may be directors. Secretary must be a resident of Malaysia. Register of directors and copies of annual financial statements are available to the public in Malaysia.
Annual shareholders’ meetings may be convened in any country of the world and held by telephone, fax or modem, and through proxies. Meetings are held no later than 9 months from the date of annual financial statements to be submitted to the authorities no later than 30 days after each calendar year end from the date of incorporation.
All Malaysian companies (except “exempt private company”) are subject to taxation at a rate of 28%. Companies engaged in oil business are subject to taxation at a rate of 38%.
The key difference between offshore companies in Labuan from ordinary companies in Malaysia is the preferential taxation regime.
Labuan offshore companies may engage in any activities without a license, except for banking, insurance, fund-related, leasing, factoring activities, as well as professional management of other entities. Offshore companies are not allowed to engage in shipping operations either.
The standard minimum registered capital for setting up an offshore company in Labuan is US$10’000. Capital is not required to be fully or partially paid at the time of registration.
Offshore companies may have one shareholder and must have at least one director and one secretary, as well as a registered or larger office (depending on the type of activity). Register of directors and copies of annual financial statements are available to the public in Labuan.
Offshore company must have a secretary, Malaysia resident (physical or legal person). The company’s director may be both a physical or legal person, resident or non-resident of Malaysia.
Offshore company may not issue bearer shares.
Offshore partnerships in Labuan are to be established by at least two members (maximum number of partners is 20). One of the partners is the general partner who bears unlimited liability for the company’s debts in Labuan.
Partnerships, as a rule, are established for business by persons having the same professional interest - architects, designers, etc. Lawyers, accountants or auditors will need a license in Labuan to set up a partnership.
Offshore companies registered in Labuan are divided into two categories in terms of taxation: commercial and non-commercial
Taxation of commercial and non-commercial entities
The concept of commercial operations includes banking and insurance, trade, management of assets, including trusts and funds, transactions with patents, licenses and copyrights, maritime transport operations, as well as any other type of operations that does not fall within the definition of non-commercial operations.
Non-commercial operations include operations of holding companies that own on their own behalf assets in the form of investments in stock and other securities, real estate, as well as bank deposits and debt obligations. Non-commercial offshore companies are tax exempt.
If an offshore company is engaged in both commercial and non-commercial operations, the tax authorities consider the company commercial.
Commercial offshore companies may elect what tax to pay: either a fixed amount of MYR 20’000 or 3% of its net profit. In the latter case, their annual financial statements are automatically subject to audit.
Capital gains are not taxed in Labuan, except for capital gains resulting from selling real estate. However, offshore companies may purchase real estate here only for office premises and staff housing.
No interest received by a Malaysian resident (physical or legal person) from any offshore company registered in Labuan, other than a bank or an insurance company, is subject to taxation. No general provisions of the local tax law are applicable either if the profit generated by a Labuan offshore company is not taxed.
No offshore companies’ dividends are subject to withholding tax in Malaysia; however, no withholding tax deductions from dividends are set off in other jurisdictions. Dividends paid by Labuan offshore companies from gains generated from offshore entrepreneurial activity and from other “exempted” profits are not subject to Malaysian tax either when they are paid or when they are received. The same approach applies to offshore trusts’ payments to their beneficial owners. Offshore companies in Labuan pay no stamp duty for paperwork related to their entrepreneurial activity.
There is no foreign exchange control in Labuan for offshore companies.
Speaking about strengths and weaknesses of Labuan, please, note that this territory is not involved in any tax agreements while Malaysia has made double taxation agreements with many countries; however, Malaysia’s partner states under those agreements are not always willing to recognise Labuan as part of the Malaysian tax jurisdiction under the agreements made. If they do recognise, Labuan offshore companies are treated in the same way as other ordinary Malaysian companies, i. e., they are subject to taxation at a reduced rate in the partner’s jurisdiction.
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