Establishment of Management Office
Management office is a sales office that conducts business activities.
There is no requirement to establish a sales office at the stage of Labuan company incorporation, and there is no requirement to open business office. However, if you wish to obtain working permit, the management office (sales office) must be within 30 days of the work permit acquisition date) is required.
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| Businesses that are obligated to establish a management office | |
| Attribute | Labuan company whose director has been issued work permit |
| Licensed company (banks, securities companies, trust companies, etc.) | |
* With the enforcement of the Labuan Business Activity Act 2018, all business entities including Labuan company are expected to establish an office on Labuan Island as a substantive requirement. Kindly note that the mainland Malaysia tax system (24%) applies to Labuan corporations that do not have an establishment on Labuan Island (the mainland Malaysia – Labuan CFC rules apply).
In addition, if you wish to open a marketing office in West Malaysia, you will also need to establish a management office as a prerequisite (*Ref: “Establishment of Marketing Office”).
At the time of completion of corporate registration, only a written legal personality was acquired (so-called “paper company” status), for many businesses, opening a management office is considered an important issue.
When considering opening a management office, the following points should be noted.
Tax treaty with mainland Malaysia
Since Labuan belongs to the Malaysian federation, it is necessary to consider tax treaties with mainland Malaysia.
Labuan belongs to the Federation of Malaysia, but the tax system has “1 country 2 tax system” that is different from the mainland Malaysia (Eg: This is the same case as the tax relationship when a Hong Kong company deals with mainland China company).
According to the federal tax requirements of Malaysia, “the tax rate of the Labuan Company Law applies to sales billed through Labuan and sales generated within Labuan“.
For example, we examine the case (1) “Do not have a sales office on Labuan Island”, (2) “Working Permit for Labuan Company”, (3) “Residence in Kuala Lumpur”, and (4) “Do business overseas on the Internet”.
Indeed, in the above example case, after establishing Labuan company, the Labuan work permit is obtained, and business transactions (in this case, offshore transactions) are conducted with other countries while living in Kuala Lumpur. This is a legal business transaction within the scope of the Labuan Law.
However, if a business operation of the Labuan company is remotely controlled on the Internet without setting up a management office, in some cases it might regarded as a “commerce transaction by a Malaysian company” and the mainland Malaysia tax rate (24%) applies (This is a particular problem due to the system that enjoys the benefits of 1 country and 2 tax systems and is able to live in mainland Malaysia).
Therefore, in the case of the above the tax rate avoidance between mainland Malaysia and Labuan is considered invalid because the corporate tax rate of mainland Malaysia (24%) is applied instead of the tax rate (3%) based on the Labuan Company Law. As a result, there is a possibility the total tax will be imposed on the mainland side of Malaysia.
This makes it impossible to meet the requirements of the tax treaty with mainland Malaysia, paying a great deal of labor and expenses, and greatly reducing the benefits of establishing and operating the Labuan company.
The above is considered to be based on the concept of CFC rules in terms of international tax rules, and requires the establishment of a management office on Labuan Island in order to meet the substantive requirements. Therefore, the revision of the guidelines in February 2015 can be interpreted as requiring the establishment of a management office for all companies who hold work permit .
Furthermore, as a result of the revised guideline in April 2019, the Labuan Corporation, which conducts all business activities, is obliged to establish a management office as a minimum requirement.
Therefore, from the viewpoint of avoiding legal risks that occur with the mainland of Malaysia, and also from the viewpoint of CFC rules with other countries, all Labuan entities including company and have sufficient room to consider opening a management office if possible.
* It is difficult to understand from a general sense, but Labuan belongs to Malaysia but should be regarded as a foreign country.
* The above examples are not limited to Malaysia but are verified as basic rules for international taxation.