The Labuan Trading Company – substance creation

Trading companies located in low tax locations attract tax collectors interest because the multiple activities a trading company undertakes, the cause and effect on profits such activities have and the possibility that the activities may be conducted in a number of locations gives rise to the possibility of “tax mischief”.

 

Businesses have to be mindful that as tax information starts to flow freely and efficiently between tax authorities, future proofing of trading companies in low tax locations is paramount.

 

In this environment the Labuan Trading Company’s “star” is rising! As with many other possible locations Labuan is highly suitable as a tax efficient “profit centre” for trading companies. But Labuan is distinguished by a number of interesting and possibly unique features, its 8 Tax Treasures, that should help trading companies navigate the new tax landscape.

 

The need for operational substance creates an enormous challenge on the location of a trading company’s functions. Fortunately, a Labuan Trading Company’s level of operational substance has no impact on its Labuan tax position. The same amount of tax is payable whether there is a “light” presence in Labuan or a “substantial” one.

 

Thus, businesses enjoy the flexibility of “housing” in Labuan those activities causing contention in their home location and/or the targeted market.

 

In this regard, Labuan is clearly a sophisticated financial centre that “enables” substance to be created in real terms. That is, a Labuan Trading Company has the ability to employ local staff, maintain a local office, and have access to local support services at a relatively low cost.

 

Placing the contentious activities in Labuan causes no adverse Labuan tax consequences and by corollary, helps to minimise international tax risks.

 

Labuan’s tax efficient framework creates a level playing field for transactions no matter their nature. Transactions with uncertain tax outcomes may have to be reported for accounting purposes and tax collectors are known to leverage off the inherent level of comfort Company Directors have with the tax positions taken to encourage disclosure.

 

The source of trading income, whether profit is revenue (and taxable) or capital (and non taxable) and Islamic funding arrangements are examples of tax uncertain areas. There is no downside of conducting tax uncertain transactions via a Labuan Trading Company as the low tax system results in a minimal tax exposure whatever the outcome and therefore plays a useful tax risk management role.

 

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