Companies investing in projects in another country sometimes invest through an offshore holding company in order to benefit from tax treaties that reduce withholding taxes at the project country border when earnings are repatriated. For example, one might use a holding company in Mauritius or Holland to invest into India. Treaties also may reduce capital gains taxes in the project country upon exiting the project.
Labuan is an island off the coast of Malaysia. It is a tax haven. Malaysia has favorable tax treaties with many Asian countries, including Korea. Korea proposed an amendment to the treaty in December that would exclude Labuan from the Malaysia-Korea tax treaty. The change is expected to be accepted.
Hooi Cheng Lee, a lawyer with Zaid Ibrahim & Co. in Kuala Lumpur, said, “We understand that certain countries — such as the United Kingdom, Netherlands, Switzerland, Sweden, Japan and Korea — have already informally excluded offshore companies incorporated in Labuan from taking advantage of the treaty benefits, but only Japan has formalized the exclusion of Labuan from its treaty with Malaysia.” Lee said it is possible whenever a treaty is formally amended that existing Labuan companies will be “grandfathered,” but this depends on the wording of the new treaty.