Certain tax treaties to which Malaysia is a party exclude Labuan offshore companies from benefit. See the list in the Appendix below. The language used to exclude a Labuan Offshore Company is similar in all cases but may differ between one treaty and another. To date, the exclusion has been effected by an amending protocol or an exchange of letters or notes, in conjunction with an existing Article. For instance, the Malaysia-Australia tax treaty was originally enacted on the 20th August 1980 and amended by the First and Second Protocols of 1999 and 2002 respectively. Under Article 7 of the Second Protocol, a general paragraph was added to Article 27, which, in effect, states that any persons entitled to a preferential tax treatment as identified in an Exchange of Letters will be denied treaty benefits. An Exchange of Letters was later entered into in July 2002, whereby the Malaysian and Australian governments agreed to exclude from enjoying treaty benefits persons carrying on an offshore business under the Labuan Offshore Business Activity Act 1990 (LOBATA). A number of the exclusions are in force. These are with Australia, Japan, Luxembourg, Netherlands and the United Kingdom. In other instances, the amending Protocol has yet to be gazetted and ratified ? as in the case of Indonesia, Spain, Sweden, South Africa, Chile and the Seychelles. Other countries have opened discussions to exclude Labuan offshore companies. For one reason or another discussions have stalled and do not appear to be progressing ? those, for instance, with South Korea, Norway, Mexico, Germany and Brazil.However, with effect from the 1st January 2009, Labuan offshore companies may make an irrevocable election to be taxed under the Malaysian Income Tax Act 1967. Under this Act, the Labuan Offshore Company becomes subject to a headline rate of tax of 25% on Malaysian-source income and on foreign-source income it is remitted into Malaysia. However, following an amendment in 2004, an exemption from tax was granted in relation to foreign-source income. This amendment effectively puts a Labuan Offshore Company carrying on an offshore business activity and taxed under LOBATA on a similar standing to an Labuan Offshore Company with foreign-source income elected to be taxed under the Malaysian Income Tax Act 1967.The LIBFC is currently in the process of clarifying the status of ?chargeable offshore companies? with the eleven treaty partners which have excluded Labuan offshore companies. The hope is that chargeable offshore companies will be in a position to enjoy treaty benefits. The Netherlands has provided a private ruling to a specific taxpayer to this effect. The Malaysian Ministry of Finance will follow this private ruling up by seeking a blanket approval for all chargeable offshore companies to be eligible for treaty benefits. Based upon ?off the record? discussions with the Netherlands Authority, the LIBFC is reasonably optimistic that the request will be favourably received. If this comes to pass, the Labuan chargeable offshore company will provide an attractive alternative to the Dutch Co-operative as a vehicle for holding the shares of Dutch holding company since there is no withholding tax on dividends from the Netherlands. Labuan holding companies are now allowed to operate from Kuala Lumpur and employ staff locally. This development should allow for real ?substance? to be created, and allow investors to demonstrate tax residence and beneficial ownership of income in Malaysia for a more robust access to tax treaty benefits.