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Labuan

Private company limited by shares

The Labuan International Business and Financial Centre is a reputable free trade area located in the Federal Territory of Labuan, an island off the coast of the state of Sabah in East Malaysia.

Labuan is becoming one of the major financial hubs of Asia due to its pro-business regulation, low taxes and compliance with international standards on due diligence and transparency.

Companies incorporated in Labuan benefit from an attractive tax regime. Trading profits arising outside of Malaysia are taxed at 3%.

Certain royalties or income derived from the exploitation of an intellectual property right will be subject to tax under the Malaysian Income Tax Act, rather than under the Labuan tax.

Non-trading profits such as those arising from the holding of investments in securities, stocks, shares, loans, deposits or other properties may not be subject to taxation.

Furthermore, payments on dividends, interests, royalties, technical and management fees are exempt from withholding taxes.

Labuan companies no longer require an authorization from the Ministry to conduct Labuan business activities with Malaysian currency or with Malaysian residents.

Labuan is ideal for import-export businesses. As it has a free-port status, indirect taxes do not apply. Stamp duty is also exempted on all instruments executed by a Labuan entity in connection with its Labuan business activity.

Labuan companies are not subject to exchange controls and free movement of capitals is ensured.

In addition, Labuan incorporated entities may benefit from the tax treaties that Malaysia has concluded.

However, some treaties especially exclude Labuan from the treaty tax benefits. Including, Japan, Netherlands, United Kingdom, Australia, Sweden, Luxembourg, Republic of Seychelles, Chile, Indonesia, South Africa, and South Korea.

To benefit from these tax treaties, a Labuan company may elect to be treated as a Malaysian resident company and taxed at Malaysian standard rates.

Labuan companies are required to have the so-commercial substance in Labuan. This could be having a Labuan bank account, staff in Labuan, a virtual office or an annual board meeting in Labuan.

Furthermore, Labuan holdings and companies conducting regulated activities are required to meet certain economic substance requirements – they will need to have an adequate number of full-time employees and an adequate amount of annual operating expenditure in Malaysia according to their business.

For instance, Labuan holdings would be required to have a minimum of 2 full-time employees in Labuan and a minimum annual expenditure in Labuan of RM 50,000.

There are certain restrictions for Labuan companies. A Labuan private limited company is not permitted to engage in the business of banking, insurance or other financial services unless it is licensed under the Offshore Banking Act 1990 or the Offshore Insurance Act 1990.

Expatriate directors and employees of a Labuan company can secure a 2-year multi-entry business visa, together with their dependents.

Among other benefits, employees of Labuan companies enjoy a 50% tax-exemption on employment income in a managerial capacity with Labuan entity in Labuan, or in a co-located office of marketing office which may be located elsewhere in Malaysia to facilitate business meetings.

A 100% exemption applies for non-citizens in respect of director’s fees from Labuan entities.

A 65% exemption of the statutory income applies on the provision of qualifying professional (legal, accounting, financial or secretarial) service rendered in Labuan by that company to a Labuan entity.

Malaysia has implemented the OECD’s automatic exchange of information for tax purposes (AEoI).

In summary, the Labuan private limited company is an excellent vehicle for ASEAN market entry, fund management, group holding company, international trade, and professional services, among others.

Taxes

Basis – Companies in Labuan are taxed on a worldwide basis.

Tax rate – Labuan companies are subject to 3% tax on their trading profits arising outside of Malaysia. Certain royalties or income derived from the exploitation of an intellectual property right will be subject to tax under the Malaysian Income Tax Act, rather than under the Labuan tax.

Profits derived from income accrued in Malaysia are subject to Malaysian corporate income tax standard rate, 24%. 

Companies may elect to be taxed as Malaysian resident entities to benefit from Malaysian tax treaties that specifically excluded Labuan from treaty benefits.

Tax treaties that exclude Labuan are those concluded with Japan, Netherlands, United Kingdom, Australia, Sweden, Luxembourg, Republic of Seychelles, Chile, Indonesia, South Africa, and South Korea.

Capital gains – Capital gains are not subject to taxation.

Dividends – Dividends received are tax-exempt.

Interests – Interest income is tax-exempt.

Royalties – Royalty income is tax-exempt.

Withholding taxes – There are no withholding taxes in Labuan on dividends, interests, royalties or fees paid to non-residents.

Personal income tax –  An individual is tax resident in Malaysia if he or she stays more than 182 days per year in the country.

Both tax residents and non-residents are taxed on income derived from Malaysia. Foreign-source income is usually not subject to taxation.

Personal income tax is levied at progressive rates from 0% to 28% on income exceeding MYR 1,000,000. Non-residents are taxed at a 28% flat rate. Dividends from Malaysian sources are treated as ordinary income, while interests are tax exempt. Both interests and dividends from foreign sources are tax exempt, whether remitted or not.

Capital gains derived from the sale of securities are tax-exempt, those derived from the sale of real properties are subject to the Real Property Gains Tax at rates of 30% for properties held up to 3 years, 20% on the fourth year, 15% on the fifth year and 5% after 5 years.

There is an exemption of 50% of employment income in a managerial capacity with Labuan entity in Labuan, or in a co-located office of marketing office which may be located elsewhere in Malaysia to facilitate business meetings, but cannot be for exercising trading activities on behalf of Labuan entities.

A 100% exemption applies for non-citizens in respect of director’s fees from Labuan entities.

A 65% exemption of the statutory income applies on the provision of qualifying professional (legal, accounting, financial or secretarial) service rendered in Labuan by that company to a Labuan entity.

Other taxes – Labuan has a free-port status, hence indirect taxes do not apply. Stamp duty is exempted on all instruments executed by a Labuan entity in connection with its Labuan business activity.

Exchange controls do not apply to Labuan companies.

  • Offshore Income Tax Exemption
  • Offshore capital gains tax exemption
  • Offshore dividends tax exemption
  • CFC Rules
  • Thin Capitalisation Rules
  • Patent Box
  • Tax Incentives & Credits
  • Property Tax
  • Wealth tax
  • Estate inheritance tax
  • Transfer tax
  • Capital duties
  • 3% Offshore Income Tax Rate
  • 3% Corporate Tax Rate
  • 0% Capital Gains Tax Rate
  • 0% Dividends Received
  • 0% Dividends Withholding Tax Rate
  • 15% Interests Withholding Tax Rate
  • 10% Royalties Withholding Tax Rate
  • 0 Losses carryback (years)
  • Indefinitely Losses carryforward (years)
  • FIFO Inventory methods permitted
  • 11% Social Security Employee
  • 13.00% Social Security Employer
  • 28% Personal Income Tax Rate
  • 6% VAT Rate
  • 73 Tax Treaties

Country details

Malaysia
MYR
Kuala Lumpur
Asia
m s - M Y , e n , z h , t a , t e , m l , p a , t h
28274729

The Federal Territory of Labuan is a federal territory of Malaysia, which comprises the Labuan Island and six smaller islands. It is located off the coast of the state of Sabah in East Malaysia.

It is populated by about 96,800 inhabitants and its capital is Victoria.

Malaysia’s official currency is the Ringgit (MYR) and official languages is Malay, although English is widely spoken.

The island is administered by the federal government through the Ministry of Federal Territories. Labuan Corporation is the municipal government for the island and is headed by a chairman who is in charge of the development and administration of the island.

Labuan has one representative in each of the Lower and Upper Houses of Federal Parliament. Usually, the chairman of the Labuan corporation is the Labuan’s parliament current member.

Labuan is an offshore support hub for deepwater oil and gas activities in the region, as well as a tourist destination and an international financial center.

Labuan is a free trade zone with an export-oriented economy, mainly exporting crude oil, methanol, HBI, gas, flour, animal feed, sea products, and ceramic tiles, which are exported to mainland Malaysia or overseas.

Raw materials, parts, and equipment for industrial uses well as consumer products are imported.

Labuan is also a reputable financial center (Labuan International Business and Financial Centre, LIBFC), currently with more than 300 licensed financial institutions including major leading banks.

Labuan LIBFC is mainly comprised of holding companies, captive insurance, Shariah-compliant Islamic Finance structures, public and private funds, and wealth management.

Tax treaties

Country Type Date Signed
Namibia DTC  1998-07-28
Belgium DTC  1973-10-24
Jordan DTC  1994-10-02
Bahrain DTC  1999-06-14
Sudan DTC  1993-10-07
Poland DTC  1977-09-16
Uzbekistan DTC  1997-10-06
Seychelles DTC  2003-12-03
Kyrgyzstan DTC  2000-11-17
Syrian Arab Republic DTC  2007-02-26
Viet nam DTC  1995-09-07
Kuwait DTC  2003-02-05
Egypt DTC  1997-04-14
Hong Kong, China DTC  2012-04-25
Hungary DTC  1989-05-22
Pakistan DTC  1982-05-29
Brunei Darussalam DTC  2009-08-05
Czech Republic DTC  1996-03-08
Turkey DTC  1994-09-27
Bangladesh DTC  1983-04-19
Kazakhstan DTC  2006-06-26
Mongolia DTC  1995-07-27
Italy DTC  1984-01-28
Bosnia and Herzegovina DTC  2007-06-21
Saudi Arabia DTC  2006-01-31
Finland DTC  1984-03-28
France DTC  1975-04-24
India DTC  2012-05-09
Iran DTC  1992-11-11
Albania DTC  1994-01-24
Spain DTC  2006-05-24
Norway DTC  1970-12-23
New Zealand DTC  1976-03-19
Morocco DTC  2001-07-02
Korea, Republic of DTC  1982-04-20
Papua New Guinea DTC  1993-05-20
Senegal DTC  2010-02-17
Mauritius DTC  1992-08-23
Austria DTC  1989-09-20
Zimbabwe DTC  1994-04-28
Ireland DTC  1998-11-28
China DTC  1985-11-23
Malta DTC  1995-10-03
Romania DTC  1982-11-26
Chile DTC  2004-09-03
San Marino DTC  2009-11-19
Singapore DTC  2004-10-05
Thailand DTC  1982-03-29
Myanmar DTC  1998-03-09
Fiji DTC  1995-12-19
Luxembourg DTC  2002-11-21
Japan DTC  1999-03-19
Sri Lanka DTC  1997-09-16
Australia DTC  1980-08-20
Turkmenistan DTC  2008-11-19
Denmark DTC  1970-12-04
Indonesia DTC  1991-09-12
Canada DTC  1976-10-16
Venezuela DTC  2006-08-28
Philippines DTC  1982-04-27
Lebanon DTC  2003-01-20
South Africa DTC  2005-07-26
United Arab Emirates DTC  1995-11-28
Bermuda TIEA 2012-04-23
Croatia DTC  2002-02-18
Sweden DTC  2002-03-12
Qatar DTC  2008-07-03
Lao People's Democratic Republic DTC  2010-06-03
United Kingdom DTC  1996-12-10
Germany DTC  2010-02-23
Switzerland DTC  1974-12-30
Russian Federation DTC  1987-07-31
Netherlands DTC  1988-03-07

Tax treaties Map

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