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Labuan

Labuan Foundation

A Labuan foundation is a corporate body with a separate legal personality, distinct from its founder and beneficiaries. Unlike companies, foundations do not have shareholders or owners. Instead, they are established by a founder who endows the foundation with an initial asset or contribution—referred to as the initial endowment—and defines the foundation’s purpose in a document called the charter.

Once established, the foundation becomes the legal owner of its assets, which are managed in accordance with its charter and any further rules or regulations adopted by the foundation council.

Several parties may be involved in the governance and operation of a Labuan foundation:

  • Founder: The individual or legal entity who creates the foundation and transfers assets to it. The founder may reserve certain powers, such as the right to amend the charter or dissolve the foundation.
  • Council: The body responsible for managing and administering the foundation’s affairs. The council must consist of at least one member and may include natural or legal persons. The council functions similarly to a board of directors in a corporate context.
  • Officer: A Labuan foundation must appoint at least one officer who is responsible for the day-to-day administration. This role can be filled by a trust company licensed under the Labuan Financial Services and Securities Act 2010.
  • Beneficiaries: These are individuals or entities who are identified in the foundation’s charter or by the council as being eligible to benefit from the foundation’s assets. Unlike in common law trusts, beneficiaries of a foundation do not hold any legal or equitable interest in the foundation’s assets.
  • Protector (optional): A protector may be appointed to oversee and supervise the council. This role is often used to add an extra layer of governance and to safeguard the founder’s intent.

There is no statutory minimum value for the initial endowment, although the contribution must be sufficient to fulfill the foundation’s objectives.

Labuan foundations can be established for charitable, non-charitable, or mixed purposes. Common objectives include:

  • Asset Protection: By transferring assets into a foundation, individuals can shield them from personal creditors, provided the transfer is not intended to defraud creditors.
  • Succession Planning: Foundations allow for the structured transfer of wealth across generations, bypassing probate and reducing exposure to inheritance disputes.
  • Philanthropy: Foundations can be set up to fund charitable projects, educational scholarships, or community development initiatives.
  • Corporate Structuring: In some cases, foundations are used to hold shares in private companies, offering long-term stability and centralized governance for family-owned businesses or holding structures.

Labuan foundations may not engage in commercial trading activities unless these are incidental to their primary objectives.

Labuan foundations benefit from the tax regime under the Labuan Business Activity Tax Act 1990. A Labuan foundation that engages in a Labuan business activity and meets the economic substance requirements may elect to be taxed at 3% of net profits. Alternatively, it may choose to pay a flat tax of MYR 20,000 annually, regardless of income, provided that it qualifies as a Labuan entity.

If the foundation engages in non-Labuan business activities or fails to meet substance requirements, it may be taxed under Malaysia’s Income Tax Act 1967 at the standard corporate tax rate of 24%.

Dividends and capital gains are generally not taxed in Labuan. 

The Labuan Foundations Act also includes asset protection provisions, including a two-year limitation period within which creditors must bring claims against assets transferred into the foundation. After this period, claims may be barred unless fraud can be proven.

Although Labuan foundations benefit from a relatively light regulatory burden, they are required to meet certain ongoing obligations, including:

  • Annual Return Filing: Foundations must file an annual return with the Labuan FSA confirming the details of the council members, officers, and current status.
  • Accounts and Records: Proper accounting records must be maintained and kept at the foundation’s registered office in Labuan.
  • Audit: There is no statutory audit requirement unless the foundation is engaged in business activity or as specified by the charter.

Labuan foundations offer a legally secure and versatile mechanism for asset management, succession planning, and philanthropic initiatives. By blending the structural features of civil law foundations with elements of common law trust governance, they provide a familiar yet adaptable structure for high-net-worth individuals, family offices, and charitable entities operating across jurisdictions.

Their favorable tax treatment, confidentiality provisions, and flexible governance options make them a viable choice in the international wealth management landscape. However, users must be mindful of compliance obligations, particularly around substance requirements and cross-border taxation, to ensure the long-term sustainability and legality of the foundation’s activities.

Taxes

If the foundation does not engage in trade in its own right (but through subsidiaries) its non-trading profits such as those arising from the holding of investments in securities, stocks, shares, loans, deposits or other properties are not subject to taxation.

Profits derived from properties 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.

Capital gains are not subject to taxation.

Dividends, interests, and royalties received are tax-exempt.

  • 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
  • 0% Offshore Income Tax Rate
  • 0% 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
  • 28% Personal Income Tax Rate
  • 6% VAT Rate
  • 73 Tax Treaties

Country details

Malaysia
MYR
Kuala Lumpur
Asia
ms-MY, English, zh, ta, te, Malayalam, Punjabi, Thai
28,274,729

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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