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Taxation for Companies in Labuan

Taxation for Companies in Labuan

Depending on their activities, businesses can pay a preferential income tax rate in Labuan of 3%. Moreover, when transactions involve non-residents, companies can benefit from a highly advantageous tax regime in Labuan. Labuan companies enjoy tax exemptions on various types of income, including dividends, interest, royalties, and capital gains.

One of the most important characteristics of the Labuan corporate tax rate is the fact that the principles are differentiated according to the activity of the company. For example, an investment holding company can be tax exempt while a trading company can choose between two different taxation options. Below, our team answers some of the most commonly asked questions about Labuan taxes rates. We can help investors understand both the in-depth taxation principles and the other rules and regulations related to company formation. 

What is the taxation system like in Labuan?

The taxation system applicable to Labuan companies is rather simple and it is differentiated according to the primary activities of the company. The list below contains the four types of companies and the taxation method applicable to each of them:

  1. Trading company: Labuan tax system imposes that an investor will have to pay a 3% tax on the company’s income (which has to be verified under a local audit) or pay a flat tax of RM 20,000 (no audit required);
  2. Investment Holding Company: no tax is applicable and it is not subject to audit requirements under Labuan tax act;
  3. Dormant company: relevant tax documents need to be submitted, but it is not subject to tax or auditing requirements;
  4. Companies engaged in business with Malaysian residents: these are subject to a tax rate of 24% on the net profit.

A trading company refers to businesses operating in the fields such as banking, insurance, trade, import, export, and others. In some cases, the management account can be subject to auditing in case of the holding company and the dormant company. A holding company is one that is not engaged in trading activities itself; it only owns stocks, shares in other companies, securities or immovable property in Malaysia or in other locations. 

 A Labuan company that is engaged in doing business with a Malaysian resident company, whether individual or company, will not only be required to pay tax at a different rate, but it will also need to have its accounts audited. Furthermore, regardless of the company type, the investors are exempted from paying the withholding tax of dividends, as well as on the capital gains. The local legislation does not prescribe a sales tax, but the goods and services tax (GST) is applicable for an income above RM 500,000.

What are the tax laws for Labuan companies?

Investors interested in company formation in Malaysia should know that the businesses registered in Labuan benefit from a more favorable taxation system, applicable under the Labuan Business Activity Tax Act 1990. 

 There are several types of legal entities which can be incorporated here and the most common are: 

  • trading companies;
  • non-trading companies. 

The legal framework provides a third type of company, Labuan Charged Company, which falls under the taxation system applicable in Malaysia and which can benefit from the provisions of the treaties signed for the avoidance of double taxation signed by the Malaysian authorities. Our team of company formation agents in Malaysia can offer more details on Labuan taxes.

Labuan holding companies

The regionis a great location for establishing holding companies, especially considering the taxes in Labuan for this type of entities.

Labuan holding companies that derive their investment income from non-trading activities are not subject to taxation under the Labuan Business Activity Tax Act (LBATA). This means that companies primarily engaged in holding and managing investments can potentially benefit from tax exemptions on their investment income.

You can benefit from the competitive tax rates in Labuan, especially in the case of holding companies. Payments of dividends, interest, service fees, and royalties made by Labuan companies to non-residents are exempt from Malaysian withholding tax. This exemption encourages cross-border financial transactions and supports the movement of funds between Labuan and other jurisdictions without being subject to withholding tax in Malaysia.

A holding company in Labuan can be structured as a limited liability company (LLC). We can help you in the process of opening a company in Labuan.

What companies are exempt from taxation in Labuan?

According to Labuan Business Activity Tax Act 1990, 65% of the statutory revenues registered by companies with financial or accounting services is exempt from the income tax from the year of calculation. Also, the fees received by foreign individuals who are directors in a Labuan company are not subject to taxation. The same is available for managers of a company in Labuan, the only thing changing is the gross employment income percentage which is set at 50.

Labuan leasing companies

You can also benefit from Labuan’s tax system by opening a leasing company. Labuan leasing refers to the business activity of letting or sub-letting property (machines, equipment, ships, etc.) on hire.

A Labuan leasing company, like other types of companies, is subject to the specific tax regime and tax rates in Labuan.The specific tax rate for Labuan leasing companies may vary based on the type of leasing activity.

Labuan leasing companies are required to meet substantial activity requirements in Labuan, including:

  • maintaining an operational office;
  • incurring minimum operating expenditure;
  • employing a specified number of full-time employees, etc.

Our specialists in company incorporation in Labuan can help you establish this type of company in the country.

Income tax on intellectual property in Labuan

Any Labuan entity deriving income from an intellectual property right is subject to taxation under the Income Tax Act 1967, instead of Labuan Business Activity Tax Act 1990 (LBATA). The Labuan tax act came into effect on January 1, 2019. So, the Labuan entities do not enjoy the tax exemption or preferential 3% tax rate. Instead, such entities are subject to taxation at the rates prevailing under the Income Tax Act. Here are some obligations that Labuan entities need to comply with inside Labuan:

  • Residence requirements;
  • Minimum number of full-time employees as prescribed;
  • A minimum amount of annual operating expenditure.

These are the obligations that Labuan appplies on the entities, regulating their activities in its territory. Only those entities which fulfill these obligations will enjoy the preferential 3% treatment for a year of assessment. Any entity carrying on a Labuan business activity that fails to comply with the above commitments for a year of assessment will be taxed with a rate of 24% under Labuan taxes act. The intellectual property right is termed as a right if arising from any:

  • copyright;
  • utility innovation and discovery;
  • grant of protection of a plant variety, geographical indication;
  • service-mark or trademark;
  • layout design;
  • industrial design;
  • any secret formulae;
  • patent;
  • secret processes, or other like rights.

If you obtain income as a Labuan entity from intellectual property, you need to be very careful. Maybe you are paying preferential 3% tax, but any negligence in fulfilling obligations may lead to the 24% tax rate in the following year assessment. If you are new to Labuan intellectual property taxation system, you can rely on the services of our experts at company formation in Labuan. They can provide you with comprehensive assistance regarding how to avoid extra taxation. You can also get information regarding withholding taxes in Labuan.

Are double taxation treaties applicable in Labuan?

Malaysia has entered into more than seventy treaties for the avoidance of double taxation and part of these agreements also apply to Labuan, as a federal territory. However, benefiting from these treaties is subject to certain conditions and not all countries recognize Labuan as being part of Malaysia for the purpose of applying the treaty. The countries that do not apply the treaties in Labuan are the following: Australia, Germany, Indonesia, India, Chile, Japan, Luxembourg, Seychelles, the Netherlands, South Africa and South Korea, Sweden, Spain, and the United Kingdom. Apart from these fourteen countries, the rest of the double tax treaties signed by Malaysia can be applied to Labuan entities. 

For the purpose of benefiting from the treaty provisions, a Labuan company can opt to be taxed under the Malaysian Income Tax Act. In most cases, this applies to those Labuan companies that are engaged in business with Malaysian companies, also referred to as non-Labuan business activities. One of our Labuan offshore company agents can give you more information about permanently opting to be taxed under this regime. We can also provide complete information about a double tax treaty signed between Malaysia and another country.  

Penalty in case of delay in tax payment

Those Labuan entities taxed under Labuan Business Activity Tax Act (LBATA) are obliged to full payment of the taxes charged for a year of assessment at the time of filing the tax return. The tax authorities in Labuan require the clearance of tax payment a few days before submitting the tax return. This way, the authorities borrow some time for the discharge of the pay cheque. If any entity fails to comply with the tax payment within the due time, it shall face a penalty. If an entity does not pay its taxes within 30 days after the service of the notice of assessment, a 10% penalty will be imposed on it.

If you have an entity that is carrying out its business activities in Labuan, you need to make sure that it conforms with the taxation to avoid any penalties. If you need any assistance regarding Labuan’s corporate tax rate, you can get in touch with our experienced team members in Labuan. You can also trust the services of our team members if you are facing any difficulties regarding adherence to accounting requirements in Labuan. Our experts will guide you in detail and make it easy to conform to the accounting requirements.

Non-deductions under Income Tax Act

Suppose a Malaysian resident company makes a payment to a Labuan resident company for use of intellectual property and delivery charges. In this case, it will be allowed to make a tax deduction of only 3% from the total payment. Please find below the non-deduction of payment made by a tax resident of Malaysia to a Labuan company:

  • 25% for the interest payment;
  • 25% for lease payment;
  • 97% for other kinds of payments.

Foreign Exchange control in Labuan

Apart from the low taxes in Labuan, the region is known for having relatively relaxed foreign exchange controls. This means that there are fewer restrictions on the movement of funds and foreign currency transactions compared to other jurisdictions. This can be attractive for businesses looking to conduct international transactions and manage their finances more freely.

Labuan allows a variety of foreign currencies to be used for trading and financial activities within its jurisdiction. Among these currencies, the USD is commonly used for transactions. We can help you set up a company in Labuan to take advantage of the foreign exchange control.

However, there are still certain restrictions in place. Specifically, local offshore trading companies based in Labuan are prohibited from conducting business transactions in Malaysian ringgits (MYR), which is the official currency of Malaysia.

Why should you invest in Labuan

Investing in Labuan can offer several benefits and advantages, making it an attractive option for individuals and businesses looking to establish a presence in an offshore financial center. Labuan is a tax haven, which prompted many investors to start a business in the region.

Here are a few interesting statistics that show growth in different sectors or industries in Labuan, in 2022:

  • There has been a 17% increase in the number of new registered or incorporated companies in Labuan;
  • International commodity trading companies have experienced a significant increase of 55% in their profitability;
  • There has been a 22% increase in the number or size of businesses operating in the digital space.

Contact our team members if you need assistance in any taxation issued in Labuan. It is essential to comply with the regulations of the Labuan tax to avoid penalties.

If you are looking out to incorporate a company in Labuan, our team members can provide you with comprehensive guidance in this regard. In addition, they will educate you about the investment tips that can make your business flourish.