In line with global efforts to address tax evasion and ensure fair tax practices, Malaysia, including Labuan, has actively participated in the Base Erosion and Profit Shifting (BEPS) Action Plan initiated by the Organization for Economic Cooperation and Development (OECD) since 2018. This commitment has led to continuous revisions of tax incentives and economic substance requirements to safeguard against harmful tax practices and promote transparency in cross-border businesses.

The recent enactment of the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 represents a significant step forward in this endeavor. Replacing its predecessors, the Regulations 2021 aim to mitigate tax-related disputes and foster a conducive business environment in Labuan. Mandating a minimum number of full-time employees and annual operating expenditure, these regulations underscore the importance of economic substance in Labuan entities.

To comply with these regulations, Labuan entities must establish a physical presence with an office in Labuan, maintain a specified number of permanent staff, ensure regulatory and tax compliance, and keep necessary accounts on-site. Adherence to these economic substance requirements enables Labuan entities to benefit from preferential tax rates, either the 0% or 3% tax rate on net audited profits and various tax incentives. Conversely, failure to meet these requirements may result in taxation at the standard income tax rate of 24% under the Labuan Business Activity Tax Act (LBATA).

There are three primary categories of Labuan activities one may engage in: Labuan Investment Holding Activity (also referred to as Labuan Non-Trading Activity), Labuan Trading Activity, and Non-Labuan Business Activity.

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Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 ("Regulations 2021")

According to the Regulations 2021, a Labuan entity carrying on a Labuan business activity must meet the stipulated number of full-time employees and amount of annual operating expenditure in Labuan, as specified in the First Schedule (for Labuan trading activity) and the Second Schedule (for Labuan non-trading activity).

  • Pure Holding Company is a company that holds equity participations and mainly earns dividends and capital gains. It must comply with the management and control requirements and incur a minimum annual operating expenditure of MYR 20,000 to fulfill the substance requirements and operate in Labuan.
  • Non-Pure Holding Company is a company that holds various assets that earn different incomes from external sources such as interest and dividends. It requires a minimum of one full-time employee and a minimum annual operating expenditure of MYR 20,000.

Below is the latest update for P.U.(A) 423 / 2021 on Labuan substance requirements.

First Schedule

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Second Schedule

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Control and Management Conditions in Labuan

The conditions in relation to control and management in Labuan as follows:

  • Board of directors’ meeting is convened in Labuan at least once a year.
  • Registered office of the Labuan entity must be situated in Labuan.
  • The secretary of the Labuan entity appointed under the Labuan Companies Act 1990 [Act 441] must be a resident in Labuan.
  • Accounting and business records including minutes of board meetings must be kept in Labuan.

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