Overview of Labuan Tax Framework and Substance Requirements

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.

Type of Labuan Activity	Tax Treatment (if complies with substance requirements)	Minimum Full-Time Employee(s) in Labuan	Minimum Annual Operating Expenditure (OPEX) in Labuan (MYR)
Labuan Investment Holding Activity (also known as Labuan Non-Trading Activity) Holding of Investments in securities, stocks, shares, loans, deposits, or any other properties situated in Labuan and held by a Labuan entity on its own behalf.	0% of net profit	0 - 1 (depending on the type of holding activity)	20,000
Labuan Trading Activity (Listed under P.U.(A) 423/2021)	3% of net profit	2 - 4 (depending on the type of license)	100,000 - 200,000
Carrying out both Labuan Trading & Non-Trading Activities – Deemed to be Labuan Trading Activity	Same tax treatment as Labuan Trading Activity: 3% of net profit	2 - 4 (depending on the type of license)	100,000 - 200,000
Non-Labuan Business Activities	Taxed under the Malaysian Income Tax Act (ITA): 24% of net profit

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

No.	Type of Labuan Entities	Minimum full-time employees	Minimum annual operating expenditure (MYR)
1.	Labuan insurer, Labuan reinsurer, Labuan takaful operator or Labuan retakaful operator	3	200,000
2.	Labuan underwriting manager or Labuan underwriting takaful manager	4	100,000
3.	Labuan insurance manager or Labuan takaful manager	4	100,000
4.	Labuan insurance broker or Labuan takaful broker	2	100,000
5.	Labuan captive insurer or Labuan captive takaful - (a) Labuan first party captive insurer or Labuan first party captive takaful (b) Labuan third party captive insurer or Labuan third party captive takaful	(a) 2 (b) 3	100,000
6.	Labuan bank, Labuan investment bank, Labuan Islamic bank or Labuan Islamic investment bank	3	200,000
7.	Labuan trust company	3	120,000
8.	Labuan leasing company or Labuan Islamic leasing company which has - (a) Not more than 10 related Labuan leasing companies or Labuan Islamic leasing companies; (b) 11 to 20 related Labuan leasing companies or Labuan Islamic leasing companies; (c) 21 to 30 related Labuan leasing companies or Labuan Islamic leasing companies; or (d) More than 30 related Labuan leasing companies or Labuan Islamic leasing companies	(a) 2 for each group of companies (b) 3 for each group of companies (c) 4 for each group of companies (d) 1 additional employee for each group of companies for each increase of 10 related Labuan leasing companies or Labuan Islamic leasing companies	100,000 for each Labuan leasing company or Labuan Islamic leasing company
9.	Labuan credit token company or Labuan Islamic credit token company	2	100,000
10.	Labuan development finance company or Labuan Islamic development finance company	2	100,000
11.	Labuan building credit company or Labuan Islamic building credit company	2	100,000
12.	Labuan factoring company or Labuan Islamic factoring company	2	100,000
13.	Labuan money broker or Labuan Islamic money broker	2	100,000
14.	Labuan fund manager	2	100,000
15.	Labuan securities licensee or Labuan Islamic securities licensee	2	100,000
16.	Labuan fund administrator	2	100,000
17.	Labuan company management	2	100,000
18.	Labuan International Financial Exchange	2	120,000
19.	Self-regulatory organization or Islamic self-regulatory organization	2	120,000
20.	Labuan entity that carries on any one or more of the following business activity: - (a) Administrative services (b) Accounting services (c) Legal services (d) Backroom processing services (e) Payroll services (f) Talent management services (g) Agency services (h) Insolvency related services (i) Management services other than Labuan company management (item 17)	2	50,000

Second Schedule

No.	Type of Labuan Entities	Minimum full-time employees	Minimum annual operating expenditure (MYR)
1.	Labuan entity that undertakes investment holding activities other than pure equity holding activities	1	20,000
2.	Labuan entity that undertakes pure equity holding activities	Exempted under the Labuan Business Activity Tax (Exemption) Order 2020 [P.U.(A) 177/2020], but must exercise control and management in Labuan	20,000

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.

Choose FA Advisory as your trusted partner in navigating the dynamic business landscape of Asia. With our commitment, we are your gateway to success in Labuan and beyond. Let us be a part of your business journey.

Email: advisory@finarkasia.com | Phone number: +6010-931 6678