Is Labuan still attractive for companies seeking tax advantages?
Labuan is a low tax International Business Financial Centre (“IBFC”) and was established by the Government of Malaysia (“the Government”) in 1990 with the intention to attract international financial activities. With this purpose in mind, the Government of Malaysia offered preferential tax treatment for Labuan companies which were a fixed tax rate of 3% of audited tax profits.
In line with the Government’s commitment to the implementation of the minimum standards of the Base Erosion and Profit Shifting (“BEPS”) Action Plans introduced by the Organisation of Economic Co-operation and Development (“OECD”), the Government announced major changes to the Labuan tax regime effective 2019 which included amongst others an introduction of economic substance requirements and the removal of intellectual property income from enjoying the Labuan preferential tax rate.
Labuan also enjoys access to double tax treaties with many countries except certain countries (i.e., India, Indonesia, Japan, etc.) that have specifically disregarded Labuan from enjoying access to the double tax treaties.
Notwithstanding the changes, Labuan is still a highly regarded, well-regulated and efficiently administered IBFC.
Costs vs Benefits of using Labuan
Incorporation and maintenance costs of a Labuan entity
- One-off expenses
- Company formation.
- Initial tax and legal advice, if necessary.
- Professional fees for opening of bank account, application of Labuan Financial Services Authority (“LFSA”) license, etc.
- Annual expenses
- Annual LFSA fees.
- Professional fees such as audit fees, tax fees, accounting fees (if necessary) and trust company fees (company secretarial, nominee directors, registered office, mail forwarding, etc.).
- Salaries of staff to meet economic substance requirements.
- Office rent, if necessary.
- Flight and accommodation costs for travel to Labuan annually (by at least one director for annual directors’ meetings).
- Restriction on tax deduction of expenses paid by a Malaysian company to a Labuan company (this affects groups of companies if the Malaysian company and the Labuan company are members of the corporate group).
- No tax for investment holding companies.
- Tax of 3% on annual audited profit for eligible Labuan companies.
- No withholding tax on payments made by a Labuan company to a non-Malaysian resident.
- Access to Malaysia’s double tax treaties which can lower withholding taxes in the paying country when payments are made to the Labuan company as compared to payments to a non-treaty country.
Use cases for Labuan structures
- A Labuan finance company can be used to reduce withholding tax on interest payments made to a non-Malaysian lender.
- Fund management companies can reduce tax on their fund management income.
- Captive insurance companies can reduce tax on their insurance income.
- Shipping companies can reduce tax on their worldwide freight income.
How Crowe Can Assist You
Tailored Solutions to Meet Your Needs
- Preparation of tax computations, tax filing and provision of other tax compliance services for Labuan companies and entities.
- Tax advisory services for Labuan companies and entities.
- Audit services for Labuan companies and entities.
- Internal audit, IT audit, cyber-security and corporate recovery services for Labuan companies and entities.
- Audit, tax, internal audit, IT audit, cyber-security, corporate recovery, IPO, feasibility study and other services for non-Labuan Malaysian entities. View our services here >>>
Tip: Tax minimisation in Labuan requires close coordination between auditors and tax consultants to ensure proper set up.
Our Labuan Office
Office Suite 1662,
Level 16(A), Main Office Tower,
Financial Park Complex Labuan,
Jalan Merdeka,
87000 Labuan F.T
+6087 584 798 Main
