Labuan IBFC

Labuan International Business Financial Centre

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 or tax at RM20,000 per year.

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

Costs
Benefits
Costs

Incorporation and maintenance costs of a Labuan entity

  1. 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.
  2. 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).
  3. 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).
Benefits
  1. No tax for investment holding companies.
  2. Tax of 3% on annual audited profit for eligible Labuan companies.
  3. No withholding tax on payments made by a Labuan company to a non-Malaysian resident.
  4. 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

Some examples of how companies can use Labuan structures.
Intermediary company
A Labuan company can be used as an intermediary company to retain profits for reinvestment and to avoid the profits from being repatriated and taxed in the home country. Labuan foundations and trusts can serve a similar function to retain profits and preserve wealth.
International trading
International trading companies especially those in commodity trading, can conduct business from Labuan and benefit from the Labuan tax regime.
Labuan leasing company
A Labuan leasing company can be used to reduce withholding tax on lease payments made by a Malaysian resident to a non-Malaysian resident.
Labuan finance company
  • 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.
Offshore financial services
Companies engaged in offshore financial services e.g. banks, insurance companies and insurance brokers, can reduce tax on their income.
Digital companies
Digital companies (crypto-currency, digital banking, insurtech, digital asset exchange, credit token, crypto trading, e-payments, etc.) can reduce tax on their 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

Our Service Leaders

Kok Wai Lee
Kok Wai Lee
Managing Partner
Location: Kuala Lumpur
Yew Hoe Poon
Yew Hoe Poon
Partner
Location: Kuala Lumpur
Chong Mun Yew
Mun Yew Chong
Partner
Location: Kuala Lumpur
Lean Wei Ee
Wei Ee Lean
Partner
Location:  Kuala Lumpur