LABUAN CORPORATE TAX

Labuan does offer various tax incentives to businesses operating in the region, and the Labuan corporate tax rate in 2023 is 3% for qualifying companies which is one of the lowest in the world.

Labuan IBFC (International Business and Financial Centre) was established more than 25 years ago to develop and improve the economic activities in Labuan, Malaysia. Labuan companies are governed by several Labuan IBFC acts, and the Labuan tax laws are mainly governed by the Labuan Business Activity Tax Act 1990 (LBATA 1990).

The LBATA act was last updated on December 23, 2020. This low tax rate, combined with other incentives, makes Labuan an attractive destination for businesses looking to minimize their tax liabilities.

Labuan offers various tax incentives to businesses operating in the region. The corporate tax rate in Labuan is 3% for qualifying companies which is one of the lowest in the world. This low tax rate, combined with other incentives, makes Labuan an attractive destination for businesses looking to minimize their tax liabilities.

One of the main advantages of doing business in Labuan is the ability to take advantage of the country’s double tax treaty network. Labuan has signed over 60 double-tax treaties with countries around the world, which can help businesses avoid or reduce double taxation on their income.

Additionally, Labuan’s corporate tax system is based on a territorial principle, which means that businesses are only taxed on income generated within the territory of Labuan. This can provide further tax savings for businesses that operate in multiple jurisdictions.

Labuan offshore companies are often used for wealth management, asset protection, and holding investments such as real estate, shares, and other assets. Labuan is at times deemed as Malaysia’s Tax Haven due to its tax incentives. 

Under the LBATA 1990 act, companies are taxed based on their Labuan business activity category and whether it meets the Labuan substance requirements as stipulated by the authorities.

Labuan incorporated companies are categorized into the following two categories before determining their tax rate.

LABUAN TRADING ACTIVITY

A company undertaking Labuan Trading activity will be taxed at 3% of the net profit before tax. However, to qualify for the 3% a Labuan company has to meet the following physical substance requirements. Failure to meet the substance requirements will subject the company to a 24% tax rate. The substance requirements were implemented effective 1st January 2019.

The substance requirements are assessed mainly by the minimum number of employees (full-time) employed in Labuan and the minimum annual operating expenditure incurred in Labuan.

Substance requirements (1): Minimum employees (full-time) employed in Labuan

Substance requirements (2): Minimum annual operating expenditure in Labuan (RM)

Substance Requirements For Different Business Activities In Labuan:

As per the Labuan business activity tax regulations 2019. The substance requirements are assessed mainly by the minimum number of employees (full-time) employed in Labuan and the minimum annual operating expenditure incurred in Labuan. Based on Labuan’s business activity, a company has to meet the following requirements:

Based on the Labuan regulations, the definition of Labuan full-time employees is as follows:

1. At least an officer of managerial capacity and
2. Other employees dedicated to serving the Labuan entities may be employed either on a permanent or contract basis by the Labuan entities, which include non-managerial and clerical staff.

As per the Inland revenue board of Labuan, any company that undertakes activities that do not fall within the activities in Regulations will not be a Labuan business activity, hence it will be taxed at 24%.

Tax Filing and Payment

Businesses operating in Labuan must file their tax returns and pay their taxes to the Labuan Financial Services Authority (LFSA) within six months of the end of their financial year. Companies engaged in non-trading activities may have to file additional forms and have to comply with different regulations.

Labuan withholding Tax

Labuan companies will have access to most of Malaysia’s double tax agreements. Selected countries such as Australia, Chile Spain have excluded Labuan from their Double tax agreement. For qualifying companies, the usual withholding tax will be applicable.

Sales and Service Taxes

Labuan has been given a concessional sales and service tax as a designated area. Hence any sales within Labuan or overseas will not be subjected to the Malaysian SST. However, if a Labuan company is providing services to other states and places in Malaysia the SST might be enforced.

Inheritance Tax and Gift Tax

Malaysia and Labuan do not have any inheritance tax or estate duty.

The following items are exempted from the income tax act:

• Payments of royalties, interest, technical fees, or other profits or gains not derived from the specified classes of income.
• Payments to non-residents made.

LABUAN COMPANY ANNUAL COMPLIANCE REQUIREMENTS

Annual Return Filing

All Labuan-incorporated companies are required to submit an annual return to the Labuan authorities. The annual return must be accompanied by a fee of US$ 800 government fee, and the annual return must be accompanied by a certificate from an approved auditor and a certificate from the company director.

The annual return is due annually 30 days prior to the anniversary of the date of incorporation of the Labuan company. Failure to submit the annual return by the specific deadline may result in penalties for the company and its director.

Tax Filing

All Labuan companies are required to submit their corporate tax filing before the deadline of 31 March annually.

Accounting and Auditing

A Labuan company’s financial year-end is December 31st annually. As such, all Labuan business entities must hold the annual general meeting and finalize the financial statements within 9 months from the end of the financial year.

However, a Labuan Holding Company or a Labuan Dormant Company is not required to submit audited financial statements. A copy of the management accounts is acceptable by the authorities. The deadline for a Labuan Company (Licensed) to submit the audited financial statements to the authorities is June 30th.

Penalties for non-compliance

If a Labuan company fails to comply with the above requirements, it may be subject to penalties such as fines, penalties or even being struck off by the Labuan Financial Authority if the annual fee is not paid or the non-compliance has been more than 3 years. It is important for companies to stay compliant with the regulations and requirements set by the Labuan Financial Services Authority in order to avoid these penalties.

Relin Consultants offers corporate tax filing services for businesses operating in Labuan, Malaysia. Our team of experts is well-versed in the local tax laws and regulations, and we can help ensure that your company complies with all tax filing requirements.

We can assist with everything from initial registration to ongoing compliance, accounting and bookkeeping services and we will work with you to minimize your tax liability and take advantage of any available incentives. If you’re looking for reliable and efficient tax filing services in Labuan, look no further than Relin Consultants.