The Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulation 2021 has been gazetted on 22 November 2021 and is deemed to have come into operation on 1 January 2019. A Labuan entity carrying on a Labuan business activity is only subject to tax at the rate of 3% or 0% of the net profit provided that it has fulfilled the requirement of the number of full-time employees and an amount of annual operating expenditure as specified in the Schedule.
Corporate Tax: 3% or 0%
Labuan entities benefit from a preferential tax framework, provided they meet defined economic substance requirements. The applicable rate depends on the nature of the activity (trading or non-trading) and whether the entity satisfies the minimum thresholds for full-time employees and annual operating expenditure in Labuan.
Substance Requirements Schedule
The following table specifies the minimum number of full-time employees (FTE) and annual operating expenditure (OPEX) required for each type of Labuan entity:
| Labuan Entity Type | Min. FTE in Labuan | Min. Annual OPEX (RM) |
|---|---|---|
| Labuan insurer, reinsurer, takaful operator or retakaful operator | 3 | 200,000 |
| Labuan underwriting manager or underwriting takaful manager | 4 | 100,000 |
| Labuan insurance manager or takaful manager | 4 | 100,000 |
| Labuan insurance broker or takaful broker | 2 | 100,000 |
| Labuan first party captive insurer or captive takaful | 2 | 100,000 |
| Labuan third party captive insurer or captive takaful | 2 | 100,000 |
| Labuan International Commodity Trading Company | 3 | 3,000,000 |
| Labuan bank, investment bank, Islamic bank or Islamic investment bank | 3 | 200,000 |
| Labuan trust company | 3 | 120,000 |
| Labuan leasing company (10 or less related companies) | 2 per group | 100,000 each |
| Labuan leasing company (11 to 20 related companies) | 3 per group | 100,000 each |
| Labuan leasing company (21 to 30 related companies) | 4 per group | 100,000 each |
| Labuan leasing company (more than 30 related companies) | +1 per 10 additional | 100,000 each |
| Labuan credit token company | 2 | 100,000 |
| Labuan development finance company | 2 | 100,000 |
| Labuan building credit company | 2 | 100,000 |
| Labuan factoring company | 2 | 100,000 |
| Labuan money broker | 2 | 100,000 |
| Labuan fund manager | 2 | 100,000 |
| Labuan securities licensee | 2 | 100,000 |
| Labuan fund administrator | 2 | 100,000 |
| Labuan company management (Section 129 LFSSA) | 2 | 100,000 |
| Labuan International Financial Exchange | 2 | 120,000 |
| Self-regulatory organisation | 2 | 120,000 |
| Investment holding (other than pure equity) | 1 | 20,000 |
| Pure equity holding activities | Exempted* | 20,000 |
| Administrative, accounting, legal, backroom, payroll, talent management, agency, insolvency and management services | 2 | 50,000 |
FTE = Full Time Employees | OPEX = Operating Expenditures
* Pure equity holding entities must: convene a board meeting in Labuan at least once a year, have a registered office in Labuan, appoint a secretary resident in Labuan, and keep accounting and business records in Labuan.
Summary of Tax Treatment
The table below illustrates how the combination of business activity type and substance compliance determines the effective tax rate for a Labuan entity:
| Entity | Business Activity | Substance Compliance | Tax Rate |
|---|---|---|---|
| Entity A | Trading + Non-Trading* | Trading: Not Comply / Non-Trading: Comply | 24% |
| Entity B | Trading + Non-Trading* | Trading: Comply / Non-Trading: Not Comply | 3% |
| Entity C | Trading | Comply | 3% |
| Entity D | Trading | Not Comply | 24% |
| Entity E | Non-Trading | Comply | 0% |
| Entity F | Non-Trading | Not Comply | 24% |
* Where a Labuan Entity carries on both a trading and non-trading activity, it shall be deemed to be carrying on a trading activity (Subsection 2(2) LBATA).
Additional Notes
Income from intellectual property rights: Subjected to tax at 17% or 24% under Income Tax Act 1967.
Non-Deductibility
With effect from 1 January 2019, certain payments made to a Labuan Entity by a Malaysian resident company are not entitled to a full tax deduction:
| No. | Type of Payment | Amount Not Allowed for Deduction |
|---|---|---|
| 1 | Interest payment | 25% |
| 2 | Lease rental | 25% |
| 3 | Other payments | 97% |
Key takeaway: Labuan entities can achieve tax rates of 3% (trading) or 0% (non-trading) by meeting the economic substance requirements. Non-compliance results in the standard 24% corporate tax rate.
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