Tax Framework in Labuan IBFC: Labuan Business Activity

This whitepaper provides a structured overview of the complete tax framework applicable to Labuan business activities under the Labuan Business Activity Tax Act 1990 (LBATA), including corporate tax, personal tax, other taxes, double taxation agreements and tax return filing requirements.

Part A: General

Item	Details
Governing Law	Labuan Business Activity Tax Act 1990 and its regulations
Labuan Business Activity	Labuan trading activity: Includes banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a Labuan non-trading activity. Labuan non-trading activity: An activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties situated in Labuan by a Labuan entity on its own behalf. For trading activities: Must have adequate full-time employees in Labuan and adequate annual operating expenditure in Labuan. For non-trading activities: Must have adequate full-time employees, adequate annual operating expenditure, and comply with control and management conditions in Labuan. Note: Income derived from intellectual property rights is subjected to tax at 17% or 24% under Income Tax Act 1967.
Dormant Labuan Entities	A Labuan entity is considered dormant if it: has never commenced operations since incorporation; has previously been in operation but has now ceased; or does not have any significant accounting transaction for one financial year before a substantial change (50% or more) in equity shareholding. Minimum expenses for compliance include: annual return filing, secretarial fee, tax filing fee, audit fee and accounting fee.

Part B: Economic Substance Requirements

Please refer to our whitepaper on Tax Framework in Labuan IBFC: New Development for the full substance requirements schedule.

Part C: Corporate Tax

Key rule

Where a Labuan Entity carries on both a Labuan trading activity and a Labuan non-trading activity, such entity shall be deemed to be carrying on a Labuan trading activity (Subsection 2(2) LBATA). Non-Labuan Business Activity is taxed at 17% to 24%.

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%

Part D: Non-Deductibility

Type of Payment	Amount Not Allowed for Deduction
Interest payment	25%
Lease rental	25%
Other payments	97%

Part E: Personal Tax

Category	Rate
Resident	0% to 28%
Non-resident	28%
Exemption (up to year of assessment 2025)	100% exemption on director's fee received by non-citizen individual

Part F: Other Tax

Tax Type	Applicability
Service Tax	No service tax shall be charged on taxable services provided within or between Special Areas and Designated Areas, unless prescribed otherwise.
Sales Tax	No sales tax for goods (except petroleum) manufactured in, imported into, and transported between the designated areas.
Withholding Tax (Non-resident)	No
Withholding Tax (Agents, Dealers, Distributors)	Pending confirmation from the IRB
Capital Gains Tax	No (gains are reflected as part of net profits)
Stamp Duty	No stamp duty for: all instruments executed by a Labuan entity in connection with Labuan business activity; all documents stating the establishment of a Labuan entity; all instruments of transfer of shares in a Labuan entity.

Part G: Double Taxation Agreement (DTA)

Labuan Entities enjoy the benefits of more double taxation treaties than any other entity from an offshore jurisdiction, as they almost enjoy the same full double taxation benefit as a domestic/onshore entity in Malaysia, except for eleven (11) of those 74 countries.

Part H: Tax Return

Item	Details
Due Date of Submission	31 March (or any extended period)
Types of Forms	Form LE1: Return of Profits under Section 5 and Section 10 of the LBATA Form LE4: Statutory Declaration under Section 5 (for trading activities) Form LE5: Statutory Declaration under Section 10 (for non-trading activities) Audited Financial Statements
Filing Requirements	Labuan Trading Activity: LE1 + LE4 + Audited Financial Statement Labuan Non-trading Activity: LE1 + LE5 + Audited Financial Statement Dormant (Trading NOB): LE1 + LE4 (management account acceptable if duly signed report not prepared) Dormant (Non-trading NOB): LE1 + LE5 (management account acceptable if duly signed report not prepared)
Parties Permissible to Sign LE1	The manager or other principal officer in Malaysia; the resident director as provided in the Labuan Companies Act 1990; the secretary; in the case of a trust, the trustee(s); in the case of a company under liquidation or receivership, the liquidator or receiver; in the case of a partnership, the partner(s); in the case of a Labuan limited partnership or LLP, the general or designated partner(s); in the case of a Labuan foundation, its officer(s).

Key takeaway: The Labuan tax framework offers significant advantages including 3% or 0% corporate tax, no withholding tax, no stamp duty, no capital gains tax, and access to 74 double taxation agreements. Compliance with economic substance requirements is essential to access these benefits.

The information contained in this document is provided for information purposes only. It does not constitute legal advice and should not be relied upon as such. Readers may need to obtain professional advice on legal or tax issues before relying on it. Signature Trust Ltd tries to ensure that the content is accurate, adequate, or complete, but does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. Signature Trust Ltd expressly disclaims any liability to any person for loss or damage incurred as a result of reliance placed upon the information contained in this document. All rights reserved © 2022 Signature Trust Ltd.