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B20 LABUAN
The Labuan International Business and Financial Centre (Labuan IBFC) was established on
1 Oct 1990 as an international offshore financial centre (formerly known as Labuan International Offshore
Financial Centre).
Approved Labuan trading activities include banking, insurance, trading, management, licensing, shipping
operations or any other activity which are not Labuan non-trading activities. Labuan non-trading activities
mean activities relating to the holding of investments in securities, stock, shares, loans, deposits or any
other properties by a Labuan entity on its own behalf. Prior to 11 Feb 2010, Labuan activities did not include
any shipping operations in or out of Malaysia other than charter of ships on a bareboat basis.
Labuan activities are required to be carried out with persons not resident in Malaysia, and in foreign
currencies, although there are some exceptions for banks, insurance companies and Labuan entities
carrying on the business of Labuan leasing or money-broking. Transactions in Malaysian Ringgit are
permitted only for purposes of defraying administrative and statutory expenses, or for acquisition of shares
or other securities in a Malaysian company by a Labuan entity.
As part of the national financial liberalisation package announced by the Prime Minister in Apr 2009,
effective from 1 Jun 2009, a Labuan Company defined as a "Labuan Holding Company" (LHC) may apply to
the Labuan Financial Services Authority (Labuan FSA) to open an operational and management office in
Kuala Lumpur. A LHC that has been approved to co-locate must make an irrevocable election to be taxed
under the Income Tax Act 1967 (ITA 1967).
In addition, the following entities are also allowed to have co-located offices in any part of Malaysia:
(a) Labuan bank (effective from 19 Jan 2010);
(b) Labuan insurance and takaful licensee (effective from 1 Mar 2011).
Labuan entities
Preferential tax treatment is given to Labuan entities incorporated or registered under the Labuan
Companies Act 1990, Labuan trusts/Islamic trusts, Labuan foundation/Islamic foundation and Labuan
limited/limited liability partnership undertaking Labuan business activities as follows.
1. A Labuan entity carrying on a Labuan trading activity for the basis period for a Y/A can enjoy the
preferential tax rate of 3% of its audited net profits or elect to pay tax of RM20,000 for a Y/A.
2. Income derived from a Labuan non-trading activity for the basis period for a Y/A is exempt from tax
for that year of assessment.
3. A Labuan entity may make an irrevocable election to tax its income from Labuan business activity
under the ITA 1967, instead of the Labuan Business Activity Tax Act 1990 (LBATA 1990).
Non-Labuan business activities carried on by a Labuan entity are subject to normal Malaysian income tax at
the rate of 25%
Individuals
Individual residents in Labuan are subject to tax under the principal Act, the ITA 1967. Thus, income
accruing in or derived from Malaysia is taxable. Foreign sourced income received in Malaysia by a resident
individual is tax-exempt. The rate of tax ranges from 0% to 26% for resident individuals and a flat rate of
26% for non-resident individuals.
INTRODUCTION
TAXATION SYSTEM
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The following tax exemptions are available to certain individuals from Y/A 2011 to Y/A 2020:
Taxpayers Tax exemptions
Non-citizen individuals employed in a managerial capacity with a
Labuan entity in Labuan, co-located office or marketing office
50% of their income from such
employment
Non-citizen individuals acting in their capacity as a director of a
Labuan entity
Directors fee received
Citizen of Malaysia who received housing allowance and Labuan
Territory allowance from exercising an employment in Labuan with a
Labuan entity
50% of gross housing allowance
and Labuan Territory allowance
received
Capital gains
For a Labuan entity carrying on a Labuan trading activity, capital gains are reflected as part of the net profits
and hence subject to 3% tax. However, if election is made, the liability is restricted to RM20,000.
Capital gains arising from sale of shares in a Labuan company by the shareholders are not taxable
assuming that the shareholders do not have a business presence in Malaysia and are not investment
dealers.
Withholding taxes
Royalties, interest, technical or management fees and other gains or profits under S. 4(f) of the ITA 1967
paid by a Labuan company to a non-resident person or another Labuan company are exempted from
income tax and thus not subject to withholding tax. However, rental of moveable property paid to a non-
resident person does not enjoy this exemption, with the exception of Labuan banks or Labuan companies
carrying out leasing business.
Any interest paid by a Malaysian resident to Labuan banks in Labuan is not subject to withholding tax.
Indirect taxes
There are no indirect taxes (such as sales taxes, service taxes and custom duties) since Labuan enjoys free
port status.
Stamp duty
The following instruments are exempted from stamp duty:
(a) all instruments which are executed by a Labuan entity in connection with a Labuan business activity;
(b) all Memorandum and Articles of Association, statute, charter, rules, by-laws, partnership agreement or
other instrument, under or by which a Labuan entity is established and the scope of that entitys
function, business, powers and duties are set out, whether contained in one or more documents; and
(c) All instruments of transfer of shares in a Labuan entity.
Fund for Tax Refund
The fund for tax refund on excess of tax paid shall be paid from the fund established under S. 111B of the
ITA 1967.
1. Dividends paid by a Labuan company in respect of income derived from a Labuan business activity and
distributions made by a Labuan trust are not subject to tax in the hands of the recipients. In addition, if
the recipient is a company incorporated under the Companies Act 1965 and resident in Malaysia, the
recipient may pay tax exempt dividends to its shareholders.
OTHER INCENTIVES
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2. Any person providing legal, accounting, financial or secretarial services in Labuan to a Labuan entity will
be allowed an exemption of 65% of the statutory income derived from providing such services from
Y/A 2011 to Y/A 2020.
3. Any zakat which is paid by a Labuan entity in the basis period for a Y/A will be granted a tax rebate,
subject to a maximum of the tax charged, that is 3% of net profits, or RM20,000 upon election. Any
excess of tax rebate over the tax charged will not be refunded to the Labuan entity or be made available
as a credit to set-off against the tax liability for that Y/A or any subsequent Y/A.
4. Incentives under the Global Incentives for Trading (GIFT) programme are available to a Labuan
International Commodity Trading Company (LITC) which uses Malaysia as its international trading base.
A LITC is a Labuan company licensed by Labuan FSA to carry out the trading of physical and related
derivative instruments of the following commodities with non-residents in any currency other than
Ringgit:
petroleum and petroleum-related products including liquefied natural gas (LNG);
agriculture products;
refined raw materials;
chemicals; and
base minerals.
A LITC is taxed at 3% of audited net profits while a LITC set up purely as a LNG trading company is
entitled to 100% income tax exemption on chargeable profit for the first 3 years of its operation provided
the LITC is licensed before 31 Dec 2014. A LITC is allowed to establish its operational office anywhere
in Malaysia so long as it maintains a registered office in Labuan.
Labuan has no tax treaties with any contracting state and relies on Malaysias treaty partners to recognise
the Labuan legislation as part of the Malaysian tax regime. Currently, Labuan has been specifically excluded
from Double Tax Agreements with Australia, Chile, Germany, Indonesia, Japan, Luxembourg, Netherlands,
South Africa, Spain, Sweden, the Republic of Seychelles and the United Kingdom. While there is no mention
of Labuan being excluded from the Double Tax Agreements of Switzerland and South Korea, there may be
an unwritten practice of the Swiss Tax Authorities to exclude Labuan from access to treaty rates and the
Ministry of Finance and Economy of South Korea has announced that they will deny investor access to the
rates of the withholding tax rates under the treaty.
Section 22A of Labuan Business Activity Tax Act 1990 provides for disclosure of information in respect of
double tax agreements or tax information exchange agreements to a duly authorised servant or agent of the
Government with whom such arrangements have been made where such information is required to be
disclosed under such arrangements and upon request from any tax authority from any Government of any
territory outside Malaysia.
TAX TREATY ARRANGEMENTS
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Various administration fees/charges for entities in Labuan have been revised with effect from 1 April 2013.
The following are the relevant subsidiary legislation that gives effect to the changes:
PU(A) Orders Effective From
75/2013 Labuan Foundations (Amendment) Regulations 2013 1 April 2013
76/2013 Labuan Companies (Amendment) Regulations 2013 1 April 2013
77/2013 Labuan Financial Services And Securities (Amendment) Regulations 2013 1 April 2013
78/2013 Labuan Limited Partnerships And Limited Liability Partnerships
(Amendment) Regulations 2013
1 April 2013
79/2013 Labuan Trusts (Amendment) Regulations 2013 1 April 2013
80/2013 Labuan Islamic Financial Services And Securities (Amendment)
Regulations 2013
1 April 2013




LEGISLATION UPDATES ON ESTABLISHMENT OF LABUAN