Labuan IBFC’s tax system is simple and straightforward. In addition, investors can access to a large network of Malaysian double taxation agreements, one of Asia’s most extensive treaty networks spanning close to 80 countries.

The attractive Labuan tax system applies to Labuan entities carrying on a Labuan Business activity under the Labuan Business Activity Tax Act 1990 (LBATA).

A Labuan Business activity is:

• a Labuan trading or a Labuan non-trading activity,
• carried on in, from or through Labuan,
• with non residents or another Labuan entity,
• in a currency other than Malaysian currency.

The following activities by a Labuan entity with residents or in Malaysian currency where permitted under the Exchange Control regulations would also be regarded as a Labuan business activity:

• a Labuan entity carrying on a banking, insurance or financial business  licensed under the Labuan Financial Services and Securities Act 2010 or Labuan Islamic Financial Services and Securities Act 2010
• a Labuan entity holding investment in a domestic company
• a Labuan entity holding debt obligations in a domestic company
• a Labuan entity defraying its administrative and statutory expenses, including payments to its professional contacts such as counsel, attorney, accountant, bookkeeper, management company, investment adviser, Labuan trust company or a corporation owned by a Labuan trust company made available to act as resident director or resident secretary of a Labuan company.

Shipping operation carried out by a Labuan entity in Labuan or outside Malaysia can be regarded as a Labuan business activity.

Resident

Resident for the purposes of LBATA means:

(i) in relation to a natural person, a citizen or a permanent resident of Malaysia; or
(ii) in relation to any other person, a person who has established a place of business, and is operating, in Malaysia, and includes a person who is declared to be a resident pursuant to Subsection 43(2) of the Exchange Control Act 1953.

Tax rates

Tax Rebate

Tax incentives

• Dividends received from Labuan entities
• Distributions received from Labuan trusts and foundations (including both Islamic) by the beneficiaries
• Distributions of profits by Labuan partnerships (including Islamic partnerships)
• Interest received by residents*, non-residents* or another Labuan entity from a Labuan entity.
• Royalties and fees for services, advices or assistance specified in Section 4A(i) and (ii) of the ITA, received by a non-resident or another Labuan entity from a Labuan entity.
• Other gains or profits under Section 4(f) of ITA received by a non-resident from a Labuan entity
  

• on payments to non-residents for  interest, royalties, fees for services, advice or assistance, or other gains or profits under Section 4(f) of ITA by a Labuan entity
• on payments to non-residents for use of moveable properties by a Labuan licensed leasing company.
  

• Tax exemption on directors’ fees received by a non-citizen individual in his capacity as a director of a Labuan entity.
• Tax exemption on 50% of gross income received by a non-citizen individual from exercising an employment with a Labuan entity in a managerial capacity, in Labuan or at its marketing or co-located offices approved by LFSA.
• Tax exemption on 50% of gross housing and Labuan Territory allowances received by a Malaysian citizen from exercising an employment in Labuan with a Labuan entity.
• Tax exemption on 65% of the statutory income of any person providing qualifying professional services such as legal, accounting, financial and secretarial services, rendered in Labuan by that person to a Labuan entity.
  

Stamp Duty Exemption

Advance Ruling

A Labuan entity can apply to the DG of Inland Revenue Board for an advance ruling on the tax treatment under LBATA of an arrangement or transaction that involves a Labuan entity.

Election to be taxed under ITA

A Labuan entity can also make an irrevocable election under LBATA for its profits to be taxed under the domestic income tax legislation, ie Malaysia Income Tax Act 1967 (ITA). A Labuan holding company which has a co-located office in Kuala Lumpur must make the election to be taxed under the ITA.
Under ITA, the following general provisions apply:

• Corporate tax rate - 25% (YA 2011)
• Capital gains tax are not subject to tax
• Income derived from foreign sources are exempted from tax

For details on the Labuan Business Activity Tax Act 1990 (LBATA), click here.

For details on the ITA, please visit the Malaysian Inland Revenue Board’s website www.hasil.org.my