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Labuan tax haven: current opportunities for offshore business

In 1989, the Malaysian government turned Labuan Island into an international offshore center for financial and asset management activities. Is this territory still a tax haven, or has corporate legislation changed in it?

Labuan

Is Labuan a Tax Haven?

Yes, the federal territory of Labuan, owned by the state of Malaysia, can be considered a tax haven, according to the definition below.

A tax haven is a country or its separate territory, where legislation offers benefits and low tax rates for non-residents if they register a business in its jurisdiction.

In Labuan, the income tax rate for non-resident companies does not exceed 3%. Therefore, this federal territory can be considered a tax haven. In addition, it has a solid reputation in corporate circles, and the legislation is fully consistent with international standards. Labuan is great for doing business in Asia and the Middle East.

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Contact our experts for help in registering companies in Labuan and opening accounts in foreign banks. To order consultation, use the portal Contacts section.

Is Labuan Considered a Classic Offshore?

According to the general perception, classical offshores are various countries or territories with the lower taxation for the companies (tax rate – 0%) registered by non-residents. From this, we can conclude that Labuan is not a classic offshore.

Key Features of Labuan Tax Haven

The official name is the Federal Territory of Labuan. It has the right to autonomy in Malaysia. The territory includes the large island of Labuan and six more islands of smaller sizes. The total area of Labuan is 92 km².

It lies eight kilometers away from the largest island of Borneo (Kalimantan). Also nearby is the Sultanate Brunei, considered the richest state of Southeast Asia. Labuan transport communication with the rest of Malaysia is carried out by ferry and aircraft.

The Federal Territory of Labuan is part of Malaysia and is governed by the federal government of Malaysia, so the head of Labuan, the Federal Territory Administrator, is the official appointed by the Federal Government. In March 2023, the current administrator is Datuk Bashir Alias.

The budget of the tax harbor Labuan does not completely depend on the offshore financial sector, since oil and natural gas are produced on its territory. There is a large port with oil terminals taking tankers. Deliveries go both to Malaysia itself and to South Korea, as well as India. In addition, the tourist sector is well-developed in Labuan.

In 2021, the GDP per capita in Labuan amounted to 18,174 US dollars. Among all regions of Malaysia, only in the capital, Kuala Lumpur, is it higher – 24,864 US dollars.

Over the past two decades, the financial services management in Labuan has stimulated the significant development of local infrastructure, especially telecommunications systems.

About 86,908 people live on the island (as of March 2023). Most of the population speaks Malay, but English is also wide-spread in business circles. Communicating with local agents in English should not be a problem.

Labuan Tax Haven – Foreign Exchange Control

One of Labuan’s distinctive features is quite liberal foreign exchange controls. However, there are certain restrictions:

  • Local offshore trading companies cannot do business with settlements in Malaysian ringgits, the country’s official currency
  • (the official currency of the country). It is also forbidden to nominate the authorized capital of the company in them;
  • Various foreign currencies are used for trading, but the most common one is the US dollar;
  • The main source of income for Labuan offshore companies cannot be trading with residents, that is, with local organizations.

Labuan Offshore Corporate Law

The legal system of Labuan, like that of the whole of Malaysia, is based on British common law. But in 1989, special laws were passed that made it possible to turn Labuan into a tax haven: the legislation created the opportunity to offer beneficial terms for non-residents who wanted to open offshore companies there.

In 1990, the Malaysian Parliament passed the following legislation:

  • Law on offshore companies;
  • Law on offshore banking;
  • Offshore Trust Companies Act.

Today, the process of registering companies owned by non-residents is regulated by the latest Labuan Companies Law in force in the tax haven since 2010.

In 2019, Substance requirements were introduced at the legislative level in the tax haven of Labuan. Under these rules, offshore companies registered in this jurisdiction are required to have resident employees and comply with the requirements for the sum total of annual operating expenses. 

Types of Offshore Companies in Labuan and Corporate Taxation

Labuan legislation allows non-residents to register two types of offshore companies in this tax haven:

  • trading companies;
  • holdings.

Corporate income tax for Labuan trading companies is levied at a rate of 3%. The tax base is the net profit of the enterprise. The maximum threshold for the CIT constitutes 20,000 Malaysian ringgits per year, or 4,500 US dollars at the current exchange rate.

Goods and Services Tax GST (similar to VAT) is levied only on registered business income over 500,000 Malaysian ringgits, or 111,720 US dollars at the current exchange rate.

Holding companies do not pay taxes on their foreign income.

Labuan tax haven is on the White List of OECD. There is no tax on capital gains, dividends, and interest in Labuan, and there are no requirements to disclose information about the beneficial owners. Owners of offshore companies in Labuan can take advantage of the DTT concluded between Malaysia and other states.

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If you are considering this tax haven as a place to register an offshore company, contact our experts for a free consultation. The experts will help you with the choice of jurisdiction and inform you about its most notable features to ascertain that Labuan is the right place for your activity.

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Benefits of Opening Offshore Companies

The tax haven of Labuan is an excellent jurisdiction for business. It provides efficiency, international competitiveness, and better control over finances.

When opening an offshore business, a foreign owner receives the following benefits:

  • Corporate taxes with very low or zero rates;
  • The opportunity to open an offshore company with one founder, who has the right to appoint himself as a director;
  • Standard share capital is equivalent to 10,000 US dollars. It can be 100% foreign;
  • The annual maintenance fee for an offshore company is 5300 RM or about 1200 US dollars;
  • The opportunity to open a corporate account in a local bank to provide economic substance;
  • Ensuring the privacy of offshore company owners. Banking information is not available to the Malaysian government;
  • A convenient starting point for an expansion into Asian and Middle Eastern markets;
  • Labuan has the status of a “free port”. There are no import customs duties and no taxes on the sale of goods and services for the first RM500,000 per year.

Contact our experts if you want to know how to register an offshore company in this tax haven.

Requirements for Offshore Companies in Labuan

Conditions for registering an offshore company in the tax haven of Labuan:

  • the presence of a permanent secretary who is a local citizen;
  • a ban on issuing bearer shares;
  • merging firms into one legal entity is not allowed;
  • a registered office in Labuan;
  • a minimum of two employees hired by the company;
  • minimum annual operating expenses totaling 50,000 ringgit or 11,200 Us dollars at the current exchange rate.

Our experts can also help you with fully remote opening a corporate bank account in Labuan.

To get your free personal consultation, email us at [email protected].

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