Tax Framework in Labuan IBFC: Recent Developments

Corporate tax at 3% or 0%, economic substance requirements and the latest regulatory changes affecting Labuan entities.

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 schedule below specifies the minimum number of full-time employees (FTE) and the minimum annual operating expenditure (OPEX) required for each type of Labuan entity:

  • Labuan insurer, reinsurer, takaful operator or retakaful operator: 3 FTE, RM 200,000 OPEX.
  • Labuan underwriting manager or underwriting takaful manager: 4 FTE, RM 100,000 OPEX.
  • Labuan insurance manager or takaful manager: 4 FTE, RM 100,000 OPEX.
  • Labuan insurance broker or takaful broker: 2 FTE, RM 100,000 OPEX.
  • Labuan first party captive insurer or captive takaful: 2 FTE, RM 100,000 OPEX.
  • Labuan third party captive insurer or captive takaful: 2 FTE, RM 100,000 OPEX.
  • Labuan International Commodity Trading Company: 3 FTE, RM 3,000,000 OPEX.
  • Labuan bank, investment bank, Islamic bank or Islamic investment bank: 3 FTE, RM 200,000 OPEX.
  • Labuan trust company: 3 FTE, RM 120,000 OPEX.
  • Labuan leasing company (10 or less related companies): 2 per group, RM 100,000 each.
  • Labuan leasing company (11 to 20 related companies): 3 per group, RM 100,000 each.
  • Labuan leasing company (21 to 30 related companies): 4 per group, RM 100,000 each.
  • Labuan leasing company (more than 30 related companies): +1 per 10 additional, RM 100,000 each.
  • Labuan credit token company: 2 FTE, RM 100,000 OPEX.
  • Labuan development finance company: 2 FTE, RM 100,000 OPEX.
  • Labuan building credit company: 2 FTE, RM 100,000 OPEX.
  • Labuan factoring company: 2 FTE, RM 100,000 OPEX.
  • Labuan money broker: 2 FTE, RM 100,000 OPEX.
  • Labuan fund manager: 2 FTE, RM 100,000 OPEX.
  • Labuan securities licensee: 2 FTE, RM 100,000 OPEX.
  • Labuan fund administrator: 2 FTE, RM 100,000 OPEX.
  • Labuan company management (Section 129 LFSSA): 2 FTE, RM 100,000 OPEX.
  • Labuan International Financial Exchange: 2 FTE, RM 120,000 OPEX.
  • Self-regulatory organisation: 2 FTE, RM 120,000 OPEX.
  • Investment holding (other than pure equity): 1 FTE, RM 20,000 OPEX.
  • Pure equity holding activities: exempted from the FTE requirement, RM 20,000 OPEX.
  • Administrative, accounting, legal, backroom, payroll, talent management, agency, insolvency and management services: 2 FTE, RM 50,000 OPEX.

FTE means full-time employees. OPEX means operating expenditure. Pure equity holding entities are exempted from the full-time employee requirement, but 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 combination of business activity type and substance compliance determines the effective tax rate for a Labuan entity:

  • Entity A carries on trading and non-trading activity, complies for non-trading but not for trading: taxed at 24%.
  • Entity B carries on trading and non-trading activity, complies for trading but not for non-trading: taxed at 3%.
  • Entity C carries on trading activity and complies: taxed at 3%.
  • Entity D carries on trading activity and does not comply: taxed at 24%.
  • Entity E carries on non-trading activity and complies: taxed at 0%.
  • Entity F carries on non-trading activity and does not comply: taxed at 24%.

Where a Labuan entity carries on both a trading and a 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: subject to tax at 17% or 24% under the 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:

  • Interest payment: 25% not allowed for deduction.
  • Lease rental: 25% not allowed for deduction.
  • Other payments: 97% not allowed for deduction.

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.

For further detail, see our related whitepaper on the Labuan Business Activity Tax framework and our overview of economic substance requirements.

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. QX Trust tries to ensure that the content is accurate, adequate and complete, but does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. QX Trust 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.

For tailored advice on this topic, contact our team.