Tax Framework: Labuan Business Activity Tax

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

Governing law: the Labuan Business Activity Tax Act 1990 and its regulations.

Labuan business activity is divided into two categories:

• 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, the entity must have adequate full-time employees in Labuan and adequate annual operating expenditure in Labuan. For non-trading activities, the entity must have adequate full-time employees, adequate annual operating expenditure, and comply with control and management conditions in Labuan. Income derived from intellectual property rights is subject to tax at 17% or 24% under the 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: Recent Developments 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%.

The effective tax rate depends on the activity and on substance compliance:

• 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%.

Part D: Non-Deductibility

Certain payments made to a Labuan entity 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.

Part E: Personal Tax

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

Part F: Other Tax

• 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, and 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 or onshore entity in Malaysia, except for eleven (11) of those 74 countries.

Part H: Tax Return

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 plus LE4 plus audited financial statement.
• Labuan non-trading activity: LE1 plus LE5 plus audited financial statement.
• Dormant (trading NOB): LE1 plus LE4 (management account acceptable if a duly signed report is not prepared).
• Dormant (non-trading NOB): LE1 plus LE5 (management account acceptable if a duly signed report is 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 or trustees; in the case of a company under liquidation or receivership, the liquidator or receiver; in the case of a partnership, the partner or partners; in the case of a Labuan limited partnership or LLP, the general or designated partner or partners; in the case of a Labuan foundation, its officer or officers.

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.

For related reading, see our overview of economic substance requirements and the general statutory responsibilities of a Labuan entity.

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.

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