About Labuan Company
Labuan Company is an offshore company established within the Labuan Special Economic Zone under the Federal Territory of Labuan, Malaysia.
All company established in the Labuan Special Economic Zone are subject to the minimum corporate tax rate in the Asian region, and are used by a lot of international business trading companies and wealthy individuals as a base for tax planning purpose, foreign assets protection, or expansion into ASEAN.
We Bona Trust Corporation provide company secretarial services such as Labuan company establishment, management and annual renewal.
Labuan Company Overview
|● Time to establishment||Around 4 – 6 working days|
|● Dormant Company||Yes|
|● Legal effective tax rate||3% (Asia region minimum tax rate)|
|● Accounting audit system||Yes|
|● Secretarial service system||Yes|
|● Nominee shareholder||Yes|
1. About Labuan Incorporation
1-1. Labuan Overview
Labuan is only 85 km2 in total area, very small island floating in the offshore of Sabah state in east Malaysia.
Since the Malaysian government designated Labuan as a Special Economic Zone, now one of the world’s leading financial institutions has advanced one after another in this island, and it is rapidly transforming into an offshore financial centre, “representative of Asia”.
Labuan means Malay in “good port” or “anchorage place”. The shipwreck is concentrated in the offshore of the Island, and has a history that has played an important role as a marine transportation and strategic base since long long time ago.
As early’s 1852, it was a favorite port of call for many commercial ships plying between Singapore and Brunei. By 1863, the port was handling import and export trades with Singpore, Hong Kong, and Sulu. The goods traded were cotton, rice, salt, opium, tobacco, coconut, beetle nuts, shark fins, bird nests, clothing mat, copperware, and machinery. Sago flour and timber were the main exports from Labuan at that time. This port was proclaimed a free port on 1 September 1956.
In addition, because Labuan is in a very important position from a defensive point of view despite being a very small island, Brunei and British rule, and the history governed by the Japanese Army during the wartime and always dominated by other countries.
Labuan has belonged to Sabah state after Malaysia independence, then became Federal Territory in 1984, and became a duty-free port in 1990, and a lot of visitors are coming from neighboring countries such as Brunei or Singapore today.
· Labuan on geopolitics (geopolitical Malaysia East-West boundary line)
Labuan belongs to East Malaysia due to geopolitics, it takes about 2 hours 20 minutes by airplane from the capital city Kuala Lumpur.
· Labuan on Administrative (administrative Malaysia east-west boundary line)
On the other hand, Labuan belongs to West Malaysia due to administration since Labuan was designated as Federal Territory of the Malaysian government since 1984.
Due to the existence of this small island, Malaysia’s “geopolitical east-west boundary line” and “administrative east-west boundary line” are different, here is a very interesting place.
1-2. Labuan as Offshore Financial Centre
Labuan was founded in 1990 as the International Offshore Financial Centre (“IOFC”) and the name has been changed to International Business Finance Centre (“IBFC”) in January 2008. Labuan is also a place attracting attention as a tax haven in recent years.
Looking back on the era when the offshore financial centre was designated, the Malaysian government secretly hopes that the financial centre in Hong Kong will lose its international position after the return of China in 1997, and there was a history of establishing as an offshore centre to become a new foreign currency procurement receipt.
In this way, Labuan is not located on sea lanes like Hong Kong or Singapore, so it is also a reason why it is said not an offshore centre spontaneously created, but an artificially created offshore centre.
1-3. Labuan Companies Act (Act.1990)
All companies incorporated in the Labuan Special Economic Zone (within the tax preferred area) are subject to tax incentives and an extremely advantageous offshore financial centre in terms of taxation compared with Hong Kong and Singapore in the Asian region as far.
|Corporate tax rate (Trading Company)|
|Effective tax rate||16.5%||17%||3%|
|Corporate tax rate (Non Trading Company)|
|Effective tax rate||16.5%||17%||0%|
|[Very Important Notice] Economic Substance Requirements by OECD|
|OECD has begun activities to eliminate harm, deeming tax havens and tax incentives to be harmful tax competition, which have a negative effect on the economy and tax system of each country.|
As a result, all Zero-tax and Low-tax areas (so-called “tax havens”) have adopted Economic Substance Requirements to meet minimum standards so that they do not conflict with harm.
Labuan must also meet this requirement, and the requirements are as follows: –
* If the above requirements cannot be met, the mainland Malaysia tax rate (24%) will be applied.
* When conducting business activities using a Labuan corporation, the minimum annual maintenance cost is [annual contribution cost (RM50,000 or more) + effective tax rate 3%].
* This requirement is effective from January 1, 2019.
1-4. Features of Labuan company
The main features of Labuan company are as follows:-
|Share Capital||Permitted Currencies||Any Foreign Currency except Ringgit Malaysia|
|Minimum Issued Capital||One (1) in domination in foreign currency|
|Authorised Capital||N / A|
|Local Directors Requirements||Optional|
|Publicly Accessible Records||Not in public|
|Others||Possible for the same person as the shareholder|
|Migration to the mainland of Malaysia is possible with work permit|
|Local Shareholders Requirements||Optional|
|Location of Meeting||Anywhere|
|Minimum Numbers of Meeting||One (1) Annually|
|Publicly Accessible Records||Not in public|
|Others||possible for the same person as the director|
|Company Secretary||Minimum||One (1)|
|Requirements||A resident secretary who must be a trust officer of a trust company or Labuan / Malaysian domestic company wholly-owned by the Labuan trust company|
|Registered Office||Requirements||Principal office of a trust company in Labuan|
|Accounts||Records||Must keep in Labuan|
|Preparation of Accounts||Yes|
|Audit Requirements and filing||On the audited net profits|
|Publicly Accessible Records||Not in Public|
|Annual Requiments||Annual Return||Not later than 30 days from the anniversary date of incorporation of the Labuan company|
|Annual Government Fee||On or before the anniversary date of incorporation of the Labuan company|
|Tax Filing||Annual tax return needs to be filled with Malaysian Director General of Inland Revenue by 31 March of that year of assessment. Normally, an extension of time for filling is allowed by the Inland Revenue.|
|Taxation||Trading Activities||3% of net audit profits|
|Non Trading Activities||Nil|
|Trading and Non Trading Activities||3% of net audit profits|
|Others||No withholding tax, no capital gain tax, no stamp duty on offshore instruments|
|General||Legal System||Common Law|
|Double Taxation Treaty Access||Yes (* Excluded from tax treaties with Australia, Chile, Germany, India, Indonesia, Japan, Luxembourg, Netherlands, South Africa, Spain, Sweden, Seychelles, and the United Kingdom.)|
|Foreign Exchange Control||No|
2. The economy of Labuan
To strengthen the real economy in Labuan (East Malaysia), announcing the BluePrint 2030 concept by Malaysian government in 2018, attracting industries of “education” “aviation” “tourism” “health care” and “methanol” toward realisation in 2030 It is a policy to proceed with promotion.
（Ref : LABUAN IBFC [LABUAN IBFC TO UNVEIL TRANSFORMATIONAL PLAN]）
East Malaysia (Island side), which is somewhat behind the development plan as compared with West Malaysia (peninsula side), but in the Blue Print 2030 concept, such potential dissatisfaction and unfairness of people in East Malaysia it is said there is an intention to get rid of the feeling.
The Labuan economy traditionally benefited from the oil and gas industry and has achieved remarkable growth over the quarter century, but after that it will suffer catastrophic damage from the period of 2014 to 2015 due to the stagnation of oil and gas prices.
In addition, in February 2017, more than 10,000 residents (10% of the population) were driven to unemployment and the majority of those engaged in these industries were from Labuan Island. As a result, the real economy is falling into a chronic recession, such as the closing of restaurants or hotels. According to official data, Labuan’s unemployment rate is 7.8% in 2016, more than twice the national average of Malaysia.
Considering such a situation above, the Blue Printing Initiative announced by the government aiming to integrate low tax rate Labuan into the economies of Sabah and Sarawak states for banks, insurance, finance and other industries and seems like to create employment in Labuan offshore relation about 10% of the population of this island.
（Ref : LABUAN IBFC [LABUAN IBFC TO UNVEIL TRANSFORMATIONAL PLAN]）
According to the Labuan blueprint 2030, concrete numerical targets from 2015 to 2030 are included, the population of Labuan islands from about 94,600 now to about 150,000 (3.1% annual increase), the working population from about 39,500 to 70,500 (3.9% increase), the government is planning to increase the gross domestic product (GDP) per Labuan worker from 54,112 RM to 94,127 RM (3.8% increase).
|Labuan’s numerical targets from 2015 to 2030|
|year 2015||year 2020||year 2025||year 2030|
|Population in the island (people)||94,600||106,000||139,000||150,000|
|Working population (people)||39,500||45,000||63,940||70,500|
|GDP per capita (RM)||54,112||64,623||70,755||94,127|
* Created based on government released data
3. Labuan’s tax system
3-1. Labuan corporate tax system and legal effective tax rate
|Labuan company conducts business activities such as Import and Export (Trading Activity) will be 3% of the accounting audited net profit.|
If you select the former, you will need to obtain a statutory audit by the auditor, but if you choose the latter, you will be exempt from legal audit obligations.
|2. Tax reduction measures for professionals|
|Individuals, employees, or companies that provide professional services to meet Labuan’s offshore company’s qualifying standards are exempt from corporate tax up to 65% of statutory income.|
In addition, professional services include services of law, accounting, finance, secretarial services (2005 – 2020 * however there is a possibility of being extended).
|3. Tax reduction measures on employment|
|Salaries received by executives other than Malaysians are tax-exempt up to 50% of their income (2005 – 2020 * however there is a possibility of being extended).|
|4. Income tax exemption measures|
|Based on the 1967 Income Tax Law (Act. 1967), Labuan Company has the following tax exemption measures .|
· Dividends paid to individuals who are resident or non-resident by Labuan company are 100% tax exempt and fully tax exempt.
· For salary income arising from business activities or tax exemption income, the dividend to be paid by Labuan company is 100% tax-exempt and all tax exempt.
· The salary of employees working for Labuan company in Malaysians is tax exempt up to the amount equivalent to 50% of the housing allowance received (2006 – 2020 * However, there is a possibility of being extended).
|5. Tax exemption for withholding tax|
|Labuan company is exempt from withholding tax for the following .|
|6. Stamp duty tax exemption measures|
|Labuan corporate tax exemption stamp duty on all documents prepared for Labuan Commercial Activities (relocation documents of shares by M&A etc., contract documents to be concluded on business activities, articles of incorporation, etc) are tax-exempt.|
|7. Indirect tax exemption measures|
|Labuan company is not subject to the application of indirect tax such as GST or customs duty on commercial activity (offshore transaction).|
|[Important Notice] About dealings with residents of Malaysia|
|In Malaysia, there are coexist 2 types of company form, one is Malaysian company, the other is Labuan company, it is a country adopting 1 country 2 tax system rare in the world.|
Because Labuan companies law (Act. 1990) is a company which conducts offshore trading (international trade) inherently, business activities in Malaysia (domestic trade) and transactions with Malaysian residents (including company) are prohibited in principle.
* Excluding cases where affiliated companies with paid up capital exceeding 2.5 million RM are within the group company.
Although it is possible to deal with residents of Malaysia (including companies), in this case you will not be able to enjoy the benefits as an offshore company, furthermore, the maintenance and management procedure of the company is extremely strict.
At our company, with regard to doing business activities in Malaysia by using Labuan company, we never recommend you the structure based of 3 reasons below:-
1. “There is no merit of taxation system”
2. “Accounting audit is also essential”
3. “Because compliance with laws is extremely strict”
In order to use a Labuan corporation and conduct transactions with a Malaysian resident (corporation) and apply a preferential tax rate of 3%, all of the following business activity requirements must be met:-
Therefore, kindly consider using Malaysian company (SDN BHD) for whom are supposed to conduct business activities in Malaysia. In addition, we do not handle Malaysian company Incorporation service as far (If you wish, it is possible to introduce experts who can correspond.)
* 1 Kindly note that in the country of tax residence of the recipient side, taxation in each country’s tax law system may be imposed.
* 2 In cases where a dividend paid from a foreign subsidiary is subject to withholding tax in its source country, if there is no tax treaty [*3] or excluding the application of tax treaties against Labuan, the foreign tax amount of withholding tax it is necessary to note that deduction is impossible.
* 3 Labuan belongs to Malaysia, have entered into a tax treaty with countries and regions of more than 80 countries as far, however there are countries that are not subject to tax treaties for transactions related to Labuan. For details kindly contact the experts of your country of residence.
3-2. The definition of Tax Residents and Non Tax Residents in Malaysia
|Definition of Tax Resident and Non Tax Resident in Malaysia|
|The definition of tax resident / nonresident in Malaysia is as follows:-|
In Malaysia’s income tax law, regardless of citizenship or nationality, if the number of days in Malaysia is 182 days or more in the previous calendar year will be “tax resident”, if the number of days in Malaysia is less than 182 days in the previous calendar year will be “non tax resident”.
3-3. About personal income tax
|Taxation method for Tax Residents / Non Tax Residents|
|The taxation method for Tax Residents / Non Tax Residents is as follows.|
* 1 Those who fall under the condition of 3 are considered “Malaysian citizens“. For foreigners who fall under this condition, those who hold MM2H visa, dependent visas, student visas, etc. are applicable, but because these are not working visas, these are not allowed to work in Malaysia [ *2]. As it is not possible to receive salary income (domestic source income) unless it is permitted to work, there is no possibility of submitting a tax report form (*3), of course it is obviously not necessary to submit a tax report form.
*2 Since Labuan’s work permit is a special visa to “work with Labuan company” in “Labuan Island”, work in Malaysia is “prohibited in principle”.
* 3 It is possible to receive shareholder dividends or Director Fee, but kindly check with tax experts in your tax country regarding tax payment.
Lastly, we organized the merits and demerits of Labuan incorporation.
We hope you can use it as a reference material as reference information of everyone who is considering the Labuan incorporation from now on.
Merits and demerits always exist for every thing, kindly compare the 2 and make final judgment from an objective perspective, thank you.
4. The merit and demerit of Labuan company
4-1. The merit of Labuan company
The merit of Labuan company is as follows:-
|1. It can be established only with 100% foreign capital.|
|Labuan company has no local capital requirement and it is allowed to be established by 100% foreign capital.|
|2. It is possible to establish it as a minimum corporate form of 1 shareholder and 1 director.|
|Labuan company can be established as a corporate form of 1 shareholder and 1 director, and shareholders and directors can concurrently hold.|
|3. If you acquired Labuan Work Permit and moved to Malaysia, income tax will be preferential if you stay half of the year in Malaysia. Shareholders’ dividends are tax-exempt.|
|In Malaysia ‘s Income Tax Law, the 182 day rule is adopted. If you stay 182 days a year in Malaysia it is considered a tax resident and the income tax of the director is treated as 50% tax exemption and the payment of income tax is given preferential treatment.|
In the case of 1 shareholder and 1 director same person, payment to individuals through dividend payment will be tax-exempt (it is possible to receive tax-exempt amounts collected twice a year).
|4. Labuan work permit can live not only in Labuan Island but also in west Malaysia, despite being an offshore visa.|
|If you acquire Labuan work permit and meet certain requirements, you can live not only in Labuan Island but also in Kuala Lumpur or Johor Bahru in West Malaysia. This makes it possible for day trips to Hong Kong, Singapore, Thailand and so on, creating a great geopolitical advantage for your ASEAN business.|
|5. Labuan work permit issuance requirements do not have local employment requirements.|
|Labuan company has no local employment requirement as a requirement to issue work permit for foreigner.|
Considering that there are local employment requirements for Hong Kong company (2 local employment for 1 foreigners) and Singapore company (1 local employment for 2 foreigners), applicants who wish to move abroad it can be said that it is a very simple and sharp work permit.
|6. Since Labuan work permit is automatically associated with TIN (Tax Identity Number), it is possible to ensure legitimacy as a tax resident.|
|Labuan work permit will be associated with TIN (Tax Identity Number) after issuance. In Malaysia, the MM2H visa for retirees is very famous, but since the essence of this visa is a tourist visa (Social Visit Pass), it is not possible to work, so you can not obtain a TIN.|
Obtaining a TIN is an important objective basis for immigrating to the country of residence for work purposes.
|7. Labuan company will be treated as “non resident” under foreign currency regulation in Malaysia and will not be subject to foreign currency regulation.|
|Labuan company will be treated as “non resident” under foreign currency regulation in Malaysia, transactions via Labuan offshore account will not be subject to foreign currency restrictions, there will be no ceiling on transfer of funds.|
|8. When a tax resident of a country adopts territorial base taxation principle (such as Hong Kong or Singapore) is established, it is separated from the taxation system of the home country and a large tax saving effect can be expected.|
|For those living in countries / areas are tax-exempt for profits earned outside their territory, such as Hong Kong or Singapore, you can expect a large tax saving effect by using Labuan company.|
4-2. The demerit of Labuan company
The demerit of Labuan company is as follows:-
|1. It is mandatory to use company secretary service.|
|For Labuan company, it is mandatory to use company secretary service. We, -Bona Trust Corporation-, supports mainly the work related to documents.|
In order to operate a Labuan company, it is obligatory to contract a company secretary, and even if it is operated as a paper company, the annual secretarial fee will be charged from 2,500USD to 3,500USD average per year (* Annual registered address fee and corporate license fee Including).
|2. Dealing with domestic residents (including individuals and corporations) in Malaysia are prohibited in principle.|
|In principle, offshore companies such as Labuan are set very lower as corporate tax on condition that “business activities are not carried out within the territory”.|
A company with such characteristics is called IBC (= Internatinal Business Company).
If IBC accepts unlimited domestic transactions within its territory, no one will establish an onshore company with a higher tax rate, and the whole country will become a tax haven.
For the reasons stated above, Labuan company is allowed to use it only for international transactions mediating between country A and country B.
* If domestic transactions are carried out using Labuan company, written submission to Labuan FSA (LFSA) is obliged within 10 days from the day of the fact of the transaction, and if delayed, 500RM per day, A penalty of up to 10,000RM will be imposed. Therefore, we do not recommend using Labuan company for domestic transactions in Malaysia.
|3. Settlement in Malaysian Ringgit is prohibited in principle.|
|As Labuan company, trading in Malaysian Ringgit is prohibited in principle, so you will be trading in foreign currency such as USD, JPY, or SGD denominated.|
Transactions with Ringgit Malaysia denomination are permitted only for some expenses such as salary payment to local staff, rent payment at business office, airline tickets and accommodation on business trips.
|4. Work permit holder and who can not clear the Malaysian stay requirement of 182 days a year, the personal income tax rate will be uniform 28%.|
|In Malaysia’s income tax law, the 182-day rule has been adopted. If you can stay More than 182 days in Malaysia, you can regard as Tax Resident but Less than 182 days in Malaysia, you regard as Non Tax Resident.|
While income tax is given preferential treatment for tax resident, 28% will be adopted for Non Tax Resident. * The rule does not apply if you do not hold work permit. Those living outside of Malaysia are taxed according to the income tax law of the tax resident country.
|5. Even non work permit holder, salary income received from Labuan Company will need to file a personal income tax in Malaysia.|
|Directors of Labuan company pays attention to salary income. For example, if you are an overseas resident and receive salary income from Labuan Company every month, you will need to file a personal income tax in Malaysia.|
|6. Labuan work permit holder must contract management office in Labuan Island.|
|Labuan’s work permit is originally to work in labuan island. Labuan belongs to eastern Malaysia geopolitically, but administratively it belongs to West Malaysia because here is the Federal territory.|
In other words, you can move to West Malaysia if you acquire a Labuan work permit, but you must contract with the management office property in the island.
Because it costs bit high every year, it can be said that it is a visa for wealthy people.
|7. Labuan work permit holder needs renewal procedures every 2 years.|
|Labuan work permit needs to be renewed every 2 years, renewal must be submitted by the expiration date 3 months in advance. While Labuan work permit has the merit of being able to migrate to Malaysia for work purposes, comparing MM2H is a 10 year renewal, the procedure becomes relatively complicated relatively.|
For example, it is necessary to temporarily return your home country such as “obtain certification of all passport pages” and “to reacquire educational certificate” and “to submit a balance history to prove the company is not in a dormant status before updating” Office work such as submitting balance history to prove fixed monthly salary is paid basend on employment agreement” will also occur.
|8. If a tax resident of a country that adopts global tax system (such as Japan or Indonesia) establish Labuan company, it will be subject to the taxation in the home country and the tax saving effect can not be expected.|
|For those whom living in countries / areas that adopt the global tax system (profit earned anywhere in the world), such as Japan and Indonesia, even if Labuan company is established, you can not expect a tax saving effect.|
Labuan company is used as tax planning or asset protection for HNWIs (High-net-worth individual) in Hong Kong and Singapore, it is the lowest tax rate economic special economic zone in Asia.
Labuan is a major merit the corporate tax rate is set at only 3% and it is not subject to foreign currency regulation.
Indeed, it can be said it is a financial special economic zone adopts HNWI preferential policies have the most merits in Asia.
With the rapid spread of IT infrastructure, most of the external environment surrounded a company were freed from physical limitation, and resources such as “Manpower”, “Goods”, “Capital”, and “Information” went over the border and the times to come these days.
As the result, the company came to be put in the environment of the different dimension as we could not compare it before across the conventional framework.
Even if the internal environment of the company does not change with a sudden change of such an external environment, the external environment surrounding the company continues changing by rapid force day by day.
But the essence itself “the company must make profit” and “must continue developing growth” turns into nothing conventionally.
In the times when external environment greatly changes, the company catches the descent from change appropriately and copes flexibly, and we think this is very important theme above all that growth continues developing.
From now on, not only large companies but also Small and Medium Enterprises (SMEs) and individual businesses are aggressively aiming for overseas.
But, the first step in expanding overseas is that even Large companies with abundant financial capabilities are forced to struggle, SMEs and individual businesses still have a large cost to high-risk initiatives, there is no fact also.
That is why the first step must be realised at a low cost, and even in case of failure, it is necessary to have an environment where we can withdraw quickly without expanding the wound.
We will provide our clients with opportunities for offshore financial services and we will endeavor to drastically reduce operating costs and administrative tasks.
Kindly consider utilising our service as a means to realise your dreams.
(Ref: Labuan IBFC [Labuan Companies Act 1990])
(Ref: Labuan IBFC [Labuan Business Activity Tax Act 1990])
Should you have any queries, please do not hesitate to contact us.