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Labuan Offshore Company Incorporation Guide 2022

21 min read|Last Updated: August 15, 2022|
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In Malaysia, there are vast opportunities to establish a business due to its robust economy and government initiative to promote entrepreneurship, competition and innovation in the workforce. Labuan offshore company incorporation is one of the most attractive company setups for locals and foreigners for various reasons which will be discussed in this article.

Labuan Offshore Company in Malaysia

The common business entity which foreign investors aim for when they plan to venture in Malaysia market is Private Limited Company (Sdn. Bhd.), where it can be solely owned by a foreigner as long as they have legitimate local residential address.

However, if an entrepreneur aims to focus on:

  • Tax-free trading

  • Asset protection

  • Privacy

Then, a Labuan offshore Company is the best option. Many multinational Companies have opted to incorporate a Labuan offshore Company due to the lax regulations and governance.

A Labuan offshore Company aims to assist an entrepreneur to save tax and protect their assets while expanding their business globally with minimal impact.

A Labuan offshore Company is a business structure governed under the Labuan Companies Act 1990 (LCA 1990). Local and foreign entrepreneurs alike are allowed to incorporate a Labuan offshore Company.

A Labuan offshore Company which meets a certain condition includes substance requirements will be taxable at a preferential rate. Such companies may have these structures within:

  • Company limited by shares

  • Company limited by guarantee

  • An unlimited Company

A Labuan offshore Company:

  • May participate in business activities and enjoy attractive tax benefits provided under the Labuan Business Activity Tax Act 1990 (LBATA).

  • May carry out any business that is permitted in Malaysia in, from or through Labuan.

  • Would need to be licensed if it intends to undertake specific businesses as defined under the Labuan Financial Services and Securities Act 2010 or the Labuan Islamic Financial Services and Securities Act 2010, which may include the banking, insurance/insurance-related, fund management, leasing, factoring and company management businesses.

Malaysia Incorporation Specialist Suey

Labuan offshore Companies may own controlling stakes in a Malaysian domestic company and are also allowed to undertake shipping operations with non-residents.

Advantages of Labuan Offshore Company in Malaysia

Labuan has become one of the most representative business destinations in Asian region for the past years. Located in one of the peaceful parts of Malaysia, Borneo, it also comprised of several other islands.

Ranked as the 12th easiest and friendliest place to do business, Malaysia turns out to be a lucrative business investment option. Comparing to other countries who offers offshore incorporation such as Hong Kong and the Marshall Islands, Labuan has become reputable amongst the few offshore financial hub in Asia, automatically attracts investors all around the world.

What benefits does incorporate a Labuan Offshore Company compared to a Private Limited Company (Sdn. Bhd.)?
Here are some of the reasons:

1. No local partners required

Similar to a Private Limited Company (Sdn. Bhd.) under Company Act 2016, a Labuan offshore Company also does not need a local nominee director in order for the Company to be incorporated.

The aim was to attract foreign investors to invest within the Malaysia market, hence the government has eased the registration requirement and make it an entirely foreign owned with a minimum presence of one director and one shareholder.

2. Low-cost Company setup

The Labuan offshore Company setup cost is considered reasonable compared to other offshore jurisdictions. This automatically encourages the foreign investors to kickstart their business here with ease.

3. Low corporate tax

It is common knowledge that the corporate tax for Private Limited Company (Sdn. Bhd.) is between 17% to 24%. However, for a Labuan offshore Company, the tax is much lower which is at 3%. This tax rate is able to assist business entrepreneurs to get help over the high corporate tax instalment.

There are also several tax advantages offered especially for Labuan Offshore Company which are:

  • Global tax market – The lower scale tax brackets meant to minimise the net levy liability on local incorporations

  • Business tax deferral – Offshore Company impose income tax solely on Companies that are both locally traded as well as domicile. It is an ideal hub for investors to position a portion of their pools of revenue

  • Tax Off-Setting incentives – Offshore Company also provide more shielding and exemption from stamp duties and excise on transactions.

A summary of description of Labuan offshore Company business activities and its tax treatment is shown below:

DESCRIPTION OF LABUAN ACTIVITIES  TAX TREATMENT 
Labuan non-trading activity
Holding of investments in securities, stock, shares, loans, deposits or any other properties situated in Labuan by a Labuan company 
Not subject to tax 
Labuan trading activity
Includes banking, insurance, trading, management, shipping operations, licensing or any other activity which is not a Labuan non-trading activity 
3% of net profits per audited accounts 
Carrying out both Labuan trading and non-trading activities
– Deemed to be Labuan trading activity 
Same tax treatment as Labuan trading activity (3% of net profits per audited accounts) 
Non-Labuan business activities or where an irrevocable election is made to be taxed under the MITA 1967  Taxed pursuant to the MITA 1967 at the prevailing income tax rate of 24% 

Despite being an offshore Company, Labuan is still liable to comply with the rules and regulations enacted by the Central Bank of Malaysia (Bank Negara), the Labuan company formation authority, Malaysia’s immigration, and Inland Revenue Authority laws.

In lieu to adhering with the anti-money laundering (AML) and counter terrorism financing legislation, all licensed service providers such as Company Secretary and Auditors specifically for Labuan Companies are expected to enhance their Know-Your-Client (KYC) procedure before closing any business deals.

Characteristics of Labuan Offshore Company in Malaysia

Governing Corporate Legislation 

Legal system of Malaysia for offshore Companies are based on British Common Law and the Companies are regulated based on: 

  • Central Bank of Malaysia (Bank Negara) 
  • The Labuan Company Formation Authority 
  • Malaysia’s Immigration  

 

Inland Revenue Authority Law 

Confidentiality  The business is privy to high level of privacy and anonymity  
Accounting Requirements  All accounting must be prepared accordingly for audit purpose. Once audited, it must be lodged annually 
Taxation  Even though a Labuan Company is considered a tax haven, however, they are still liable to 0% to 3% tax. Tax filing must be done annually 
Legislation  Modern offshore legislation  
Minimum Director  At least 1 Director (18 years old above) 
Requirement to appoint Company Secretary  Must appoint a certified local Company Secretary
Requirement to appoint Auditor  Must appoint a certified local auditor  
Registered office  Must have a registered office in Labuan (normally using the appointed Company Secretary office address) 

Requirements to fulfil in order to incorporate a Labuan Offshore Company in Malaysia

The requirements to establish this type of business entity include:

Share Capital

  • Can be in any currency

  • A minimum of one (1) share with no minimum share par value

Director

  • At least one (1) director who is at least 18 years old

Company Secretary

  • Must have at least one (1) Company Secretary from a Labuan Trust Company

Registered address

  • Must have a registered address which is the principal office of Labuan Trust Company

Accounting requirements

  • Must submit audited financial statement as part of the tax filing requirements

  • Under LCA 1990, the account information is not a publicly accessible record

Economic substance requirements

  • Must have a prescribed number of minimum employees in Labuan

  • Must have a prescribed number of annual operating expenditure in Labuan, based on specific activity carried on by relevant Labuan offshore Company

You will also need to fulfil the following requirements upon incorporating the Labuan Offshore Company:

  • Plan the Company business structures and ensure it is aligned with the compliance and tax regulations in Labuan

  • Propose a Company name – Advisable to prepare at least 3 names names in case of Labuan Offshore Financial Services Authority (LOFSA) rejects the proposed name [Name application cost is MYR 50]

Malaysia Incorporation Specialist Suey
  • Confirms which suffix to use for the Company – Choices include Co. Ltd, Limited, Ltd, LLC, Labuan or Inc.

  • Regulate the ownership portion of each share within the Company

  • Draft out an agreement to plan the shares proportion between the shareholders

  • Plan what kind of work visa suitable for your purpose

  • Bank account opening must be complete before proceeding with incorporation

Those who wish to apply for work visa in Malaysia are mostly eligible for a two-year multiple entry visa. It also includes dependant pass (if needed). This visa will allow you to stay in Labuan or any part of West Malaysia.

With effect from 1 January 2019, a Labuan entity carrying on Labuan business activity must fulfil the substantial activity requirements as below:

  • Must employ at least 2 to 4 full time employees in Labuan

  • Must incur at least MYR 50,000 to MYR 3 million annual operating expenditure in Labuan

The above was introduced in Requirements for Labuan Business Activity Regulations 2018 to comply with the substantial activities requirements of the Base Erosion and Profit Shifting (BEPS) minimum standards.

Documents and Fees Required to incorporate a Labuan Offshore Company in Malaysia

Once the name application is approved, it will be valid for the next three (3) months for the Company to complete its registration procedure.

The documents below are required to submit the incorporation application:

  • NRIC/Passport copies of each stakeholder and account signatories (must be certified)

  • Proof of residential address of each stakeholder involved within the Company (original utility bills or personal bank statements is preferred)

  • Detailed business plan proposed for the Labuan Company

  • Memorandum and Articles of Associations of the proposed Company

  • Statutory declaration of compliance by the trust company

  • Consent to act as a director(s)

  • Business licenses (if any) – For activities that requires licensing, it must be obtained and approved before Company incorporation

The fees involved are based on the table below:

Type of Fees  Fees  Form 
MYR  USD$   
General Fees 
Application for the reservation of company name  50  15  9 
Incorporation Fees 
Statutory declaration of compliance  Nil  Nil  6 
Consent to act as director  Nil  Nil  24 
Memorandum and Articles of Association (Labuan company)  Nil  Nil  Nil 
Paid-up Share Capital 
RM50,000 and below  1,000  300  Nil 
Exceeds RM50,000 but less than RM1 million  2,000  600  Nil 
RM1 million and above  5,000  1,500  Nil 
Registration Fees 
Statutory declaration by a Labuan trust company as an agent of a foreign Labuan company  Nil  Nil  33 
Return on particulars and changes of directors and secretaries  Nil  Nil  25 
Memorandum and Articles of Association (foreign Labuan company)  Nil  Nil  Nil 
Registration of a foreign Labuan company  6,000  2,000  Nil 
Annual Fees 
Labuan company  2,600  800  Nil 
Foreign Labuan company  5,300  1,500  Nil 

Once all documents are ready for submission, the appointed certified local Company Secretary will proceed to submit the incorporation application and make the necessary payments via online.

Upon lodgement of complete documentation and payment fees as well as clearance from due diligence process conducted by Labuan Offshore Financial Services Authority (LOFSA), the incorporation can be approved within 1 to 3 working days.

Private Limited Company (Sdn. Bhd.) VS. Labuan Offshore Company in Malaysia

Company  Labuan Company  Malaysian Sdn Bhd 
Capital Paid Up for 100% Foreign Ownership  Min. USD 1  Min. RM 1 million 
No. of Shareholders  Limited to 50  Limited to 50 
Capital Monies to Show in the Bank  Yes  Yes 
Trade License for Import, Export, Trading, On-line and Consultancy Business  Not Required  Yes 
Capital Paid Up for Work Permit Application  Min. USD 1  RM 1 million 
Office Rental and Tel Line for work permit application  Yes  Yes 
Net Profit Tax for Trading Activities  Tax: 3% permissible to deal with Malaysians  International
and Local Sales: 24% 
Directors’ Fee for Foreigners  Zero Tax  Taxable 0-28% 
Expatriate Income Tax  50% rebate on taxable income  0-28% with no rebate 
DTA Tax Treaty  Yes, except exclude 14 countries  Yes 

Opening a Corporate Bank Account for Labuan Offshore Company in Malaysia

Once a Labuan Company is incorporated, it is customary for the owner to initiate the corporate bank account opening. It is permissible for a Labuan offshore Company to open an offshore and/or onshore bank accounts. While the onshore bank accounts will directly be linked to the Central bank of Malaysia, an offshore bank is a different matter entirely as it depends on which offshore banks was chosen and the services suitable for offshore investors.

Malaysia Incorporation Specialist Suey

It is not mandatory for the directors to travel to Labuan to be physically present during the bank account opening but, it is highly advisable to do so. This is to ensure the bank account opening process is smooth and the directors can have the complete information about the bank as well as the officer in charge on his case.

The documents required to initiate the bank account opening are:

  • Bank’s forms which normally requires the stakeholder personal information

  • Certified copy of passport /NRIC of stakeholder

  • Certified residential proof of address of stakeholders

  • Foreign bank recommendation commonly provided by the banker from stakeholder home country

  • Business plan which also includes the financial projection for the Labuan Company

  • Certified proof of documents showing sources of the funds injected in the Labuan Company

Some of the consideration before initiating a bank account opening in Labuan

The tax regulation in Labuan may have come in handy for bank transactions especially for business related transactions. No withholding tax are applied on interest paid by Labuan Companies to residents and non-resident Companies and no withholding tax applied on interest payments made by Malaysian tax residents to entities registered in Labuan. The accounts are maintained under Labuan Financial Services and Securities Act.

However, the banking tariffs, conditions as well as services offered will greatly differ between the banks available in Labuan. For example, Labuan account holders are expected to be charged for transfers between accounts opened with the same banks.

Bankers are also allowed to set forth their own internal regulations that account holders are required to comply with. For example, the mandate used for opening a first Labuan corporate account are allowed to also apply other accounts after it is opened. Any changes of signatories must be duly notified by the bankers within a certain amount of time (normally within 30 days of change).

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Annual Compliance for Labuan Offshore Company

According to Labuan Companies Act 1990, a Labuan Offshore Company is still liable to complete its annual compliance lodgement which includes:

Annual return

According to Labuan Companies Act 1990, a Labuan Offshore Company is still liable to complete its annual compliance lodgement which includes:

Financial statement

All Labuan offshore Companies with trading activities are required to audit their financial statement annually. All accounts must be finalised and approved by the Board of Director at least by the month of March every year in order for the appointed auditor to complete the audit procedure by May annually.

Example: Account year ended is 31.12.2020 and submitted to auditor by 31.01.2021. The auditor will require at least 2 months to finalise the audited financial statement. It should be ready to be lodged by 31.03.2021. As long as lodgement is done before 31 May annually, it will not be liable to a penalty.

Income tax return

The purpose of the audited financial statement is for the tax filing purpose to Labuan Inland Revenue Board. The corporate tax is 3% on international sales. However, those transactions occur locally will be taxed at 24% on net profit payable to local Inland Revenue Board under Income Tax Act 1967.

For Companies with business activities that occur locally and internationally, the auditor will need to disclose both markets separately in the audit report as “Labuan Business” and “Non-Labuan Business” activities.

The deadline to submit the corporate tax filing is by 31 May annually.

Tax treatment on Labuan Offshore Companies

A Labuan entity is subject to tax under Labuan Business Activity Tax Act 1990 (LBATA) in respect of its Labuan business activity.

The tax rate applicable to Labuan entity is 3% on chargeable income from Labuan Trading activities only. Automatically, income from non-trading activities such as holding of investments in securities of a Labuan entity is not subject to tax at all.

The tax is chargeable only on net profit as reflected in the signed audited report in respect of Labuan trading activities such as management, licensing, etc.

As for intellectual property income, with effect from 1 January 2019, any income derived from royalty or other income derived from an intellectual property right by Labuan entity shall be subject to tax under Income Tax Act 1967 and not LBATA. In layman’s term, any intellectual property right income will not be able to enjoy the 3% tax rate or tax exemption.

Another input that is recently enacted by the Government in year 2020 is that all Labuan entity carrying on Labuan business activities but fail to comply with the substance requirement mentioned above will not be able to enjoy the 3% tax rate. They will be however, be charged at 24% upon its chargeable profit under Labuan tax legislation.

Tax exemptions available for Labuan Offshore Companies

One of the main reasons why foreign investors are keen to incorporate a Labuan Offshore Company is due to the tax exemptions they can enjoy:

1. No indirect tax – Labuan offshore companies enjoy free-port status. Hence, indirect taxes such as services and sales taxes are not applicable to Labuan entities located in Labuan

2. Stamp dutyStamp duty is exempted from all instruments executed by Labuan entity in connection with its business

3. Exchange control – The entity is also not subject to exchange control restrictions

4. Payments made by Labuan entities – The following exemptions are available to recipients of income from Labuan entities:

  • Dividends received by Labuan Company

  • Dividends received from Labuan Company which are paid, credited or distributed out of income derived from Labuan business activity

  • Distributions received from Labuan trust by beneficiaries

  • Interest received from Labuan Company by a resident person

5. Withholding tax – The following payments made by Labuan entities to non-residents are exempted and not subject to withholding provisions:

  • Royalties

  • Interest

  • Technical services, advice or assistance

  • Other income

Disadvantages of Labuan Offshore Company

While there are multiple advantages to setting up a Labuan offshore company, investors and business owners should also note the disadvantages.

1. Difficult for valuation, appraisal, and financing

Potential financial partners or investors will have a difficult time to do their own independent research and perform an estimated valuation before they conclude if the business is worth the investment or not. This is due to the lack of information about the Company, publicly.

2. Proving ownership of an Offshore Company

It is well known that offshore Company is not required to maintain Company registers publicly. This has come to a drawback in proving ownership of such Company to third party. Even though confidentiality and anonymity are proven benefits for such entities, however for the owner to declare themselves as the owner of such entity will be very difficult and time-consuming.

3. Negative perception of Offshore Company

Even though the aim for foreign investors to venture into offshore Company is commonly due to the tax benefits it offers, it may directly or indirectly reflect and portray such business is trying to evade from tax obligations. As such, the concept and recognition of offshore Companies are not held with the highest regards.

Terminating a Malaysia Offshore Company

Business owners are able to strike off their Labuan offshore Company any time after the incorporation was done. It will be done by the appointed Company Secretary electronically via CORAL system.

There are two (2) stages of to complete the strike off procedure:

Stage 1 – Waiting for Labuan FSA strike off notice

The strike off notice is required to close the corporate tax file (File LE) with Inland Revenue Board. It is normally issued on the 8th or 10th month from the Labuan Company date of incorporation.

Board resolutions will be prepared and once signed, the Company is no longer allowed to continue business transactions, unless revoked. The Company may also proceed to close the bank account at this stage.

The Labuan FSA will be keeping the Company records for the next 3 years after striking off application is made before they erased them from the system.

The appointed Company Secretary and tax agent is only able to resign once the strike off notice and all corporate tax filing has been completed and successful.

Stage 2 – Lodgement with Inland Revenue Board to close Corporate Tax (LE) and Employer (E) file (if any)

It is very important for business owner to remember that even though the Company was deemed dormant before they apply the strike off application, they are still liable to submit the tax filing to the Inland Revenue Board. Once IRB has confirmed no tax payment pending from the Company, they will then proceed to strike off the Company accordingly.

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FAQs

Is Labuan Company part of Malaysia business structure?2021-12-29T14:10:42+08:00

Yes, even though it is governed under different Acts but a Labuan offshore Company is one of the many business structures Malaysia offers. 

What is Labuan trust Company?2021-12-29T14:07:46+08:00

A Labuan Trust Company refers to the Company that is registered under Labuan Companies Act 1990 and is licensed by the Labuan Financial Services and Securities Act 2010 (LFSSA) to act as Company Secretary on behalf of other Labuan incorporated Companies. 

Is Labuan considered as tax haven?2021-12-29T14:07:32+08:00

Yes, in lieu of its favourable tax structures for non-residents, Labuan is deemed to be a tax haven. 

What is a foreign Labuan Company?2021-12-29T14:06:19+08:00

A Labuan Company is basically a Company incorporated under the Labuan Companies Act 1990. Such business entity is allowed to carry out businesses in, from or through Labuan in order to enjoy its tax neutrality.  

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