What’s in this article
- Labuan Offshore Company in Malaysia
- Advantages of Labuan Offshore Company in Malaysia
- Characteristics of Labuan Offshore Company in Malaysia
- Requirements to incorporate a Labuan Offshore Company in Malaysia
- Documents and Fees Required to incorporate a Labuan Offshore Company in Malaysia
- Private Limited Company (Sdn. Bhd.) VS. Labuan Offshore Company in Malaysia
- Annual Reporting & Compliance for Labuan Offshore Company
- Tax treatment & exemptions for Labuan Offshore Companies
- Disadvantages of Labuan Offshore Companies in Malaysia
- Terminating a Malaysia Offshore Company
- FAQs
In Malaysia, there are vast opportunities to establish a business due to its robust economy and government initiatives 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. It 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.
If the Labuan offshore Company meets a certain condition which includes substance requirements, it 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
Here are some other pointers to note when establishing 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.
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
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:
|
| 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 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 company names in case of Labuan Offshore Financial Services Authority (LOFSA) rejects the proposed name [Name application cost is MYR 50]
- 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
- Corporate 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 |
| 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 |
Annual Reporting & Compliance for Labuan Offshore Company
According to Labuan Companies Act 1990, a Labuan Offshore Company is still liable to complete its annual business reporting lodgement which includes annual return, financial statements, and income tax return.
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 & exemptions for Labuan Offshore Companies
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 venture a Labuan company incorporation 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 duty – Stamp 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:
5. Withholding tax – The following payments made by Labuan entities to non-residents are exempted and not subject to withholding provisions:
Disadvantages of Labuan Offshore Companies in Malaysia
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.
FAQs
Yes, even though it is governed under different Acts but a Labuan offshore Company is one of the many business structures Malaysia offers.
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.
Yes, in lieu of its favourable tax structures for non-residents, Labuan is deemed to be a tax haven.
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.
