Is Labuan a Tax Haven? Offshore Jurisdiction Review

Why Choose Labuan as a Tax Haven?

Labuan is a small set of islands off the coast of Borneo and is considered a federal territory of Malaysia. Labuan is considered one of the tax havens due to its favorable tax structures for nonresidents and has become one of the preferred jurisdictions in Asia for offshore company formation since the Malaysian government made it into an international offshore financial centre with the passing of legislation in 1989. 

Labuan offers offshore investors a number of practical advantages, friendly offshore incorporation laws, and very attractive tax benefits. It is also a highly reputable jurisdiction which is fully compliant with international standards. In addition, its location is ideal for giving business owners access to both Middle Eastern and Asian markets. 

It is also a beautiful place to live or visit, with a pleasant climate throughout the year. It is easy to obtain work visas, affordable, and very welcoming to foreign investors. All in all, it is an ideal jurisdiction for entrepreneurs and investors who would like to form a tax-efficient company in an offshore tax haven. 

For more: Offshore Companies in Brunei

Benefits

• Labuan Offshore Companies have either zero or minimal tax rates, depending on the type of offshore company formed.
• Offshore companies require only a single director and shareholder who can be the same person. There are no restrictions on ownership, so it can be entirely owned by foreign investors.
• The registration fees are low, as is the minimum authorised capital requirement (10,000 USD). However, annual fees are quite high compared to other offshore jurisdictions: Labuan offshore companies usually pay fees of about 5,300 Ringgit per year (equal to around 1,200 USD at the time of writing).
• Although Labuan is not known as a premier destination to open an offshore bank account, it is quite easy for foreigners to do so.
  • The offshore banking sector is improving with a number of major banks operating (e.g. HSBC, Maybank Offshore, CIMB Bank Offshore). This is beneficial because having a bank account in Labuan is one way to maintain a physical “commercial substance” in Labuan, which is a requirement for having a Labuan International Company. 
• There is a high degree of confidentiality for offshore companies and offshore account holders.
  • The Malaysian Federal Government cannot access banking information, and there are minimal disclosure requirements for offshore companies. 
• The Labuan jurisdiction is in an ideal location that offers access to both Middle Eastern and Asian markets.
• The infrastructure is conducive for offshore corporate setup, which includes access to a well-qualified work-force.
• Labuan is a “free port” which means there are no import or export duties on traded goods, and no sales taxes are levied.
• English is widely spoken in Labuan.

Background Information

Location

Labuan, officially called the “Federal Territory of Labuan”, is primarily made up of Labuan Island itself along with 6 smaller islands. It has a total land area of about 92 square kilometres and is located just 8 kilometres off the coast of Borneo in South East Asia.

Although Borneo is its nearest neighbor; since 1984, it has officially been an autonomous “federal territory” of Malaysia, which is similar to an independent state. It is well connected to Malaysia by plane and ferry, and there are also ferries directly to Brunei.

Political Structure

Labuan is primarily administered by the Malaysian federal government through the Ministry of Federal Territories. Malaysia operates as a constitutional monarchy under the “Westminster parliamentary system”, and it is categorised as a representative democracy.

Labuan does have its own municipal government, Labuan Corporation, which is currently represented by Amir Hussein. 

Economy and Infrastructure

Labuan has a thriving economy which is driven by both its oil and gas resources, as well as its offshore financial sector. Being a small port, the economy is oriented towards imports and exports, both with peninsular Malaysia and elsewhere (e.g. India, South Korea).

The per capita GDP was at approximately 62,000 Ringgits in 2016 (14,500 USD at current exchange rates).

Income levels are generally high, as is the quality of life. Under the guidance of The Labuan Financial Services Authority (LOFSA), there has been substantial investment in Labuan’s physical infrastructure in recent decades, so it is efficient, completely modernised, and has a high-quality telecommunications system. 

Population, Language and Culture

Labuan had just under 100,000 inhabitants as of 2019. About 70% of the population are of native Malay origin (Bumiputras). The remaining 30% is split equally between non-indigenous citizens (mostly of Chinese origin) and non-citizen residents.

Over 75% of the population is Muslim, with the rest being made up predominantly of Christians (12%) and Buddhists (9%). Malay is the official language, but English is very widely spoken, especially in the corporate space. 

Labuan is also a beautiful island and a popular tourist destination. It is very safe, with almost no violent crime.

Exchange Control

It is important to note that Labuan Offshore Trading Companies are not allowed to trade in the Malaysian Ringgit, nor can share capital be denominated in the Ringgit.

Trade is permitted in most other currencies, with the USD being the most common currency used. There are also restrictions and limitations on trade with Malaysian companies and residents: while it is allowed to a certain extent, it cannot be their sole or primary source of trade. Otherwise, the Labuan jurisdiction enjoys very liberal exchange controls. 

Type of Law

The legal system in Malaysia is based upon British Common Law, and as Labuan Island is a part of Malaysian territory, it falls under the same laws. However, because of its degree of independence, there are some minor differences.

In addition, in 1989, Labuan was turned into an international offshore financial centre with special legislation that was passed that made it an attractive jurisdiction for offshore company incorporation.

Principal Corporate Legislation

The Labuan Financial Services Authority (LOFSA) is the governing body that oversees Labuan’s corporate laws. In 1990, the first Offshore Companies Act was laid out which set the foundation for Labuan’s offshore corporate laws.

The Offshore Banking Act and the Offshore Trust Companies Act were also passed in the same year.

Later, the Labuan Companies Act of 2010 took over, which currently governs the formation, taxation and business activities of Labuan International Companies.

This legislation allows for a number of practical benefits of the Labuan jurisdiction, such as its cost-effective and convenient incorporation laws, favourable taxation (low corporate tax rate, no capital gains tax, no withholding tax on dividends, interest, royalties, and technical Fees, tax exemptions for non-trading activities, etc.), and high level of confidentiality.

Fiscal Regime of Offshore Companies

There are two main types of Labuan Offshore Companies which one can incorporate: trading companies or non-trading companies (i.e. holding companies). Non-trading offshore companies pay zero tax on foreign-earned income.

Trading companies, on the other hand, pay only 3% tax on their net profit up to a maximum tax of 20,000 Malaysian Ringgit per year (about 4,700 USD). 

Labuan Offshore Company Products from Offshore Protection

For more information on Labuan Offshore Company Formation:

•  Labuan Offshore Company