Labuan Company Formation

Labuan is a small set of islands off the coast of Borneo and ois officially a “federal territory” of Malaysia. The Labuan Offshore Jurisdiction 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 in 1989. 

The formal name for an offshore company in Labuan is a “Labuan International Business Company” (Labuan IBC). Incorporation is very quick and easy with minimal startup requirements and fees.

The legislature which governs offshore company formation in Labuan allows for a number of practical benefits of the jurisdiction, such as its cost-effective and convenient incorporation laws, favourable taxation, and high level of confidentiality.

It is also a highly reputable jurisdiction which is fully compliant with international standards. Its location is ideal for giving business owners access to both Middle Eastern and Asian markets. 

For more: Offshore Companies in Brunei

Key Takeaways

• Labuan provides a legally sound and beneficial framework for offshore company formation.
• Incorporation in Labuan requires compliance with local regulatory standards and can be completed swiftly.
• Labuan company formation caters to international businesses seeking strategic advantages.

Advantages & Top Uses of a Labuan Offshore Company Formation

• Allows 100% foreign ownership - offshore companies require only a single director and shareholder who can be the same person or corporate body. 
• Labuan Offshore Companies are subject to either zero or very low taxes (maximum of 3% corporate tax), depending on the type of offshore company formed.
• Partial access to Malaysia’s wide network of Double Taxation Avoidance Treaties (DTAs), as well as its tariff reductions in the ASEAN Free Trade Area (AFTA).

• Incorporation can be completed within 2 - 7 days.
• Registration and licensing fees are low, and there are effectively no minimum issued share capital requirements.
• There is a high degree of confidentiality for offshore company and offshore account holders.
  • The Malaysian Federal Government cannot access banking information, and there are minimal disclosure requirements for offshore companies. The names of shareholders and directors are not publicly available, nor are the accounting statements of the company.
• The Labuan jurisdiction is in an ideal location which offers access to both Middle Eastern and Asian markets.
• The infrastructure is conducive for successful corporate setup, which includes access to a well-qualified work-force and advanced telecommunication system.
• 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, and corporate documents and legislation are usually written in English.
• It is easy to obtain a two year, renewable work visa in Labuan.

Top uses

• International trading and access to top Asian markets
• Asset protection
• Minimization of taxes
• Protection and ownership of intellectual property
• Estate planning
• Confidentiality
• Investment holding

Key Takeaways

• Labuan provides a legally sound and beneficial framework for offshore company formation.
• Incorporation in Labuan requires compliance with local regulatory standards and can be completed swiftly.
• Labuan company formation caters to international businesses seeking strategic advantages.

Fundamentals of Labuan Company

Labuan companies are established under the Labuan Companies Act 1990, offering a unique balance of regulatory oversight and business efficiency. They cater to entrepreneurs looking to leverage the benefits of an offshore company.

Types of Labuan Companies

Labuan offers various types of company structures to suit diverse business needs. The primary types are:

• Trading Companies: Engage in commerce, banking, insurance, and trading activities.
• Non-Trading Companies: Include holding assets, ownership of investments, and intellectual property.
• Protected Cell Companies (PCC): Suitable for businesses that wish to segregate assets and liabilities into different cells.
• Foundations: Used for wealth management and asset protection.
• Limited Partnerships and Limited Liability Partnerships: Offer alternatives with different levels of liability.
• Trusts: Designed for estate planning and wealth management.

Each structure has specific regulatory requirements and benefits that are important to consider based on the intended business activities.

Key Advantages

Labuan Companies benefit from:

• Tax Benefits: A competitive tax rate of 3% on net audited profits or a flat rate of MYR 20,000 for trading companies; non-trading companies are not subject to tax.
• Privacy Protection: Shareholder anonymity and confidentiality are upheld.
• Regulatory Framework: The Labuan Companies Act 1990 provides a robust legal framework that ensures companies operate within a regulated yet business-friendly environment.
• Ease of Doing Business: Simplified company registration process and the possibility to be 100% foreign-owned.
• Wide Network of Treaties: Labuan has double taxation agreements with numerous countries, facilitating international business.

The strategic advantages such as low tax rates, well-established legal framework, and confidentiality make Labuan Companies a compelling option for international business and investment activities.

Legal and Regulatory Framework

The key components of the Labuan Company formation revolve around adherence to specific legislation and thorough compliance procedures. The governance and regulation of these companies are robust, necessitating an understanding of the legislative environment and a commitment to due diligence.

Governing Bodies and Legislation

The Labuan Financial Services Authority (Labuan FSA) is the primary regulatory authority overseeing Labuan companies. It operates under the legal framework established by the Labuan Companies Act 1990 (LCA), which forms the cornerstone of Labuan's corporate regulatory regime. In 2022, significant amendments were made to the Act to strengthen the regulatory framework, thus ensuring that Labuan FSA can effectively perform its supervisory role.

Compliance and Due Diligence

Labuan companies must comply with strict due diligence requirements set forth by Labuan FSA. This includes adherence to guidelines on beneficial ownership, where it must be transparent who the true/ultimate beneficial owners of the company are. The Labuan Companies (Amendment) Act 2022 stipulates that a Labuan company is to appoint at least one director who must be a resident, and it must also conduct due diligence to the standards required by Labuan FSA. Furthermore, companies should work with a licensed Labuan trust company for their incorporation and to undergo the necessary background checks.

Incorporation Process

The process of incorporating a company in Labuan is streamlined and can be completed efficiently, typically within 5-10 business days. It involves several key steps, such as obtaining name approval and preparing the Memorandum and Articles of Association, each a critical part of the registration.

Name Approval

The first step in incorporating a Labuan company is to secure approval for the company name. The proposed name is submitted to the relevant authorities and should be unique, non-offensive, and not in use by another corporation. A name check ensures that there is no duplication and that the name adheres to the regulations set forth by the Labuan Financial Services Authority (LFSA). Once approved, the name reservation generally holds for a certain period, allowing the incorporation process to proceed.

Memorandum and Articles of Association

The Memorandum and Articles of Association are foundational documents that outline the company's constitution and its internal operating rules. The Memorandum specifies the company's activities, objectives, and powers, and the Articles of Association delineate the rules governing the management of the company, including the appointment of directors and the conduct of shareholders' meetings. Both documents must be submitted as part of the statutory declaration during the incorporation process and are subject to LFSA's scrutiny to ensure compliance with the Labuan Companies Act 1990 (LCA).

Requirements for Incorporation

To incorporate a Labuan Offshore Company, the following documents must be submitted to the Registry:

• Memorandum and Articles of Association
• Consent form from the director
• Statutory Declaration of Compliance with the Companies Act
• Identity Certificate
• Incorporation/registration fee

In addition, a Labuan offshore company must register with the following government agencies:

• Labuan Company Formation Authority
• Malaysia Immigration Department
• Inland Revenue Authority
• Central Bank of Malaysia

Business Operations

In forming a Labuan company, understanding the nuances of operational regulations is vital. Specific industries require distinct licensing, and maintaining annual obligations is essential for compliance and smooth business operations.

Licensing for Specific Industries

Licenses are a prerequisite for certain business activities in Labuan, especially for those dealing in financial services. Companies intending to undertake trading activities or management services must obtain the appropriate licenses from the Labuan Financial Services Authority (Labuan FSA). The process includes a thorough review of the company's operational expenditure and managerial capabilities to ensure that the entity can sustain its activities responsibly.

• Financial Services: Companies offering services such as banking, insurance, and fund management need to secure a financial services license.
• Trading Activities: Entities involved in trading activities that include dealing with securities or foreign exchange must also be licensed.

These licenses are not just formalities but a commitment to adhere to the operational standards set forth by the Labuan regulatory body.

Annual Obligations and Maintenance

Once a Labuan company is operational, it must meet certain annual requirements to maintain its status and compliance.

• Annual Returns and Financial Statements: Companies are required to file annual returns along with their audited financial statements.
• Operational Expenditure: There is an expectation to maintain a minimum amount of annual expenditure in Labuan, which varies depending on the nature of business activities.
• Licensed Entity Compliance: Entities holding a license must regularly monitor their compliance with Labuan FSA's conditions, including any restrictions on management or operations.

Meeting these obligations ensures continuous regulatory compliance and operational integrity of Labuan companies in the international business environment.

Financial Considerations

When forming a company in Labuan, financial considerations play a critical role, particularly in terms of taxation and compliance with statutory accounting and auditing requirements. These factors have a significant impact on the operational costs and fiscal advantages of the company.

Tax Structure and Benefits

Labuan offers a favorable tax regime for businesses incorporated in its jurisdiction. With the Labuan Business Activity Tax (LBAT), trading companies can opt between paying a 3% tax on audited net profits or a flat rate of MYR 20,000, whichever is lower. The LBAT provides a competitive corporate tax rate that is attractive to businesses seeking tax-efficient structures.

Tax exemptions are also noteworthy, especially for non-trading activities which include holding investments in securities, stocks, shares, loans, deposits, or any other properties held for passive income. These activities are exempt from tax in Labuan.

Additionally, companies should maintain minimal share capital which can be as low as one share of any denomiation, thus providing flexibility in capital structuring for businesses.

Accounting and Auditing Requirements

Labuan companies are obliged to keep proper financial statements in compliance with the Financial Reporting Act 2013 and the Financial Reporting Standards. These statements ensure that a company's financial health is transparent and in accord with international accounting practices.

Moreover, it is mandatory for Labuan companies to have their financial statements audited by an approved auditor annually as stipulated by the Labuan Business Activity Tax Act 1990. This audit requirement applies regardless of the company’s size, ensuring that all financial activities are appropriately monitored and reported.

Banking and Finance

In Labuan, the ability to access comprehensive banking and finance services is a critical aspect of company formation. Robust financial management and establishing a corporate bank account are two pivotal components necessary for businesses to operate efficiently in the international market.

Opening a Corporate Bank Account

Companies in Labuan can set up a corporate bank account to facilitate their financial transactions. Typically, the process involves providing requisite documents that often include the company's registration details, proof of business activities, and identity verification of the directors and shareholders. Banks in Labuan are accustomed to international business practices and can provide services tailored to the needs of a global clientele, including multi-currency accounts and online banking facilities.

• Required Documents may include:

  • Certificate of incorporation
  • Company's constitutional documents
  • Due diligence documents of company officials

• Services Offered may cover:

  • Multi-currency account operations
  • Internet banking platforms
  • Trade finance services

Financial Management Services

Labuan boasts a well-regulated financial services sector that caters to the diverse needs of businesses, particularly in areas of banking, fund management, and other financial services.

• Banking: Labuan’s banks offer a plethora of services that encompass commercial and investment banking. They are adept at handling international transactions and can offer expert advice on cross-border financial activities.

• Fund Management: Many businesses leverage Labuan's strategic position to manage funds effectively. The jurisdiction provides a conducive environment for fund managers to operate with professionalism, benefiting from favorable tax conditions and a stable economy.

• Financial Services: As a recognized financial hub, Labuan hosts various financial institutions that provide services such as asset management, insurance, and wealth management. These services ensure that companies have the necessary support to manage their finances diligently.

Businesses operating in Labuan leverage these banking and financial services to enhance their competitiveness in international markets.

Strategic Business Activities

In the light of establishing a business in Labuan, it's imperative to understand the demarcations between trading and non-trading companies, as well as the imperative of specific business licenses. These classifications play a pivotal role in the strategic planning and benefits a company can avail in Labuan.

Trading vs Non-Trading Companies

Trading Companies in Labuan are entities that engage in banking, insurance, management, or other similar commercial activities that involve transactions with third parties. They are subject to a taxation of 3% of net audited profits if they meet certain conditions, including maintaining an adequate operational presence in the region.

• Banking
• Insurance
• Management
• Other commercial activities

In contrast, Non-Trading Companies are essentially holding entities that hold investments in securities, stocks, shares, loans, deposits, or any other properties. These entities typically do not have any tax liabilities as they do not conduct active business operations.

• Hold investments
• Securities, stocks, shares
• Loans, deposits

Special Business Licenses

For certain business activities in Labuan, obtaining a Special Business License is mandatory. A regular Labuan Offshore Company may not require a special license to operate; however, special licenses are needed when the business involves:

• Banking
• Insurance and insurance-related activities
• Fund management
• Leasing
• Factoring

These licensed activities demand adherence to specific regulatory requirements laid out by the Labuan IBFC.illa/Layouts. A Trading Company could be a business engaged in retail or wholesale trade, whereas a Non-Trading Company often refers to entities that manage investments or act as holding companies without active commercial trade.

Taxation

Trading companies pay only 3% corporate tax on their audited net profit up to a maximum tax of RM 20,000 per year (about 4,700 USD). Companies which choose to pay the RM 20,000 lump sum tax are not required to file audited reports. Non-trading offshore companies are tax exempt. 

In addition, there is NO:

• Tax on Dividend payouts
• Stamp Duty
• Withholding Tax
• Capital Gains Tax and Inheritance Tax
• Personal Tax for Foreign Directors’ Fees

Substance Requirements

Substance requirements mandate that a Labuan entity must have an adequate level of management and economic presence within Labuan. The Substance Requirement is evidenced through the following:

• Physical Office Space: A leased or owned operational office within Labuan.
• Annual Return: A declaration of compliance, including evidence of substantive operations, must be filed.
• Annual Government Fee: A fixed fee is payable to the Labuan Financial Services Authority (LFSA) as part of compliance.

The Operational Expenditure should reflect the costs incurred in maintaining these substance requirements, ensuring the entity functions legitimately within the stipulated regulatory environment. Compliance with these regulations is essential for the legal operation of a Labuan company and it benefits from the jurisdiction's fiscal incentives and business-friendly framework.

Corporate Details

Anonymity, Confidentiality and Disclosure

There is a high degree of confidentiality for Labuan Offshore Company owners and offshore account holders. The Malaysian Federal Government cannot access banking information, and there are no imposed disclosure requirements for offshore companies.

This means that the names of directors and shareholders are not publicly available. Furthermore, there is no public register of trusts and private foundations which are registered in Labuan. 

Company Shares

The following classes of shares are permitted: preference shares, registered shares with par value, shares with no voting rights and redeemable shares. Labuan International Companies are not allowed to issue bearer shares.

Required Capital

Minimum standard authorised capital is USD 10,000 which is usually divided into 10,000 shares with a par value of USD 1 each. However, the minimum issued capital is only one share with a value of USD 1, so in practice startup capital requirements are negligible. 

Annual Fees

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).

Directors

A minimum of one director is required. The director/s can be any natural person or corporation of any nationality. There is no requirement for local directors.

Shareholders

A minimum of one shareholder is required. The shareholder/s can also be any natural person or corporation of any nationality. The shareholder and the director can be the same legal entity. 

Trading Restrictions

There are restrictions and limitations on trade with Malaysian companies and residents: besides some exceptions, Labuan International Companies should not engage in business with Malaysian companies and residents. 

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

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 type of law. 

Powers of the Company

A Labuan Offshore Company is regarded as a separate legal entity from its shareholders and directors. As such, it has all the same powers as a natural person. 

Local Presence Requirements

Labuan International Companies are required to maintain a local registered office address.

Trading companies must also have so-called physical “commercial substance” in Labuan. This requirement can be fulfilled in various ways, such as by holding a Labuan bank account, employing staff in Labuan, or simply holding an annual board meeting in Labuan.

Company Meetings

Meetings are not required and can be held anywhere, although having an annual board meeting in Labuan is one easy way to fulfill the physical “commercial substance” requirement. 

Company Secretary

The company must appoint at least one secretary, who can reside anywhere. If there is more than one secretary, at least one must be a local resident. 

Language of legislation and Corporate Documents

Although the official language is Malay, many pieces of legislation and corporate documents are written in English, including the legislation pertaining to Labuan Offshore Companies.

Official Language

The official language in Labuan is Malay, but English is widely spoken. This is especially the case in the corporate arena. 

Audit Requirements

There are no audit requirements for investment holding companies and other types of non-trading companies whose only source of income is from outside of Malaysia.

International Trading Companies who pay the standard corporate tax of 3% of audited net profits are required to appoint an auditor and file audited financial statements. Those trading companies who instead opt to pay a lump sum tax of RM 20,000 (USD 4,700) are not required to file audited financial statements. 

Annual Reporting Requirements

Companies are required to file an annual report containing a statement of their accounting records, which must be kept in Labuan. 

Exchange Controls

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.

Shelf Companies available 

No.

Time required to form a company

A Labuan Offshore Company can be registered in 2 - 7 days. 

Company Name Requirements and Restrictions

The name must be unique and should not:

• Resemble any other Malaysian company’s name
• Suggest Royal or Government affiliation
• Be considered undesirable by the Registrar 

In addition, certain names require special consent or license, such as: bank, insurance, trust, University and so forth. 

The name can be in any language which uses the Latin alphabet. The name must end with one of the following words or suffixes: “Labuan”, “Limited”, “Co,Ltd”, “Inc.”, “Ltd”, or “LLC”.

Access to Double Tax Treaties

Malaysia has an extensive network of Double Taxation Treaty Agreements (DTAs) of 74 DTAs. Many of these agreements also extend to Labuan, except for the following countries which do not consider Labuan as part of the benefits applicable under the double tax treaties signed with Malaysia: Australia, Chile, Germany, Indonesia, India, Japan, Luxembourg, the Netherlands, Seychelles, South Africa, South Korea, Spain, Sweden, the United Kingdom.

A Labuan company can gain access to the advantages of all of Malaysia’s DTAs by irrevocably electing to be taxed under the Malaysian Income Tax Act of 1967. This type of company is known as a Labuan Charged Company. 

Licence Fee

The fees for the application of a company name and for the registration of a Labuan Offshore Company amount to RM 6,050 (approx USD 1,400)

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