In this section:
- Labuan Forms of Offshore Operations
- Labuan Tax Treatment of Offshore Operations
- Malaysian External Investment
- Labuan Offshore Tax Treatment of Foreign Employees
- Labuan Offshore Activities
- Labuan Employment and Residence
In April 2009, Malaysia (Labuan) was added to
the Organization of Economic Cooperation and Development's
new 'blacklist' of jurisdictions which had not
committed to implementing the internationally
agreed standard in tax transparency.
The list, was published on April 2, following
the G20 London Summit and was issued at the same
time as a communique by government leaders which
set out the major economies' vision of the future
global regulatory and economic landscape. "We
stand ready to deploy sanctions to protect our
public finances and financial systems," read
the communique, presented by British Prime Minister
Gordon Brown, which went on to declare that: "The
era of banking secrecy is over."
In response to the 'blacklisting' Malaysia said
it was committed to internationally-agreed tax
standards and should not be categorized with jurisdictions
that have not.
Malaysia has since been elevated to the OECD's
'white list' of countries which have "substantially
implemented" the internationally agreed tax
In February 2010, new laws which, it is hoped,
will substantially improve Labuan’s competitive
edge in international financial markets came into
A total of four new acts, together with radical
amendments to a further four existing laws, will,
it was said, completely change the way in which
Labuan carries on its financial services business.
With the enactment of the new laws, the Labuan
Offshore Financial Services Authority was re-named
the Labuan Financial Services Authority (Labuan
Dato Azizan Abdul Rahman, the Director-General
of Labuan FSA said: “These far-reaching
changes cover all financial activities in Labuan
International Business and Financial Centre –
from banking, insurance, leasing and company incorporation
right through to the creation of Islamic financial
products and services. Apart from that, the changes
have taken into consideration all aspects so that
we are ahead of accepted international standards
The new laws allow for the creation of Labuan
foundations, limited liability partnerships, protected
cell companies (insurance and mutual funds), shipping
operations, Labuan special trusts and financial
planning activities. These complement the existing
available range of products and services and aim
to provide investors with a wider choice of financial
products to maximise investment opportunities.
In January 2013, the Labuan FSA issued guidelines
applicable to all Labuan international trading
companies (LITCs) licensed to conduct international
commodity trading business in the Labuan International
Business and Financial Center (LIBFC) under the
Global Incentives For Trading (GIFT) program.
The guidelines, which went into effect on January
1, 2013, and supersede those previously-issued
on October 31, 2011, cover a Labuan international
commodity trading business involved in the trading
of physical and related derivative instruments
of petroleum and petroleum-related products including
liquefied natural gas (LNG), agriculture products,
refined raw materials, chemicals and base minerals.
An LITC can deal only with non-residents in any
currency other than Malaysian ringgit.
In addition, within five years after the date
it obtained its license, an LITC must have a minimum
annual turnover of USD100m; minimum annual business
spending of MYR3m (USD995,000) payable to Malaysian
residents; and at least three professional Malaysian-resident
traders employed with a minimum salary of MYR15,000
per month each.
Under the GIFT program, a general LITC is subject
to a corporate tax rate of 3%, but an LITC set
up purely as an LNG trading company is entitled
to a 100% income tax exemption on chargeable profit
for the first three years of its operation, provided
the company is licensed before December 31, 2014.
The LITC is required to maintain a registered
office in Labuan, which is the office of its Labuan
trust company. However, the LITC is allowed to
establish its operational office(s) anywhere in
Malaysia, while being required to provide the
details of that office to the LFSA upon commencement
of business. It must also ensure that its business
is conducted with a proper corporate governance
and risk management framework in place.
Other tax incentives applicable for an LITC include
a 100% exemption on fees paid to non-Malaysian
directors of the LITC; a 50% exemption on gross
employment income of non-Malaysian professional
and managerial staff, including traders with the
LITC; an exemption on dividends received by or
from the LITC; an exemption on royalties received
from the LITC; an exemption on interest received
by residents or non-residents from the LITC; and
a stamp duty exemption on all instruments for
Labuan business activities and the transfer of
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Labuan Forms of Offshore Operation
Offshore operations may take place within the
Click on any of the forms for a description
of its legal basis. The annual fee for an offshore
company is RM1,500, while for a foreign offshore
company the fee is RM5,300.
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Labuan Tax Treatment of Offshore Operations
See Domestic Corporate
Taxes for the general principles of Malaysian
corporate taxation, which also apply to offshore
entities when they pay tax.
The Labuan Offshore Business Activity Tax Act
1990 (as amended in 2004) provides for the reduction
or complete exemption of income tax in respect
of certain business activities carried on by offshore
companies in Labuan.
Chargeable profits derived by an offshore company
from an offshore trading activity are subject
to tax at a rate of 3%.
Alternatively, an offshore company which carries
on an offshore trading activity may, within three
months from the commencement of any calendar year,
elect to be charged to tax of M$20,000 for that
year of assessment.
An offshore company which carries on an offshore
non-trading activity is exempt from income tax
The Income Tax Act 1967 applies to any activity
other than offshore business activity carried
on by an offshore company, ie they pay normal
The following income is traditionally exempt
from tax in the hands of a Malaysian or foreign
- a dividend received by, or received from
an offshore company;
- distributions received from an offshore trust
by the beneficiaries;
- royalties received by a non-resident or another
- interest received from, or by, an offshore
company under certain circumstances and amounts
received from an offshore company for providing
No withholding tax is applicable to items of
income specifically exempt from tax.
Stamp duty for the transfer of shares and preparation
and filing of Memorandum and Articles of Association
by an offshore company has been waived.
A number of other tax privileges were available
at the time of writing:
- 65% of income from offshore entities from
the rendering of legal, accounting, financial
or secretarial services, including that of a
trust company as defined in the Labuan Trust
Companies Act, 1990 is exempted from tax.
- Income earned from renting a "qualifying
asset" to an offshore company in Labuan is exempt
from tax for an amount of up to 50% of the income
received for a period of 5 years. Thus a developer
can expect to only pay tax on 50% of the income
received from a building rented out to offshore
- 50% of the housing and regional allowances
given to residents working in the public sector
and offshore companies in Labuan are exempted
- Second tier dividends declared out of dividends
received from an offshore company by a domestic
company are exempted from tax.
- Distributions made by an offshore trust are
not subject to income tax in the hands of the
- Royalties paid by an offshore company to
a non-resident person or another offshore company
are not subject to income tax and hence are
not subject to withholding tax.
- Interest paid by an offshore company to a
nonresident person or another offshore company
is not subject to income tax. However, where
the interest accrues to a banking, finance company
or insurance business carried on by the nonresident
person in Malaysia, that interest will be subject
to income tax as part of business income.
- Interest paid by an offshore company to a
resident person, other than a person carrying
on a banking, finance company or insurance business
in Malaysia, is not subject to income tax.
- Technical or management fees paid by an offshore
company to a nonresident or another offshore
company is not subject to income tax.
In May 2007, it emerged that the Malaysian Finance
Ministry was working with the financial authorities
of Labuan to establish a new tax structure aimed
at attracting more companies to the Labuan International
Offshore Financial Centre (IOFC).
Speaking at the release of the Labuan Offshore
Financial Services Authority (Lofsa) annual report
for 2006, Tan Sri Dr Zeti Ahktar Aziz, Bank Negara
Governor and Lofsa chairman, said that new tax
initiatives would be included in the 2008 budget,
due to be announced in September 2007, along with
new company forms to better cater for the requirements
of offshore investors.
"With the new incentives, LOFSA will be
able to compete with other offshore centres in
the Asia-Pacific region and the world," Zeti
“We want to be competitive and relative
to other offshores as the environment is changing
very significantly," she added.
In September 2007, the measures were unveiled
by the Prime Minister.
Abdullah stated in his 2008 budget speech that
in future, companies registering in the Labuan
offshore sector would have the option of having
their offshore business income taxed under the
Income Tax Act 1967, in addition to under the
Labuan Offshore Business Activity Tax Act 1990.
"In the light of greater global competition,
we need to ensure that Labuan remains competitive
as an international offshore financial centre.
Given that investors in Labuan undertake a wide
range of financial services, a flexible tax regime
is necessary," the Prime Minister explained.
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Malaysian External Investment
"The Malaysian Satay" was the name given to
a corporate structure which has traditionally
involved the ownership of a foreign subsidiary
by a resident Malaysian holding company which
is in turn 100% wholly owned by an offshore Labuan
parent corporation. In this structure, reduced
rates of foreign withholding tax obtainable through
double tax treaties (Malaysia has more than 60,
although not all are in force) are not compromised
by the offshore status of Labuan; yet the income
once in the hands of the Malaysian parent can
be passed on without further tax to the Labuan
If the foreign subsidiary were owned directly
by a resident Malaysian company with no offshore
Labuan connection then domestic Malaysian taxes
will have to be paid; if the foreign subsidiary
were owned directly by a Labuan holding company,
no Malaysian taxes will be paid, but an increasing
number of treaty partners are denying treaty benefits
to Labuan companies.
Foreign Direct Investment in Malaysia
Whilst foreign corporations traditionally require
government permission if they are to own shares
in a Malaysian company this requirement has usually
been waived where the Malaysian company is to
be 100% owned by a Labuan company which is in
turn 100% owned by foreigners. Foreign ownership
rules had previously deterred foreign companies
from owning Malaysian corporations.
Dividends and other income earned by foreign
investors in Malaysia can usually be extracted
through Labuan without taxation.
The interposition of a Labuan company by investors
into Korea and other regional target markets has
benefits because income can be routed through
Malaysia or Labuan in order to take advantage
of double taxation treaties and the absence of
taxation between Malaysia and Labuan. This route
has been much used by investors into Korea: it
is said that more than a third of Labuan companies
are used as holding companies for Western investment
A Labuan company selling in China may take advantage
of the treaty between Malaysia and the PLC so
as to avoid the representative office in the PLC
being regarded as a PE.
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Labuan Offshore Tax Treatment Of Foreign Employees
A non-Malaysian citizen employed in Labuan in
a managerial capacity would have been exempt from
payment of tax on up to 50% of his employment
income until 2004; this concession has been extended
a number of times, so it is worth checking the
current tax status of overseas employees before
the decision on whether to live and work in Labuan
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Labuan Offshore Activities
An Offshore Company (or an Offshore Foreign
Company) is only permitted to carry on business
in, from or through Labuan. An Offshore Company
The Offshore Companies Act was amended to allow
Malaysians to own offshore companies, as well as
to permit foreign-owned offshore companies to invest
in Malaysia subject to certain conditions.
- carry on business with a resident of Malaysia
except as permitted by the Offshore Banking
- carry on the business of Banking or Insurance
or such similar business unless it is licensed
so to do under the Offshore Banking Act 1990
or the Offshore Insurance Act 1990;
- carry on business in the Malaysian currency
except for defraying its administrative and
- carry on business of shipping or petroleum
operations in Malaysia or carry on business
as a trust company.
Manufacturing activities are normally carried
out by companies incorporated under the Malaysian
Companies Act. An activity which is neither offshore
trading nor offshore non-trading will be subject
to tax under the regular tax regime.
Offshore insurance and banking businesses are
permitted to maintain a marketing office in Kuala
Lumpur until the Government decides that the management
office should be relocated in Labuan.
An Offshore Company is not treated as carrying
on business with residents of Malaysia if:
- it makes or maintains deposits with a person
carrying on business in Malaysia;
- it makes contact with professional advisers
carrying on business in Malaysia;
- it prepares and maintains books and records
in Malaysia; it acquires or holds any lease
or property for operational purposes or accommodation
of its employees;
- it holds directors or members
meetings within Malaysia;
- it holds shares, debt obligations, or other
securities in a company incorporated under the
Offshore Companies Act 1990 or in a domestic
company, or holds shares, debts obligations
or other securities for the purposes of a transaction
entered into in the ordinary course of a money-lending
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Labuan Employment and Residence
To facilitate offshore activities in Labuan,
a liberal immigration policy has been adopted.
Multiple entry visas are issued to expatriates
who have been granted employment permits to work
with offshore companies in Labuan.
The normal Malaysian rules, which are softened
in many situations in Labuan, are as follows:
Any person who wishes to enter Malaysia to take
up employment with a Malaysian company or firm
must apply for an employment pass from the Department
Employment passes are issued for a specified
period, usually two to three years, and are renewable
for an additional two to three years.
Employment passes are granted on a case-by-case
basis, generally for positions that require special
technical knowledge or expertise not available
locally or for positions that cannot be filled
by local Malaysian citizens.
To obtain employment passes, expatriates must
have a valid passport from their home country,
a contract from their employer, a cover letter
and three passport-size photos, which may be black
and white or color.
The employer of an expatriate must submit an
application to the Department of Immigration and
await a decision, which may take one month. After
the employer receives a letter of approval, it
must submit the passport of the employee and pay
for the employment pass and the levy. The levy
is applicable only to expatriates earning less
than a designated amount per month or to expatriates
holding employment passes valid for less than
Licensed manufacturing companies that wish to
hire expatriates must present copies of their
manufacturing licenses. Service companies with
foreign equity of more than 30% must seek the
approval of the Foreign Investment Committee before
hiring expatriates. Companies engaged in construction
and project management must register with the
Construction Industry Development Board before
hiring expatriates. Companies engaged in the retail,
trade, wholesale and direct-sales sectors that
have foreign equity of more than 30% must seek
the approval of the Committee on Wholesale and
Retail Trade before hiring expatriates.
It is illegal to work without a valid employment
pass; therefore, a foreign national may not work
in Malaysia until he or she has received a work
permit and all other necessary documents.
To obtain an extension, expatriates must submit
new applications for extension three months before
the expiration of their passes.
Expatriates who have not completed their terms
of contract but wish to take up employment with
other companies must leave the country for six
months before taking up new employment.
In 2003, the Malaysian government decided to
make it easier for companies to hire skilled foreigners,
allowing for automatic approvals to be granted
for the recruitment of highly skilled workers
where there is no available local expertise.
From June 2003, the government further relaxed
rules on employing expatriates, granting that
manufacturing companies with foreign paid-up capital
of at least US$2m be automatically permitted ten
expatriate positions, with those to include five
key posts. Under the amended rules, expatriates
could be employed for up to ten years for executive
posts and five years for non-executive posts.
Manufacturing companies with foreign paid-up
capital of US$200,000–2m, meanwhile, were
permitted automatic approval for up to five expatriate
posts, including at least one key post.
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