Malaysia: Labuan International Business Financial Centre – The Midshore Jurisdiction

Last Updated: 15 November 2017
Article by Labuan IBFC Inc.

Labuan is a financial centre located in Malaysia. The following article discusses its role and features, including tax and trusts regimes.

I. Introduction

Labuan is a midshore jurisdiction. It possesses a robust regulatory framework and the flexibility and competitiveness of an international financial centre. The jurisdiction provides a wide range of business and investment structures for cross-border transactions, international business dealings and wealth management demands. The Labuan Financial Services Authority (Labuan FSA) regulates its financial services industry.

II. Labuan as an Asian business hub

Labuan, located in East Malaysia, lies in the heart of the Asia Pacific region and shares a common timezone with major Asian cities. Malaysia is a member of ASEAN. As such, Labuan provides a convenient business environment for companies looking to expand into Asia. This includes the advantages of extensive trade links that Malaysia has with other ASEAN member countries and beyond. Furthermore, the business language of Labuan is English.

III. Exchange controls

Unlike the rest of Malaysia, Labuan has no exchange controls. As such, all transactions can be carried out in foreign currencies through Labuan's efficient banking system. Labuan entities are not permitted to conduct business in Malaysian Ringgit (MYR).

IV. Principal legal structures

One of the key advantages of Labuan as a jurisdiction is its strong legal system, based on English common law. Labuan's legal framework empowers the Labuan FSA to administer, license and provide for the setting up of all Labuan entities participating in the international business and financial centre. The jurisdiction's tax provisions are contained within the Labuan Business Activity Tax Act 1990 (LBAT').

V. Company law framework

In Labuan, 100% foreign ownership is permitted. A company can be formed by one or more shareholders, which can be corporate entities or individuals, of any nationality or residency. The company may have one or more directors appointed (either natural or corporate persons) and there are no requirements as to their nationality or residency.

All Labuan companies must employ a Labuan trust company providing the registered address and resident secretary service. Companies must also keep their books and records at their registered office.

VI. Tax framework

Labuan has a simple tax framework that covers Labuan business activity carried on by a Labuan entity in, from or through Labuan. Tax is charged at a rate of 3% for a year of assessment on the net audited profits of a Labuan entity carrying on a Labuan business activity which is a Labuan trading activity. However, a Labuan entity carrying on a Labuan trading activity may elect, pursuant to LBATA section 7(1), to be charged at a flat rate of MYR20,000 annually.

There is no capital duty or stamp duty, which contribute to making transaction costs lower.

The LBATA also provides that a Labuan entity carrying on a Labuan business activity that is a Labuan non-trading activity will be exempt from tax in Labuan. A Labuan non-trading activity includes an activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties by a Labuan entity on its own behalf.

A. Payments to non-residents 

Labuan does not impose any applicable withholding taxes on payments to non-resident persons. This includes payments of dividends, interest, royalties and directors' fees.

B. Access to tax treaties

It is currently unclear as to whether Labuan entities, which are taxed under the LBATA, have access to Malaysia's tax treaties network. Certain tax treaties such as the Malaysia-Japan tax treaty specifically exclude entities that are taxed under the LBATA from treaty benefits. However, for treaties that are silent on this matter, Labuan entities may be able to obtain treaty benefits.

C. Irrevocable election to be taxed under ITA

A Labuan entity can make an irrevocable election for its profits to be taxed under the Malaysian Income Tax Act 1967 (ITA). As a consequence, the Labuan entity will be subject to the provisions of the ITA for its tax matters instead of the LBATA.

There is no significant difference in the taxation of foreign sourced passive income (dividends, interest, royalties) and capital gains, as the ITA does not tax foreign sourced income and capital gains. The only notable difference relates to the taxation of substantive business activities in Malaysia. Under the ITA, income is taxed at 25 percent instead of at the lower rate under the LBATA. It is therefore likely that only non-trading entities will make this election.

The main advantage of doing so would be to gain access to the majority of Malaysia's double taxation agreement network. Malaysian tax residents have access to an extensive DTA network, which contributes to a dynamic and conducive business environment. Labuan entities which elect to be taxed under the ITA and obtain residency under the Act, generally should have access to the majority of Malaysia's DTA network. However, there are specific exclusions in certain tax treaties. It is therefore imperative that an in-depth analysis is carried out on a case-by-case basis.

For Malaysian DTA purposes, one of the key requirements for enjoying treaty benefits is in the exercise of ''management and control''. Conducting other substantive activities in a particular jurisdiction in addition, generally will provide further evidence that ''management and control'' is being exercised in Malaysia. Labuan, with its financial labour force, can provide the necessary qualified manpower in order to carry on substantive business activities in Labuan. It is therefore possible to set up or move a global or regional operational headquarters to Labuan at a low cost.

VII. Islamic finance

Good modern trust law provides for a Protector as a watchdog for the Beneficiaries and Labuan covers these matters. Labuan compares favourably with Guernsey and Dubai with its provisions identifying Beneficiaries; powers of addition and removal or exclusion of Beneficiaries; disclaimer by a Beneficiary of his interest in whole or part; class closing rules; and determining the nature of a Beneficiary's interest and whether or not the Beneficiary can deal with that interest.

VIII. Private wealth management

Labuan is a well-regulated location for trusts, foundations, limited partnerships and companies limited by guarantee. There is also no estate or inheritance tax in Labuan.

A. Trusts 

A key feature of Labuan's trust laws is the Labuan Special Trust. The trust can be used to hold shares in a Labuan holding company which may in turn own assets including cash, real estate, art, securities, businesses and insurance policies as well as active trading businesses. This trust enables the shares of the holding company to be retained indefinitely and for the management of the company to be carried out by its directors without any intervention by the trustee. This is similar to a BVI VISTA trust.

Labuan also provides for the availability of private trust companies which appeal to individuals and families who wish to retain control of the management of assets and businesses, including the flexibility to be involved in the day-to-day administration of those assets.

B. Foundations

Foundations can also be established in Labuan.

A foundation is a corporate body with a separate legal entity, usually established by the founder to hold assets with the objective of managing these assets for the benefit of a class of persons on a contractual basis.

It is deemed a separate legal entity from its managers (i.e. its officers and its council) and is typically used for private wealth management and charitable purposes.

Labuan foundations set up under the Labuan Foundations Act 2010 enjoy the same taxation benefits bestowed upon other Labuan entities. However, income derived from Malaysian properties will be subject to the ITA.

IX. Labuan International Commodity Trading Company

The Labuan International Commodity Trading Company (''LITC'') is promoted under the Global Incentives for Trading (''GIFT'') programme. The GIFT programme is a framework of incentives to attract traders of specified commodities to use Malaysia as their international or regional trading base.

The LITC business is the trading of physical and related derivative instruments in any currency other than Malaysian Ringgit with non-Malaysian residents of the following specified commodities:

petroleum and petroleum-related products including liquefied natural gas (''LNG'');

agriculture products;

  • refined raw materials; 
  • chemicals; and 
  • base minerals. 

A. GIFT incentives

  • An LITC is allowed to set up its operational office(s)anywhere in Malaysia. 
  • A corporate tax rate of 3% on the LITC's chargeable profits arising from trading of the specified commodities as reflected in the audited accounts. 
  • Notwithstanding the above, a 100% tax exemption will be granted on its chargeable profits for the first three years of its operation if the LITC trades wholly in LNG and is licensed before December 31, 2014. Thereafter, the above tax rate of 3 percent applies. 

B. Requirements

  • Minimum annual revenue of $100 million; 
  • Minimum annual local expenditure of MYR3 million; 
  • Employ a minimum of three professional traders; 
  • Encouraged to use and to engage local support services; 
  • All trades must be in currencies other than the Ringgit; 
  • Except for petroleum, petroleum related products, LNG and coal, all trades must be dealt with non-Malaysian residents. 

The GIFT incentive provides a very attractive scheme which can attract global businesses to move their trading activities. Businesses can use a Labuan entity which qualifies for the incentive in order to take advantage of the scheme and Labuan's company law advantages.

X. Captive insurance and mutual funds industries

Captive insurance companies and mutual funds can use Labuan's protected cell company (PCC) legislation to carry on their business in Labuan.

A PCC is a company that segregates the assets and liabilities of different classes (or sometimes series) of shares from each other and from the general assets of the PCC. Only the assets of each segregated portfolio are available to meet liabilities to creditors in respect of that segregated portfolio; where there are liabilities arising from a matter attributable to a particular segregated portfolio, the creditor may only have recourse to the assets attributable to that segregated portfolio.

A Labuan captive insurance PCC feature is that as the operating and sponsor core, one is not allowed to underwrite the risks of the cells. Only the cells are risk bearing; and not the core. This creates a prudent structure further supported by regulatory solvency capital to the core and to each individual cell. Apart from being a cost effective risk-financing vehicle, it offers other benefits, such as the optimisation of any kind of risk transfer and risk retention, statutory segregation and protection of various risks and flexibility in programme design.

XI. Conclusion

With the numerous advantages offered by Labuan IBFC, the jurisdiction is primed to be utilised as Asia's leading Islamic financial centre and is positioning itself as a key international business and financial centre in the region.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions