Labuan is a rather complex offshore jurisdiction with cleverly written laws and tax codes. This article is by no means exhaustive, but should serve as a good primer on what’s going on in Labuan.
Labuan entered history books in the 14th century when the Majapahit Empire fell and Labuan became a part of the Sultanate of Brunei.
Not a lot happened until 1846, when the British gained control over Labuan. The island was named Victoria under British rule and served as a naval base for combating piracy in the region. The British saw potential for Labuan to become an important hub similar to Singapore.
Labuan was granted independence in 1963. It then became a part of Sabah and joined Malaysia. This lasted until 1984, when Sabah ceded Labuan, which pronounced itself a federal territory of Malaysia, gaining greater independence in the process.
Today, Labuan is a tourist attraction and growing financial center.
Labuan Offshore Companies
There are two types of offshore companies in Labuan: trading companies; and non-trading, or holding, companies.
A Labuan non-trading company is a company which engages “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”—it’s effectively a holding company.
Both forms of companies are registered under the same law; but different taxes, fees, and requirements apply depending on what the company is doing.
There is a third category, called a Labuan Charged Company. This is a company that opts to be taxed under federal Malaysian law, which grants access to Malaysia’s (as of this writing) 73 double-taxation agreements (DTAs)—a rather impressive range, with good coverage of Europe and Asia.
Labuan is becoming the favored jurisdiction in Asia for its combination of tax efficiency and reputability, owing to compliance with international standards on due diligence and transparency.
Public records of Labuan companies are not kept; in 2011, the OECD criticized Malaysia for being unable to extract information from Labuan. This is likely to improve, since Malaysia seems to want Labuan to develop as a reputable offshore financial center.
Labuan Trading Company
Under the Labuan Business Activity Tax Act of 1990, Labuan trading companies pay a tax of 3%, which is capped at 20,000 Malaysian ringgit per year. (As of this writing, 100 ringgit equals approximately €21 EUR, US$30, and £18.)
However, companies cannot trade in the ringgit. Share capital cannot be in it, either. All other currencies are permitted, with the US dollar being the by far most common.
Labuan companies are also limited in their trade with Malaysian resident persons and companies. A Labuan company cannot trade wholly with Malaysian residents, nor is it entirely prohibited from doing so. Trade with Malaysian residents must be reported to the Labuan authorities, but reporting need only be done after the transaction has taken place.
Annual fees are higher than most offshore jurisdictions. A foreign-owned Labuan company usually pays around 5,300 ringgit per year (or around US$1,600 at current rates), whereas a locally controlled Labuan company only pays 2,600 ringgit. These relatively high fees are intentional, as they prevent small or poorly funded companies from forming in Labuan.
Trading companies must also have what’s called “commercial substance” physically in Labuan. This requirement can be fulfilled quite easily by simply having a Labuan bank account, staff in Labuan, or an annual board meeting in Labuan. I know of companies that pass this requirement by utilizing a virtual office in Labuan. It’s not a very difficult requirement to live up to; its purpose is likely to further filter out all but serious entrepreneurs.
Labuan companies must have at least one director and one resident secretary. Companies are required to keep accounts and file annual returns. Audits, while not required, are commonly used, as they may be required to access certain tax benefits.
Labuan trusts require a resident settlor, whose powers may be uncomfortably wide for some. The settlor is authorized to revoke and amend the trust. They are commonly used for asset protection, wealth management, and/or as vehicles in tax-minimizing structures. The beneficiary must be a Labuan person, but this can be a foreign-owned legal entity.
Trusts can be for a limited time or, if no time is stated, perpetual. Labuan trusts are pretty much like trusts in other countries, though other jurisdictions—such as the Cook Islands—offer more ironclad asset protection attributes.
Banking in Labuan
Although many hold bank accounts in Labuan to achieve commercial substance, most offshore companies in Labuan bank elsewhere; typically they choose Hong Kong or Singapore.
There are presently around 58 banks licensed in Labuan, of which many are either local Malaysian banks or investment banks. A large number of the banks are just branches of other banks with very little actual presence in Labuan. These banks mostly just open up a Labuan branch to offer Labuan-based services to their customers elsewhere.
In the past, banking service in Labuan has been quite poor due to the limited availability of banks. Recently, though, the situation has improved. CIMB Bank Offshore, Maybank Offshore, KFH Offshore, and HSBC are some of the major banks active in Labuan.
Labuan banks are typically not interested in non-Labuan companies, although exceptions are made for companies from Hong Kong and Singapore.
Banking secrecy in Labuan is strict for now, since the Malaysian federal government cannot access information. This may change in the future, but in general, Malaysia has quite rigorous banking secrecy.
Living in Labuan
Labuan is a small island yet well connected to mainland Malaysia. There are also ferries, which connect Labuan with not only Malaysia but also Brunei.
It’s considered very safe with little to no violent crime.
While the island lacks a sales tax, the cost of living is still quite expensive. An average Malaysian salary will not be enough to live comfortably in Labuan.
Forming a Labuan company can be an effective way to gain a Malaysian residence permit. These programs tend to change from time to time, so check the Labuan or Malaysian government websites for up-to-date information.
Personal income tax is the same as in Malaysia and goes from 0% to 26%. However, as mentioned earlier, special provisions are made for personal income from Labuan companies.
If you’re a serious entrepreneur with capital looking to form a tax efficient trading or non-trading company, Labuan might be the place for you… especially if you trade across Asia.
Labuan is a beautiful island and well worth a personal visit. I did get a bit of a claustrophobic feeling in Labuan, though: to get out of the country—other than by boat to Brunei—one has to fly via Malaysia.
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Streber works as a consultant and director for a wide range of companies and has broad experience in offshore banking, offshore incorporation (formation and maintenance of offshore companies), taxation, privacy, ecommerce, merchant accounts, online payments, and all other things the privacy-minded entrepreneur might find interesting. You can read Streber’s blog on offshore incorporation and offshore banking.