Tax

Labuan tax explained: 3%, 0% and 24%

Labuan trading companies listed under the Schedule pay 3% of net audited profit and non-trading companies pay 0% — but only if economic substance requirements are met; otherwise the rate is a flat 24%.

Labuan's tax rates are the reason most people look at the jurisdiction, and they are frequently quoted without the condition attached. The condition is the whole story.

Two separate pieces of legislation are in play. The Labuan Business Activity Tax Act 1990 (LBATA) governs Labuan business activity. Malaysia's domestic Income Tax Act 1967 (ITA) governs everything else — including royalty and other income derived from intellectual property rights, which is expressly carved out of LBATA.

Since 2019, when Malaysia reformed the regime and abolished the RM20,000 flat tax option, the preferential rates have been conditional on economic substance. A company in scope that does not meet the requirements is taxed at 24% — Malaysia's ordinary corporate rate.

The rates, and what they depend on

3%	Labuan trading company whose activity is listed in the Schedule, and which meets the substance requirements. Charged on net audited profit
0%	Labuan non-trading company (investment holding), meeting the applicable substance requirements. Management accounts in the IRB's prescribed format are sufficient — no audit required if substance is met
24%	A Labuan entity in scope that fails to meet the economic substance requirements. Audit still required
Under the ITA instead	Non-Labuan business activity, including royalty income from IP rights, taxed under Malaysia's Income Tax Act 1967
Irrevocable ITA election	A Labuan company may make an irrevocable election to be taxed under the ITA 1967 instead of the LBATA. This is common where the company conducts non-Labuan business activity — the rate is generally 24%, but the election puts the company squarely within the domestic regime
Dividends	Dividends distributed by a Labuan company are currently exempt from Malaysian tax up to YA 2027, subject to the applicable conditions, including the Labuan company meeting the Economic Substance Requirements (ESR). The tax treatment of the dividend in the shareholder’s jurisdiction should also be considered, as the shareholder may be subject to tax in its country of residence
Audited loss	If the company reports an audited loss there is no tax payable, whether or not the substance requirements were met
How LBATA tax is computed	The rate is applied directly to the audited accounting profit. LBATA does not recognise taxable versus non-taxable income, deductible versus non-deductible expenses, or realised versus unrealised gains and losses — which makes the computation materially simpler than under the ITA

Reference tables and diagrams

Malaysia runs two separate corporate tax regimes, and a Labuan entity sits in one of them by default while being able to elect into the other. The table below sets them side by side across every axis that changes the answer.

The rate is the least interesting difference. Look instead at the mechanics: LBATA applies tax directly to audited accounting profit, with no concept of taxable versus non-taxable income, deductible versus non-deductible expenses, or realised versus unrealised gains. There is no capital allowance, no loss carry-forward relief and no tax estimation filing — the computation is genuinely simpler, which is a real saving in professional fees as well as in tax.

The trade-offs sit further down. Under the ITA, withholding tax applies to specified payments to non-residents, while certain payments involving Labuan entities may qualify for specific exemptions. Against that, a resident taxpayer paying a Labuan entity faces deduction restrictions — 25% non-deductible on interest, 25% on lease rentals and 97% on other payments — which is why a Labuan company serving mainly Malaysian customers often works out worse than a domestic one. It is also why a Labuan company is more suited to businesses with overseas clients rather than Malaysian clients.

	ITA	LBATA
Principal legislation	Income Tax Act, 1967	Labuan Business Activity Tax Act, 1990
Corporate income tax	Headline rate – 24%Concessionary rates are available for Malaysian resident companies, ranging from 15 to 17% subject to applicable conditions	0% or 3% tax rates if the business activity is listed under the Schedule and the Labuan company meets the ESRFlat 24% tax rate if the business activity is listed under the Schedule but the Labuan company does not meet the ESR
ESR	Not a general requirement, apply to particular tax incentives or exemptions	Yes
Withholding tax	Applies to specified payments to non-residents subject to DTA/exemptions	Certain payments involving Labuan entities may qualify for specific withholding tax exemptions, subject to condition
Foreign sourced income tax	Yes, subject to specific exemption orders and conditionsExemption of foreign sourced income tax up to year 2030.	Not applicable
Tax year	Current year basis	Current year basis
Dividend	2% dividend tax apply at individual shareholder level where annual dividend income exceeds RM100,000	Exempted until year 2027 if ESR is met
Tax loss carry forward relief	Business losses can be carried forward to be utilised against income for up to 10 years	No
Capital allowance	Yes	No
Capital gain tax	No, except for real property gains tax and disposal of unlisted shares	No capital gain tax, however, capital gains from real property are not Labuan business activities and will be assessed under the ITA
SST	Separate indirect tax regime; applicability depends on goods/services and SST rules	No
Dealing with residents	No issue	Certain restrictions, in particular on deduction for payments made by resident taxpayers to Labuan entities –25% non-deductible for interest payments25% non-deductible for lease rentals97% non-deductible for other payments
Tax estimation	Yes	No filing on estimation of income
ITA selection	N/A	Yes

The difference between the ITA and the LBATA

The judicial reviews, and what they changed

What the IRB had been doing
After the 2019 reforms the Inland Revenue Board and Ministry of Finance took the position that a Labuan entity carrying on an activity NOT listed in the Regulations fell outside LBATA altogether, and was therefore taxable under the ITA at 24%. Around 170 Labuan entities challenged that interpretation by way of judicial review.
What the courts decided
In Bright World Trading Co Ltd & Ors v Director General of Inland Revenue, the High Court held on 13 June 2022 that Labuan entities carrying on activities not specified under the Regulations were eligible for the 3% rate under LBATA and were not required to comply with the economic substance requirements. The decision was subsequently upheld by the Court of Appeal.
Where it stands now
Despite the decision, the position on activities that are not listed in the Regulations is not yet settled in practice. Do not rely on the decision for your own entity without advice — talk to us and we will look at your assessments and filings.

How we help

Determining which legislation applies to your activity — LBATA or the ITA
Assessing whether your activity is listed in the Schedule
Structuring so that substance obligations are met and the preferential rate is preserved
Preparing and filing the annual tax return with the Inland Revenue Board
Coordinating the audit that the rate depends on

Frequently asked questions

Is Labuan a tax haven?

No, and the framing matters. Labuan operates a substance-based, compliant midshore regime under Malaysian law. The preferential rates are conditional on real employees and real expenditure in Labuan, proper accounts, and annual filings with both Labuan FSA and the Inland Revenue Board.

Is the 0% rate really zero?

For a Labuan non-trading company meeting its substance requirements, the LBATA rate on that activity is 0%. Management accounts in the IRB's prescribed format (no audit is needed) and annual returns are still required, and the substance costs are real.

What is the Schedule?

The Schedule lists the Labuan business activities that fall within the substance regime. Whether your activity is listed determines whether the substance requirements apply to you at all.

How does IP income work?

Royalty and other income derived from intellectual property rights is taxed under Malaysia's domestic Income Tax Act 1967, not under LBATA. It does not receive the Labuan preferential rate.

What are the tax rates under the domestic ITA, for comparison?

The headline rate is 24% for a resident company. SMEs qualify for concessionary corporate tax rates in the form of a progressive, tiered tax structure, typically ranging from 15 to 17%. The frequently quoted flat 24% is the headline rate, not the whole picture — which matters when comparing a Labuan structure against a domestic one.

How is foreign-sourced income treated?

The Finance Act 2021 removed Malaysia's long-standing exemption for foreign-sourced income, imposing tax on residents on foreign income received in Malaysia with effect from 1 January 2022. The Ministry of Finance then granted exemptions, given effect by the Income Tax (Exemption) (No. 5) Order 2022 and (No. 6) Order 2022, gazetted on 19 July 2022, conditional on the income having been subjected to some form of tax in the jurisdiction where it arose. For individuals, the exemption now runs to 31 December 2036. For qualifying companies and LLPs, the exemption for foreign dividend income runs to 31 December 2026, and Budget 2026 proposes extending it to 31 December 2030. Check the position for your own structure before relying on it.

Can I choose to be taxed under the ITA instead of LBATA?

Yes. A Labuan company may make an irrevocable election to be taxed under the Income Tax Act 1967. It is a common choice for clients whose activity is not in substance a Labuan business activity — the rate is generally 24%, but the position is clean and the company operates within the domestic regime. Because the election cannot be reversed, take advice before making it.

Speak to us

We are the licensed trust company, so the advice and the filing come from the same place.

Talk to our Konsultan

Sources

The primary documents this page relies on, linked to the authority that issued them. If one has moved, tell us and we will correct it.

Acts administered by Labuan FSA — including the Labuan Companies Act 1990, the Labuan Business Activity Tax Act 1990 and the Labuan Financial Services and Securities Act 2010 (opens in a new tab)
Labuan FSA · Legislation
LBATA 1990 sets the 3%/0% rates; the Income Tax Act 1967 governs the income carved out of it.
Guidelines on tax-related matters, including substance requirements (opens in a new tab)
Labuan FSA · Guideline
Labuan FSA's standing guidance on tax matters and the substance conditions attached to the rates.

Last reviewed 4 August 2026

Whilst considerable care has been taken to ensure the information contained within this page is accurate and up to date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information. The information given in this page is based on our present understanding of the current laws, guidelines and regulations and may therefore be subject to change without notice.