A recap: Impact on Labuan entities from the landmark Judicial Reviews

In March 2025, we uploaded a circular from our Association of Labuan Trust Companies on our website. This article summarises the Labuan entities' successful challenge against the IRB's actions through judicial reviews.

Background of the Judicial Review

Judicial review is a litigation route available to taxpayers in Malaysia to challenge tax laws raised by the Inland Revenue Board of Malaysia (“IRB”).

Back in 2021, about 170 Labuan entities have joined a judicial review to challenge the regulatory changes made by the IRB, affecting the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018, its subsequent amendment in 2020 and the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 (“2021 Regulations”).

Many Labuan entities were affected by the 2021 Regulations when the IRB and Ministry of Finance (“MOF”) interpreted that any Labuan entity conducting business activities not listed in 2021 Regulations will be subject to the domestic taxation i.e. Income Tax Act 1967 (“ITA”) at a rate of 24%. These entities are not eligible to be taxed under the Labuan Business Activity Tax Act (“LBATA”) at a rate of 3%.

High Court Ruling

Pursuant to the High Court decision on the case of Bright World Trading Co Ltd & Ors v Director General of Inland Revenue & Anor and applications dated 13 June 2022, which decision was later upheld by the Court of Appeal, it was held that Labuan entities carrying on business activities not under the scope of the 2021 Regulations were eligible to benefit from the 3% tax under the LBATA and were not required to comply with the Economic Substance Requirements (“ESR”).

Impact on Labuan entities

Moving forward, if your Labuan entity is carrying on Labuan trading activity that is not listed under the 2021 Regulations, your Labuan entity’s tax position is still assessed under the LBATA but without the need to comply with the ESR. However, if your Labuan entity is conducting any business activity listed under the 2021 Regulations, your Labuan entity is required to comply with the ESR for your Labuan entity to quality for either 0% or 3% tax rate.

Subject to the fulfilment of certain conditions, Labuan entities that did not participate in the judicial review may wish to challenge the IRB’s imposition for the higher tax paid based on the 2018 Regulations or for the period during which the 2021 Regulations purported to have retrospective effect. Labuan entities that have vested rights may apply to the Director General of the IRB to recover the excess tax paid. The application must be made within 5 years after the end of the year of assessment.

Practical Approach by the IRB on Operational Matter vis-à-vis Filing of Tax Return

Operationally, the current tax return form does not cater for business activities not listed in 2021 Regulations. However, Labuan entities are still able to file their tax return as normal, inter alia specifying no business code and an accompanying letter rationalising the successful  judicial review decision.

Contact us if you need more information about this matter.

If your Labuan entity is affected by the IRB’s action and the judicial reviews provide relief to you, we recommend that you first seek a legal advice before taking up challenge with the IRB. Contact us if you need a lawyer to advise and assist.

Disclaimer: Please note that our article is not a tax, legal or accounting advice. Readers should consult own tax, legal and accounting advisors before taking any action. This article has been prepared based on our own understanding of the present situation in connection with the judicial reviews affecting Labuan entities. Our article is for informational purposes only and is not to be relied upon as a professional opinion whatsoever.