There are two corporate tax legislations in Malaysia, Labuan included, namely the Income Tax Act, 1967 (“ITA”) and the Labuan Business Activity Tax Act 1990 (“LBATA”).
Income Tax Act, 1967 (“ITA”)
The ITA mainly applies to all domestic business entities in Malaysia, ranging from sole proprietorships, partnerships, private limited companies (Sdn Bhd) and public listed companies. Similar to tax computation in other jurisdictions like Hong Kong and Singapore, in general, the corporate income tax is imposed on income accruing in or derived in Malaysia. The current headline tax rate is 24% for resident company. SMEs qualify for concessionary corporate tax rates in the form of a progressive, tiered tax structure, typically ranging from 15 to 17%.
For non-resident companies, a fixed 24% corporate tax applies and a non-resident status is deemed for a company with more than 50% shareholding owned by foreigners. It is also worthwhile to understand residency may also affect availability of certain tax reliefs, access to treaty benefits as well as certain tax exemptions and incentives. Under the ITA, withholding tax is applicable on certain payments, particularly payment to non-residents, with tax ranging from 10% to 15%.
Labuan Business Activity Tax Act 1990 (“LBATA”)
The LBATA is an independent piece of legislation which was introduced at the same time as Labuan Companies Act in 1990. LBATA was designed specifically for Labuan when it became an international financial services centre, granting the Labuan entities to benefit from low tax rates. The intention of this tax framework was purposefully made simple and to attract businesses to set up in the island.
In early 2019, the Labuan tax regulations had undergone critical changes, most notably where a Labuan company is not automatically eligible to pay tax under the LBATA. If the business activity falls under the trading category as listed in the Schedule, the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 , your Labuan company is entitled to pay 3% tax on net audited profit provided that the economic substance requirements (ESR) are complied with.
The mechanics of tax calculation under the LBATA is straightforward, tax rate is applied direct on the audited accounting profits/loss. Unlike the common tax computation in other jurisdictions such as Hong Kong, Singapore and Malaysia (domestic), LBATA does not recognise ‘taxable/non-taxable income’, ‘deductible/non-deductible expenses’ or ‘realised/unrealised gain or losses’. It simply assesses tax based on the company’s ability to meet the economic substance, and the tax calculation is based on the net audited profit/loss reflected in the audited financial statements.
The Difference between ITA and LBATA
Here’s what you need to know on the main differences between the two tax legislations. Mind you, both can be applied to a Labuan company, depending on the type of business activity it is carried on.
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 |
Get in touch with us if you wish to get more insights of the Labuan tax regulations and explore how you can benefit from the low tax rates using a Labuan company.
Please note that this write-up is not a tax, legal or accounting advice. Readers should consult own tax, legal and accounting advisors before engaging us. This write-up has been prepared for informational purposes only and is not to be relied upon as a professional opinion whatsoever. Please note that whilst considerable care has been taken to ensure the information contained within this write-up 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 document is based on our present understanding of the current laws and regulations and may therefore be subject to change without notice.
