Labuan company vs Sdn Bhd in 2026: costs, tax, substance rules and who each one suits

The short answer. A Labuan company is incorporated under the Labuan Companies Act 1990 in the Federal Territory of Labuan, an island off Sabah that the government runs as an international business centre (Labuan IBFC). Its profits from trading activities are taxed at 3% of the audited net profit, and profits from holding investments are not charged to tax. Both apply only if the company meets “substance” rules: a minimum number of full-time employees working in Labuan and a minimum yearly spending in Labuan, set activity by activity. If it falls short, the rate is 24% (Labuan Business Activity Tax Act 1990, as at 1 January 2026, sections 2B, 4 and 9, checked 29 Oct 2026). For a typical services company, the floor is two full-time employees and RM50,000 of yearly spending in Labuan (LHDN guideline, 10 Dec 2025). Since 1 July 2026, the Labuan Financial Services Authority (Labuan FSA) charges its fees in US dollars: USD 300 to USD 1,500 to register a company, depending on paid-up capital, and USD 1,000 a year (P.U.(A) 241/2026). A Labuan company may deal with Malaysian residents, but not in ringgit, apart from narrow exceptions. A business that sells to Malaysian customers in ringgit is usually set up as a Sdn Bhd, which our company incorporation guide covers step by step.

A note on sources: we read the updated text of the Labuan Business Activity Tax Act (LBATA), the Labuan Companies Act, the 2025 amending Act, the 2026 fee regulations, two guidelines from the Inland Revenue Board (LHDN) and Labuan FSA’s FAQs and circulars, between 28 and 29 October 2026. The fee regulations of 2026 are scanned images; we read the figures from the gazette pages. Where a point rests on a secondary source, the text names it. This page describes the rules. It is not tax or legal advice.

What Labuan IBFC is

Labuan is a federal territory of Malaysia. Since 1990 it has had its own corporate and tax laws for international business, supervised by Labuan FSA. Malaysia’s ordinary company law (Companies Act 2016, administered by SSM) and its ordinary income tax law (Income Tax Act 1967, administered by LHDN) apply to Sdn Bhds. Labuan entities follow separate laws:

• the Labuan Companies Act 1990 (Act 441) for incorporation and governance;
• the Labuan Business Activity Tax Act 1990 (Act 445) for tax, collected by LHDN;
• the Labuan Financial Services and Securities Act 2010 (Act 704) for licensed activities.

Every Labuan company is formed and served through a Labuan trust company, a firm licensed by Labuan FSA. Documents are lodged with Labuan FSA through it (Labuan Companies Act 1990, s.9), and Labuan FSA’s FAQ states that “incorporation of a Labuan company in Labuan IBFC must be done through a Labuan trust company” (Labuan FSA, Labuan companies FAQ, Q1). We do not recommend any firm.

The legal forms

The LBATA Schedule lists the “Labuan entities” that can use the Labuan tax regime. For a private business owner, the three most common are:

Sources: P.U.(A) 241/2026, P.U.(A) 239/2026, P.U.(A) 242/2026, all gazetted 30 June 2026 and in force on 1 July 2026.

A foreign company can also register a presence in Labuan as a foreign Labuan company (USD 2,500 to register, USD 2,500 a year, same regulations). The Schedule also lists Labuan trusts and Islamic variants of each form. This guide focuses on the Labuan company.

Trading and non-trading activities

The LBATA splits what a Labuan entity does into two groups (LBATA, s.2):

• Non-trading activity: holding investments, such as shares and securities, or property located in Labuan, on the entity’s own account. LHDN reads “property” as land and buildings in Labuan only: a Labuan company that holds property elsewhere is taxed on it under the ordinary Income Tax Act (LHDN guideline, para. 4.2).
• Trading activity: everything else, including trading, management and licensing. The Act’s list also includes regulated financial activities, which need their own Labuan FSA licence and are not covered here.

A company that does both is treated as a trading company (s.2(2)). Two kinds of income stay outside the Labuan regime whatever the activity: royalties and other income from intellectual property, taxed under the Income Tax Act (s.4(3)-(4)), and income from any activity that is not a Labuan business activity (s.2(3)).

LHDN adds that a Labuan entity carrying on a trading activity “holds a valid and effective operating licence” from Labuan FSA (LHDN guideline, para. 2.2). The services listed under item 20 of the substance schedule below are the usual route for a non-financial business. General trading in goods is not named in that schedule.

The tax regime in 2026

The election under section 3A is still in the Act as at 1 January 2026. It must be filed within three months of the start of the basis period and cannot be reversed.

Filing. Every Labuan entity, trading or not, files a return of profits within seven months of the end of its accounting period, electronically (LBATA s.5 and s.10). The tax base is “the net profits as reflected in the audited accounts”, which means an audit is needed in practice even where company law does not require one (see below).

Large groups. For a Labuan entity that belongs to a multinational group with revenue of EUR 750 million or more, Malaysia’s global minimum tax rules (Part XI of the Income Tax Act) also apply (LBATA s.3(2)).

Substance: staff and spending, activity by activity

The LBATA requires an “adequate number of full time employees in Labuan” and an “adequate amount of annual operating expenditure in Labuan” (s.2B(1)(b)). The figures are set in the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021, P.U.(A) 423/2021, reproduced by LHDN in its guideline of 10 December 2025:

Sources: LHDN, Labuan trading and non-trading activity guideline, 10 Dec 2025, paras 3.3 and 4.4; commodity trading: Labuan FSA, Commodity trading FAQ, Q4 and Q16. The schedule also sets figures for banking, insurance, leasing, fund and other licensed financial activities, which we do not list.

For pure equity holding, “control and management in Labuan” means, under the 2021 regulations (P.U.(A) 423/2021, in force on this point since 1 January 2021): at least one board meeting a year in Labuan, the registered office in Labuan, a secretary resident in Labuan, and the accounting and business records, board minutes included, kept in Labuan, as summarised by the law firm Skrine (November 2021) and by Tricor Insights (March 2022).

Who counts as an employee (from 2025). Amending regulations of September 2025 (P.U.(A) 325/2025) require the employees to be “fit and proper”. LHDN’s guideline of 5 November 2025 explains what that means (LHDN, Substance requirements for fit and proper full-time employees):

• the employee does office work relevant to the activity: director, manager, secretary, accounting or administrative clerk. A cleaner, a receptionist or a despatch clerk does not count;
• the employee has the qualifications and experience for the role, and no conflict of interest;
• the employee has a contract of service with the Labuan entity itself. Staff supplied through an agency or outsourcing do not count;
• the employee works physically in Labuan throughout the year, which can be shown with time sheets or attendance records;
• group companies may share an office, but each must have its own employees.

An entity that fails these tests loses the 3% rate or the exemption and is taxed at 24% for that year.

Capital

Company law requires at least one share and sets no minimum capital (Labuan FSA FAQ, Q10). Paid-up capital still matters in three places:

• the registration fee, which rises from USD 300 to USD 600 above RM50,000 of paid-up capital, and to USD 1,500 above RM1 million;
• work permits: a non-licensed Labuan entity needs RM250,000 of paid-up capital to apply for one (Labuan FSA, FAQs on work permit applications, Q3);
• licensed activities, which have their own capital rules.

Currency of shares. Until 2025, the Act required share prices and values to be “expressed in a currency other than ringgit”. The Labuan Companies (Amendment) Act 2025 (Act A1756, gazetted 22 April 2025) replaced this with “expressed in any currency” (Act A1756, s.2). The amending Act has no separate commencement clause. Labuan FSA’s FAQ has not been updated and still says shares may be in any currency “except Malaysian Ringgit”.

What the company must have and file

Audit. Under the Labuan Companies Act, a Labuan company does not have to appoint an auditor unless another Labuan law, its own articles or a public offer of securities requires it, and Labuan FSA can still order audited accounts (s.113). The tax law, however, computes the 3% tax, the exemption and the 24% fallback on “the net profits as reflected in the audited accounts” (LBATA s.2B(1B), s.4(2), s.10(3)). A company using the Labuan tax regime therefore needs audited accounts each year.

The annual return and audited accounts are lodged with Labuan FSA free of charge (P.U.(A) 241/2026, items 19 and 39). Trust company, auditor, office and staff costs are market prices and are not listed here.

What a Labuan company cannot do with Malaysian residents or in ringgit

Section 7 of the Labuan Companies Act sets the limits. It was not changed by the 2025 amending Act.

• It must operate in, from or through Labuan (s.7(1)).
• It may do business with Malaysian residents (s.7(2)), but must notify Labuan FSA of each transaction with a resident within ten working days (s.7(5)). Routine contacts are exempt from notice: paying Malaysian lawyers, accountants or the trust company, keeping books or holding board meetings in Malaysia, leasing an office or staff housing, or having a Malaysian resident as shareholder (s.7(6)).
• It may not carry on business in ringgit (s.7(4)), except to pay its administrative and statutory expenses, to hold investments in a Malaysian company, to pay the professionals listed above, and for activities licensed under the Labuan financial services laws.
• It may not offer its shares to residents in Malaysia outside Labuan unless securities law is complied with (s.7(3)).

In practice, this means a Labuan company invoicing Malaysian consumers or businesses in ringgit falls outside what the Act allows. A Malaysian customer paying a Labuan company in a foreign currency is allowed, subject to the notice rule.

The customer’s side. Since 2019, the Income Tax Act 1967 (section 39(1)(r)) has limited the tax deduction a Malaysian-resident business can claim for payments to a Labuan entity: under rules issued in December 2018, 97% of most payments are not deductible. According to Tricor Insights (March 2022) and KPMG (November 2021), the Income Tax (Exemption) (No. 11) Order 2021, gazetted on 23 November 2021, lifts the limit for some payments. A Malaysian customer may therefore see a Labuan supplier as more costly than a Sdn Bhd one.

Employment Passes for Labuan companies

Foreign staff of a Labuan entity apply through Labuan FSA, which recommends the application to the Immigration Department. Labuan FSA’s guidelines set a minimum salary of RM10,000 a month. After the Home Ministry raised Employment Pass salary floors on 1 June 2026, Labuan FSA confirmed that this RM10,000 threshold “remains within the salary range” and qualifies for an Employment Pass. All three categories may now bring dependants (Labuan FSA, Circular 337/2026/ALL, 11 June 2026). A non-licensed entity needs RM250,000 of paid-up capital, and the holder’s office address in Labuan must be notified to Labuan FSA within 30 working days of approval (Labuan FSA work permit FAQ).

Labuan company vs Sdn Bhd

Sdn Bhd figures come from our incorporation guide, which gives their sources. The SME tiers apply from year of assessment 2023 to companies with paid-up capital of up to RM2.5 million and gross business income of up to RM50 million; since year of assessment 2024, a company does not qualify if more than 20% of its paid-up capital is held, directly or indirectly, by a company incorporated outside Malaysia or by a non-citizen (LHDN, Public Ruling 8/2025, 22 December 2025).

Who each one tends to suit

These are descriptions of how the two regimes are built, not recommendations.

• A Labuan company fits activities run from Labuan for clients outside Malaysia, invoiced in foreign currency, with real staff and an office on the island. The substance floors are low for services (two employees, RM50,000 a year), and the official fees are modest. It also fits holding shares, where the floor is RM20,000 of yearly spending in Labuan and control and management on the island.
• A Sdn Bhd fits a business that sells in Malaysia, in ringgit, needs local licences, or wants to operate from Kuala Lumpur, Penang or Johor without staff in Labuan. It pays the ordinary company tax rate.
• A Labuan company without staff or spending in Labuan pays 24% on its audited profit, the same headline rate as a Sdn Bhd, with an audit and Labuan FSA fees on top.

US citizens and green-card holders

US persons who own a foreign company face separate US rules, such as the controlled foreign corporation (CFC) regime and the US tax on a CFC’s tested income, called GILTI until 2025 and renamed “net CFC tested income” (NCTI) for tax years beginning after 31 December 2025 under Public Law 119-21 (26 U.S.C. § 951A and its amendment notes, read 29 Oct 2026). These rules can apply whatever the Malaysian rate. We do not analyse them here: see a US tax adviser.

FAQ

Is the Labuan tax rate really 3%? Yes, on the audited net profit from a Labuan trading activity, if the company meets the staff and spending floors for its activity for the whole year. If it does not, the rate is 24% (LBATA s.4 and s.2B(1A)).

Can a foreigner own 100% of a Labuan company? The Labuan Companies Act requires one shareholder, who can be an individual or a company, and sets no nationality rule. Labuan FSA’s FAQ describes the same. Licensed activities have their own conditions.

Can a Labuan company sell to Malaysian customers? Yes, but not in ringgit, apart from narrow exceptions, and each transaction with a resident must be notified to Labuan FSA within ten working days (Labuan Companies Act, s.7).

Do I have to live in Labuan? The owner does not. But the 3% rate needs full-time employees who work physically in Labuan, with a contract with the company itself, and the registered office and resident secretary are at a Labuan trust company.

How much does Labuan FSA charge? Since 1 July 2026: USD 30 to reserve a name, USD 300 to USD 1,500 to register (by paid-up capital), and USD 1,000 a year (P.U.(A) 241/2026).

Can I hold shares in other companies through a Labuan company? Yes. Pure equity holding is a non-trading activity, not charged to tax if the company spends at least RM20,000 a year in Labuan and is controlled and managed there. No employee floor applies to it.

What we do not cover

• Banking, insurance, leasing, credit, fund and other licensed financial activities in Labuan.
• Tax treaties and how other countries tax a Labuan company or its owners.
• Trusts, Islamic variants of each form, and the redomiciliation of foreign companies.
• US, EU or other home-country rules on foreign companies, beyond the short note above.
• Company secretarial, trust company, audit, office and staff costs.
• Opening an account for the company.

This guide describes official rules as published on the dates shown. It is not legal or tax advice. For a decision, check the current text with Labuan FSA or LHDN, or with a licensed professional.