Introduction
Labuan tax treatment covers more than just business profits. Companies and individuals dealing with Labuan entities need to understand how dividend income, capital gains, payments, incentives, and exemptions are treated under the Labuan Business Activity Tax Act (LBATA) and the Income Tax Act 1967 (ITA). This guide explains the key rules to ensure compliance with Malaysia’s tax framework.
Treatment of Income Received (Other Than Business Income)
Dividend Income
- Dividends from a local company → exempt (single-tier system).
- Dividends from a foreign company or Labuan non-trading company:
- If recipient Labuan entity only conducts non-trading activity → dividend is not taxable.
- If recipient Labuan entity also conducts trading activity → dividend is taxable at 3%.
Capital Gains
- For non-trading entities → not taxable.
- For trading entities → taxable at 3%.
Interest / Royalty / Other Profits
- Payments from a Malaysian tax resident to a Labuan entity → no withholding tax (WHT) since Labuan entities are treated as Malaysian residents under ITA.
- Payments between Malaysian tax residents → also no WHT.
Treatment of Payments Made by a Labuan Entity
Interest, Royalty, Technical Fees
- Payments to non-residents are exempt from WHT under Section 4A ITA.
Rental of Movable Property
- Exempt from WHT if:
- Labuan entity carries on a licensed/approved leasing business in Labuan.
- 10% WHT applies if:
- The leasing business is not licensed/approved, or
- Rental is paid to another Labuan entity.
Indirect Tax
- Labuan has free-port status → no sales tax, no service tax.
- Exceptions:
- 10% sales tax on manufactured goods sold to other parts of Malaysia.
- 6% / 8% service tax if a Labuan entity provides taxable services to Malaysia or vice versa.
Stamp Duty
- Exempt for all instruments executed by a Labuan entity in connection with its business activity.
Non-Deduction of Payments to Labuan Companies
From 1 January 2019, Malaysian tax residents face deduction limits under ITA [PU(A) 375/2018]:
- Interest payments: only 75% deductible (25% disallowed).
- Lease payments: only 75% deductible.
- Other payments (IP, shipping, etc.): only 3% deductible (97% disallowed).
Exceptions (full deduction allowed)
- Transactions with Labuan International Commodity Trading Companies (LICTC).
- Transactions with Labuan entities electing ITA 1967 taxation.
- Transactions between ITA-elected Labuan entities and LBATA entities.
📌 Objective: Prevent tax avoidance via Labuan structures.
Individual Incentives in Labuan
| Exemption Type | Explanation |
| Qualifying Professional Service | 65% income tax exemption on services (legal, accounting, financial, secretarial) provided in Labuan to a Labuan entity. |
| Non-Citizens – Directors | 100% exemption on director’s fees from Labuan entities. |
| Non-Citizens – Managers | 50% exemption on employment income from managerial roles in Labuan or co-located offices. |
| Citizens – Employees | 50% exemption on gross housing & Labuan Territory allowance. |
| Other Income (s4f ITA) | Exemption for non-residents receiving certain gains or profits from Labuan entities. |
Key Takeaways
- Dividend & capital gains: taxable only if trading activities are involved.
- Payments by Labuan entities: most exempt from WHT, with exceptions.
- Non-deduction rules: significant restrictions for Malaysian residents paying Labuan entities.
- Individuals in Labuan: enjoy attractive income tax exemptions.
ANC Group – Your Personal Tax Advisor
Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.
Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.
ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.
We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.
If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.
