Jurisdiction spotlight: Federal Territory of Labuan

Part eight of the Jurisdiction Spotlight series will focus on Labuan, which has grown significantly in the last couple of years.

Labuan is a rather complex offshore jurisdiction with cleverly written laws and tax codes. This post is by no means exhaustive, but should serve as a good primer on what is going on in Labuan.

First up, a brief history lesson.


LabuanLabuan enters history books in the 14th century when the Majapahit Empire fell and Labuan became a part of the Sultanate of Brunei.

Not a lot happened until 1846, when the British gained control over Labuan. The conditions for this cession are not well recorded, with some sources claiming it was an amicable exchange and others claiming the sultan of Brunei was under threat from the British.

The island was named Victoria under British rule and served as a naval base for combating piracy in the region. With coal exploitation proving successful in Labuan, the British saw potential in Labuan becoming an important hub similar to Singapore.

Although it never reached the size and importance of Singapore, Labuan remained a valuable asset under British rule, except for 1890 — 1906 when it was ruled by the North Borneo Company. In 1907 it became a part of the Straits Settlments, where it remained until it was captured by the Japanese Empire. The island changed name to Maida Island.

British and Australian forces liberated Labuan in June of 1945. The island remained under British military rule until 1946 when it became a colony.

The free port of Labuan opened in 1956, making the island duty free.

Labuan was granted independence in 1963. It then became a part of Sabah and joined Malaysia. This lasted until 1984 when Sabah ceded Labuan, which pronounced itself a federal territory of Malaysia, gaining greater independence.

On the 1st of October 1990, Labuan launched itself as an offshore financial center and free trade zone (FTZ).

Today, Labuan is a tourist attraction and growing financial center.

Overview Data

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Labuan Companies

There are two types of offshore companies in Labuan: trading company and non-trading (holding) company.

Both forms of companies are registered under the same law but different taxes, fees, and requirements apply depending on what the company is effectively doing; whether it’s just holding or if it’s actively trading.

There is a third category, called Labuan Charged Company. This is a company which opts to be taxed under federal Malaysian law, which grants access to Malaysia’s as of writing 73 DTAs; a rather impressive range, with good coverage of Europe and Asia.

Gradually, Labuan is becoming a favoured tax haven in Asia, for its combination of tax efficiency and reputability, owing to compliance with international standards on due diligence and transparency. Over 50% of all Labuan companies have owners from Southeast Asia and the Pacific, followed by 16% Far East, and then 13% European. The remaining is made up of owners from the Americas, Caribbean, Middle East, and Africa.

There are no public records of Labuan companies and the OECD in 2011 criticized Malaysia for time to time being unable to extract information from Labuan. This is likely to improve, since Malaysia seems to want Labuan to be a reputable offshore financial center.

Labuan Trading Company

Under the Labuan Business Activity Tax Act 1990, Labuan trading companies pay a tax of 3%, which is capped at 20,000 MYR per year. (As of writing, 100 MYR ≈ 23 EUR, 31 USD, 18 GBP.)  However, companies  cannot trade in the MYR currency. Share capital cannot be in MYR either. Any other currency is permitted, with USD being the by far most common.

Labuan companies are also limited in their trade with Malaysian resident persons and companies. A Labuan company cannot trade wholly with Malaysian residents, nor is it entirely prohibited from doing so. Trade with Malaysian residents must be reported to the Labuan FSA, but reporting need only be done after the transaction has taken place.

Annual fees are higher than most offshore jurisdiction. A foreign-owned Labuan company pays 5,300 MYR per year, whereas a locally controlled Labuan company only pays 2,600 MYR. In the grand scheme of things, this is not a particularly high amount. It does, however, prevent small or poorly funded companies from forming in Labuan. This is an intentional strategic move.

Trading companies must also have what’s called commercial substance physically in Labuan. This requirement can be fulfilled quite easily, by simply having a Labuan bank account, staff in Labuan, or annual board meeting in Labuan. It’s not a very difficult requirement to live up to and its purpose is likely to further filter out only the most serious entrepreneurs from setting up shop in Labuan. I know of companies that pass this requirement by utilizing a virtual office in Labuan to have a

Hiring staff to work for Labuan companies has an interesting quirk: employees must be at least 21 years old for IT positions and 27 years old for management positions.

Employees working for a Labuan trading company enjoy a significant tax reduction on their income of up to 50%.

Labuan companies must have at least one director and one resident secretary. While nearly always limited by shares, companies can opt to be limited by guarantee.

Companies are required to keep accounts and file annual returns. Audits, while not required, are commonly used, as they may be required to access certain tax benefits.

Labuan Non-Trading Company

Under Section 2 of the aforementioned Labuan Business Activity Tax Act 1990, Labuan non-trading company is a company which engages “an activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties by a Labuan entity on its own behalf” – effectively a holding company.

Section 9 states that “a Labuan entity carrying on a Labuan business activity which is a Labuan non-trading activity for the basis period for a year of assessment shall not be charged to tax for that year of assessment.”

If a a company engages in both trading and non-trading, it is considered a trading company. In such a situation, it would be wise to divide trading from non-trading into separate legal entities.

Labuan non-trading companies are otherwise nearly indistinguishable from trading companies.

Labuan Limited Liability Partnership

In February 2010, Labuan enacted a law which made Limited Liability Partnerships (LLP) possible.

The fees for forming an LLP are much lower than forming a company limited by shares.

At least two partners are required.

Labuan Trusts

Labuan trusts require a resident settlor, whose powers may be uncomfortably wide for some. The settlor is authorized to revoke, amend,  the trust.

The beneficiary must also be a Labuan person, but this can be a foreign-owned legal entity.

Trusts can be for a limited time or, if no time is stated, perpetual.

There is not much that separates Labuan trusts from trusts in other jurisdictions. It does not have the ironclad asset protection properties of for example Cook Island trusts.

They are commonly used for asset protection, wealth management, or as vehicles in tax structures.

Other Activities

There is a plethora of Other Activities available in Labuan.

  • Labuan leasing
  • Labuan foundation
  • Protected Cell Companies
  • Money brokering
  • Ship registry

Chances are that whatever your offshore financial itch is, Labuan has something to scratch it.

The Labuan FSA also issues licenses for a wide range of activities, such as banking and insurance.

Banking in Labuan

So far, although many hold bank accounts in Labuan to achieve commercial substance (see above) in Labuan, many if not most offshore companies in Labuan bank elsewhere; typically Hong Kong or Singapore.

There are presently 58 banks licensed in Labuan, of which many are either local Malaysians bank or investment banks. A large number of the banks are just branches of other banks with very little actual presence in Labuan. These banks mostly just open up a Labuan branch to offer Labuan-based services to their customers elsewhere.

Generally, banking in Labuan is quite poor due to the limited availability of banks. Things have however improved massively.

CIMB Bank Offshore, Maybank Offshore, KFH Offshore, and HSBC are some of the major banks active in the local markets.

Labuan banks are typically not interested in non-Labuan companies, although exceptions are sometimes made for companies from Hong Kong and Singapore.

Banking secrecy in Labuan is strict for now since the Malaysian federal government cannot access information. This may change in the future, but in general, Malaysia has quite rigorous banking secrecy.

Living in Labuan

Labuan is a small island yet well-connected to mainland Malaysia. There are also ferries, which connect Labuan with not only Malaysia but also Brunei.

While the island lacks sales tax (duty free), it is still quite expensive. An average Malaysian salary will not be enough to live comfortably in Labuan.

Forming a Labuan company can be an effective way to gain Malaysian residence permit. These programs tend to change from time to time, so check the Labuan or Malaysian government websites for up to date information.

Personal income tax is the same as in Malaysia and goes from 0% to 26%. However, as mentioned earlier, special provisions are made for personal income from Labuan companies.

Labuan is a very safe island, with little to no violent crime. Weather can be rough, as is typical for the region.

Final Words

If you are a serious entrepreneur with the capital to show it, looking to form a tax efficient trading or non-trading company, Labuan just be the right move for you, especially if you trade across Asia.

Banking is getting better all the time. With English being so well-spoken and commonly used, Labuan stands to take a strong third position in Asia for banking after Hong Kong and Singapore. The banks need to become more easy-going first.

It is a beautiful island, well worth a visit and – if you like it – stick around for a few years. I did get a bit of a claustrophobic feeling in Labuan, though, with only domestic flights. To get out of the country – other than by boat to Brunei – you have to fly via Malaysia.

Click here to see other posts in the Jurisdiction Spotlight series.

Further Reading

8 Comments on "Jurisdiction spotlight: Federal Territory of Labuan"

  1. Hi!

    Please help me if you can!

    I’m a resident of a European country. There are those British expat banks like HSBC Expat, Barclays International, Citi International, Natwest Offshore, Santander Offshore, etc. and all these banks are willing to open an account if you’re resident in certain countries they prefer but if you’re a resident in a country they’re not familiar with then you simply can’t open an account regardless of the size of your deposit – I asked them. So, a quick solution came to my mind. What if I would pay for a British residential address (in London) for a few hundred dollars a year and then I could say that that is my residential address and I could open an account with them. The address verification would be done by utilizing a nice little loophole identified by me. I would update my mailing address with my local onshore banks and they would send the statements to London therefore I would have a bank statement from Citibank for instance confirming my UK address. So it should work.

    The question is that, is there any problem / disadvantage using this trick? I do NOT want to hide any money nor I do NOT want to take any tax advantage by doing this since I would transfer TAXED money from my local onshore accounts to these accounts. I just simply want to have USD debit cards with foreign banks.

    The possible problem could be that the bank may report my balance to the UK authorities since they will think that I’m living there. What to do in that case? What if the HMRC asks me why I have not paid the taxes? Should I let them know the truth and say that I’ve never lived in the UK but I’m using that address because I want to do my banking needs with British banks and I do pay my taxes in my home country? Of course I can prove that I pay taxes in my home country so this cannot be a problem. Would I become a resident in the UK just because this trick or not? I’m not living there, I’ve been there once and I may visit London as a tourist once or twice a year in the future for a couple of days!

    My second question is that which structure is better by your opinion?

    – Panama private interest foundation where the founder is an offshore company owned by me, nominee council, I would be the beneficiary then this foundation would be the shareholder of an Antigua bearer shares company where I would be the director and I would open bank and brokerage accounts with this company


    – The same Antigua company where I would be the director but in this case it would be owned by a Samoa bearer shares company with nominee shareholder and nominee director

    Which is better in terms of secrecy? Even if the local authorities finds this structure how would they know that where to find the company’s bank and brokerage accounts? In the unlikely case if they say I benefit from this structure and I control this then they still don’t know where the assets are, right?

    Thank you in advance for your opinion! Your blog is extremely useful and it looks like you’re an expert in what you’re doing!

    • Hi David,

      Thanks for your comment!

      The question is that, is there any problem / disadvantage using this trick?

      Never lie to your bank. If the bank doesn’t want you as a client, chances are you don’t want to be their client. If they find out about your address being fake, you run the risk of the bank freezing the account and not opening it until a local court order says differently. That’s an unpleasant situation.

      I can’t really comment much on the tax aspect since that could be construed as tax advice. HMRC has an online test you can take to estimate whether you are liable for UK income tax. Head over to http://www.hmrc.gov.uk/individuals/ for more information about that. You probably won’t be as long as you don’t live there.

      My second question is that which structure is better by your opinion?

      Both structures are solid from a secrecy point of view, but I think you overestimate the secrecy you will obtain. Even if you use a Samoa bearer shares company to own the Antiguan company, Antiguan authorities are supposed to have know the UBO anyway. Now, Antigua is one of the those jurisdictions with unspoken but very much willful non-compliance when it comes to UBO declaration, so odds are they won’t. They will instead defer to Samoa and claim that they can rely on SIFA to know your identity. SIFA tends to do a better job than its Antiguan counterpart when it comes to compliance, but they can’t act without an EOI mechanism in place.

      Now, Samoa doesn’t allow mobile bearer shares any more and bearer shares must be held with a custodian, who will know on whose behalf he is holding the shares. I’m not sure you would be able to find a nominee to act as the share holder, at least not without disclosing your identity to both the nominee and the custodian. And if you do that, there are no benefits to using the bearer shares anyway.

      So let’s assume someone wants to penetrate your Panamanian PIF owned by an Antiguan IBC owned by a Samoan IBC. Anyone who isn’t law enforcement or an FIU or tax authority with an EOI mechanism in place isn’t going to find anything out that you haven’t made public yourself (usually the first weak link in any secrecy structure). It then comes down to what EOI mechanisms (TIEA, DTA, other) are in place and whether the FSCs and FIUs in the three jurisdictions have done their jobs.

      However, as the only named natural person in either structure, in any criminal investigation, you will be considered the UBO. You may even find yourself in a situation with reverse burden of proof (varies enormously between and even within jurisdictions), where you are presumed guilty until proven innocent. Secrecy doesn’t help you then. In fact, it can be a problem. But since we assume that you will be doing everything legal, pay all due taxes, and make proper declarations, it is quite unlikely that you will ever become interesting enough for anyone to investigate let alone prosecute.

      No matter that, though, a problem you’ll face is that your structure veritably oozes of tax evasion, money laundering, and other criminal activities. You may find it challenging to open a bank account or even brokerage account. The paperwork you’ll need to go through will be rigorous, to say the least.

      And that’s not accounting for the large costs of setting something like this up.

      • Hi!

        Thank you for the response!
        Okay, now I do understand why did you mention in many of your posts that there’s no ‘real’ secrecy if the authorities wants to find the UBO.

        Is there any way to really hide myself in a structure? Any structure where I could act as a manager / director but not as the UBO? Where I could hide that I created the structure? Is it possible to separate myself from the structure totally if for instance I would never withdraw any money from those accounts? I would never touch that money as long as I’m living in Europe. It would be my ‘pension fund’. I would manage the structure and the investments in it but I would not be the owner or at least it would be impossible to say so!? And if I would decide to withdraw my money in the future then I would move to a tax haven like Dubai.

        So is there any method to really, really hide myself? I don’t even want to reveal to the banks that I’m the UBO! I want to act as a manager / director and don’t want anyone else to know that I’m the UBO.

        Thank you in advance!

        • Hiding yourself as the UBO is not possible. However, what you can do is to not be the UBO. This can (sometimes) be achieved through using for example trusts or trust-like entities (like the Samoan SPIC), with the beneficiary being a nominee or a legal entity. These type of structures tend to be pointless for the average person, though, since virtually no bank will touch you unless you bring millions into a wealth management account and/or know senior staff at the bank. That is if the set-up and maintenance costs aren’t prohibitive enough on their own.

          You can most likely not achieve the secrecy you seek, I’m afraid. You can spin a very secretive web of offshore entities that would be very difficult for even a dedicated adversary to unwind, but there will always be weak links. Secrecy can in and of itself be a weak link. Having connections to some of these jurisdictions may on its own be a trigger for someone to investigate you. To make matters worse, the more complex your structure is, the more egregious your crime may appear in the eyes of the courts. For example, having a BVI BC and forgetting (“forgetting”) to pay tax tends to be seen as less serious than a Panamanian PIF owned by an IBC owned by an IBC not paying tax. This varies hugely internationally, though.

          Additionally, it’s not always through EOI mechanisms that tax cheats and money launderers are caught. Often it is things like unsecured emails, phone logs, financial behaviour, physical bank statements, and other such auxiliary evidence that is used. Legislation is catching up with these crimes, with reverse burden of proof in some cases and intent (to commit tax fraud/money laundering) alone sometimes being enough to get a conviction.

        • It is technically possible using a trust structure to keep yourself off any bank documents however, the trustee would typically have absolute control and would know who you are. In other words you enter into this challenge where the question becomes do you have someone you can trust to cover for you? And if you do then why go through all the trouble of the complex structure when something much simpler is possible?

          More importantly, why would you want to? When the Swiss banks settled with the IRS last year agreeing to hand over a percentage of the total value in undeclared accounts there was a lesson there. Better off to legitimately structure your finances to be able to declare them and still be ok than to rely on secrecy to hopefully protect you from crime. This takes a lot more work up front so a lot of people would prefer to be lazy but if there’s any amount of money involved it’s relatively cheap insurance. If the purpose is asset protection there are typically better mechanisms than secrecy that will do a substantially effective job of protecting you, particularly if you’re willing to leave your country.

          Very often people conceive fantasies about what they need or would like to have but it’s purposeless.

  2. The problem with Labuan is that while it’s reputation may be fine for opening a bank account, it’s terrible otherwise because it doesn’t exist to do anything else besides providing offshore services.

    So for example, a tax authority see that you have money going and in an out of a Labuan company…pretty suspicious…he is going to think…if he doesn’t have anything to hide…why doesn’t he incorporate in Singapore if he is really doing business in Southeast Asia?

    Is incorporating Malaysia difficult or something? I don’t see why you can’t just incorporate in Malaysia. The lower annual fee should make up for any additional costs.

    • Forming a company in Malaysia is in and of itself not a difficult process. It’s supposedly the 16th easiest in the world. However, there are requirements such as directors (of which there must be at least two) having Malaysian addresses; not necessarily residences, though, as far as I understand. The compliance aspect is generally more encompassing. This can be a pro or a con, depending on how you look at it.

      If you can fulfill the compliance requirements for a Malaysian company, the recurring costs are typically lower than Labuan. You can outsource things like bookkeeping for far less.

      Comparing Malaysia with Labuan is not quite a fair apples-to-apples comparison. They both serve their own purpose. For a small company, neither is likely the right choice. Hong Kong is probably a better candidate in a large number of cases.

      Now, about your tax authority finding Labuan suspicious – this is correct, to a degree. Labuan falls somewhere between reputable jurisdictions like Singapore and Hong Kong and irreputable ones like Vanuatu and Seychelles. Labuan has been lauded for its stringent controls to prevent for example money laundering. In the eyes of many FIUs and tax authorities, it’s tolerated much the same way FTZs are. There is enough legitimate usage of them to not automatically associate them with illegitimate activities.

      • The fairly unique thing about Labuan as compared with most similar very low tax jurisdictions is typically if you look at places I’d deem somewhat similar from a tax/reputation standpoint:

        – Isle of Man
        – Channel Islands
        – Barbados

        Labuan has access to many of the Malaysian tax treaties, which is very unusual. As a general rule jurisdictions without taxes don’t have DTAs with foreign jurisdictions and can often be penalized for it. In cases where you can get favorable tax regimes via non-resident entities generally the non-resident status excludes it from the benefits of the treaty (for example in the case of Cyprus where zero tax status can be achieved via non-resident status but this eliminates the use of the Cyprus tax treaties). In this regard Labuan is fairly unique with few similar jurisdictions (Malta has some similar advantages depending on what you’re trying to achieve) able to achieve both nearly zero tax and tax advantage of a reasonable network of tax treaties. Generally, the alternatives require very careful structuring of the income types, often involve moving through more cumbersome jurisdictions sometimes with much greater limitations, or moving through jurisdictions with territorial tax systems (sometimes acceptable and sometimes not).

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