On 10 December 2025, the Director General of Inland Revenue issued the Guideline – Labuan Trading Activity and Labuan Non-Trading Activity to provide clarification on the definition of Labuan trading activity and Labuan non-trading activity (“Guideline”) as prescribed under the Labuan Business Activity Tax Act 1990 (“LBATA”).
Labuan Business Activity
Section 2 of the Guideline provides an overview of “Labuan Business Activity”. In summary:
Under the LBATA, a Labuan entity must satisfy the relevant substance requirements for the basis period for a year of assessment (“
YA”) as set out in the First Schedule of the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 [P.U.(A) 423/2021] (“
2021 Regulations”), which is reproduced in Table 1 below, to be eligible for tax on the chargeable profits (excluding any income derived from royalties and other income derived from intellectual property rights) from its Labuan trading activity at the rate of 3%.
TABLE 1
| No. |
Labuan Trading Activity |
Minimum Number of Full-Time Employees in Labuan |
Minimum Amount of Annual Operating Expenditure in Labuan
(RM) |
| 1. |
Labuan insurer, Labuan reinsurer, Labuan takaful operator or Labuan retakaful operator |
3 |
200,000 |
| 2. |
Labuan underwriting manager or Labuan underwriting takaful manager |
4 |
100,000 |
| 3. |
Labuan insurance manager or Labuan takaful manager |
4 |
100,000 |
| 4. |
Labuan insurance broker or Labuan takaful broker |
2 |
100,000 |
| 5. |
Labuan captive insurer or Labuan captive takaful-
(a) Labuan first party captive insurer or Labuan first party captive takaful; or
(b) Labuan third party captive insurer or Labuan third party captive takaful |
2
3 |
100,000
100,000 |
| 6. |
Labuan bank, Labuan investment bank, Labuan Islamic bank or Labuan Islamic investment bank |
3 |
200,000 |
| 7. |
Labuan trust company |
3 |
120,000 |
| 8. |
Labuan leasing company or Labuan Islamic leasing company which has-
(a) not more than 10 related Labuan leasing companies or Labuan Islamic leasing companies; |
2 for each group of companies |
100,000 for each Labuan leasing company or Labuan Islamic leasing company |
| |
(b) 11 to 20 related Labuan leasing companies or Labuan Islamic leasing companies; |
3 for each group of companies |
100,000 for each Labuan leasing company or Labuan Islamic leasing company |
| |
(c) 21 to 30 related Labuan leasing companies or Labuan Islamic leasing companies; or
|
4 for each group of companies |
100,000 for each Labuan leasing company or Labuan Islamic leasing company |
| |
(d) more than 30 related Labuan leasing companies or Labuan Islamic leasing companies |
1 additional employee for each group of companies for each increase of 10 related Labuan leasing companies or Labuan Islamic leasing companies |
100,000 for each Labuan leasing company or Labuan Islamic leasing company |
| 9. |
Labuan credit token company or Labuan Islamic credit token company |
2 |
100,000 |
| 10. |
Labuan development finance company or Labuan Islamic development finance company |
2 |
100,000 |
| 11. |
Labuan building credit company or Labuan Islamic building credit company |
2 |
100,000 |
| 12. |
Labuan factoring company or Labuan Islamic factoring company |
2 |
100,000 |
| 13. |
Labuan money broker or Labuan Islamic money broker |
2 |
100,000 |
| 14. |
Labuan fund manager |
2 |
100,000 |
| 15. |
Labuan securities licensee or Labuan Islamic securities licensee |
2 |
100,000 |
| 16. |
Labuan fund administrator |
2 |
100,000 |
| 17. |
Labuan company management |
2 |
100,000 |
| 18. |
Labuan International Financial Exchange |
2 |
120,000 |
| 19. |
Self-regulatory organisation or Islamic self-regulation organisation |
2 |
120,000 |
| 20. |
Labuan entity that carries on any one or more of the following business activity:
| (a) |
administrative services; |
| (b) |
accounting services; |
| (c) |
legal services; |
| (d) |
backroom processing services; |
| (e) |
payroll services; |
| (f) |
talent management services; |
| (g) |
agency services; |
| (h) |
insolvency related services; |
| (i) |
management services other than Labuan company management under item 17 |
|
2 |
50,000 |
A Labuan entity that does not fulfil the substance requirements in the First Schedule of the 2021 Regulations will be subject to tax on its chargeable profits at the rate of 24% under the LBATA for the relevant YA.
Labuan Non-Trading Activity
A Labuan non-trading activity means an activity relating to the holding by a Labuan entity on its own behalf of investments in:
- securities;
- stocks;
- shares;
- loans;
- deposits; or
- any other property located in Labuan.
Paragraph 4.2 of the Guideline clarifies that “other property” refers to immovable property comprising lands and buildings located within the boundaries/ territory of Labuan. If a Labuan entity derives income from the holding of investment in immovable property located outside Labuan, such investment holding activity is not a Labuan business activity and is subject to taxation under the Income Tax Act 1967.
To qualify for tax at 0% on the chargeable income derived from a Labuan non-trading activity in any basis period for a YA (excluding any income derived from royalties and other income derived from intellectual property rights), a Labuan entity must satisfy the substance requirements set out in the Second Schedule of the 2021 Regulations, which is reproduced in Table 2 below.
| No. |
Labuan Non-Trading Activity |
Minimum Number of Full-Time Employees in Labuan |
Minimum Amount of Annual Operating Expenditure in Labuan
(RM) |
| 1. |
Investment holding activity other than pure equity holding activity |
1 |
20,000 |
| 2. |
Pure equity holding activity
i.e. holding of equity and deriving income solely in the form of dividends and capital gains |
Exempted |
20,000 |
A Labuan entity that does not fulfil the substance requirements in the Second Schedule of the 2021 Regulations in respect of its Labuan non-trading activity will be subject to tax on its chargeable profits at the rate of 24% under the LBATA for the relevant YA.
Entity carrying on both Labuan trading activity and Labuan non-trading activity
A Labuan entity that carries on both a Labuan trading activity and a Labuan non-trading activity shall be deemed to be carrying on a Labuan trading activity (section 2(2) LBATA). Such entity will only be required to fulfil the substance requirements applicable to its Labuan trading activity.
Where a Labuan entity carries on more than one Labuan trading activity as well as a Labuan non-trading activity within a basis period for a YA, the substance requirements for the Labuan non-trading activity shall follow the substance requirements of the Labuan trading activity that is the core income generating activity (“CIGA”) of the Labuan entity. At the same time, each Labuan trading activity carried on by the Labuan entity shall comply with the relevant substance requirements prescribed in the First Schedule of the 2021 Regulations (section 2B(1)(b)(i) LBATA).
CIGA is identified by determining the primary trading activity that generates the core income, namely the activity that contributes the most to the Labuan entity’s income or has the most significant economic impact on the Labuan entity. The determination of CIGA is to be based on the actual facts and circumstances of the business, including the main source of income as well as the amount of time and resources (such as employees, costs, management and others) allocated to each activity.
Failure to meet the substance requirements for each Labuan trading activity as prescribed, shall result in the Labuan entity being taxed at the rate of 24% for that YA (section 2B(1A) LBATA).
Example 5 of the Guideline explains how the Guideline operates when a Labuan Entity carries on more than one Labuan trading activity as well as a Labuan non-trading activity.
A Labuan entity (“X”) carries on the Labuan business activities described in Table 3.
Table 3
| Labuan business activity |
Number of Full-Time Employees in Labuan |
Annual Operating Expenditure in Labuan
(RM) |
| Labuan trading activities |
Fund manager – CIGA |
2 |
120,000 |
| Accounting services |
2 |
55,000 |
| Labuan non-trading activities |
Holding of securities |
0 |
10,000 |
Based on Table 3:
- X carries on both Labuan trading and Labuan non-trading activities. Therefore, X is deemed to be carrying on a Labuan trading activity under section 2(2) of the LBATA.
- X has complied with the substance requirements for its Labuan trading activities prescribed under items 14 and 20(b) of Table 1. As X carries on Labuan trading activities, it is also required to comply with the substance requirements of the Labuan trading activity that is identified as the CIGA in respect of its Labuan non-trading activity (instead of the substance requirement in Table 2.
- As X has fulfilled all the substance requirements, the company is taxed at the rate of 3% on the net profit reported in the audited accounts.
Comments
The Guideline provides helpful guidance as to the manner in which a Labuan entity is to determine the substance requirements when it carries on more than one Labuan trading activity as well as a Labuan non-trading activity. It also serves as a convenient single source of reference that sets out the legal requirements pertaining to tax payable by a Labuan entity on the chargeable income derived from its Labuan business activity. With the increasing interest of investment funds set up in Labuan by international institutions, this enhanced clarity is much welcomed and timely to accelerate economic growth in the region.
Alert by Tan Wei Xian (Partner) and Samson Kong (Senior Associate) of the Corporate Practice of Skrine.