The corporation established in Labuan is subject to the Labuan tax law, which is different from the Malaysian tax law, and the applicable corporate tax rate differs depending on the business content.

Labuan Business Transactions ⇒ 3% of net income (audited)
Labuan non-business transactions (holding company, return on investment in assets within Labuan, etc.) ⇒ When conducting tax-exempt business transactions and non-business transactions ⇒ 3% of net income (audited)

In addition, if the following economic activity requirements are not met from 2020, Malaysian tax law (corporate tax rate 24%) will be applied instead of Labuan tax law.
<< Economic activity requirements for applying the Labuan tax system >>
Full-time local employees (2)
Minimum annual business cost RM50,000

The personal income tax for obtaining salary income and executive compensation from Labuan corporations is as follows. Until 2020, there was a 50% tax exemption for salary income, but it was abolished after 2021 and is the same as Malaysia's income tax rate.

Salary income (after 2021) ⇒
Residents: Taxed at 0-30% progressive tax rate under Malaysian Income Tax Act
Non-residents: Taxed at a tax rate of 30%

Officer compensation ⇒ Tax exemption

Payments for royalties, interest, dividends, and provision of services that are paid by Labuan corporations to non-residents are exempt from tax.

Profit recorded as capital gains (gain on transfer) by a corporation engaged in business transactions or non-business transactions with business transactions is subject to 3% corporate tax on pre-tax profit combined with other income.

Exemption from stamp duty on contracts, share transfer documents, and registration documents created by Labuan corporations in connection with their business

Labuan is very advantageous in terms of tax system, but when investing in Labuan directly or indirectly from Japan, it is necessary to consider the combined tax system of Japanese foreign subsidiaries (tax haven tax system).

The combined tax system for foreign subsidiaries is a system in which the income of a foreign subsidiary with no economic reality is combined with the income of Japan itself and taxed in Japan in order to prevent the income from being transferred to a country with a low tax and evading taxation. Previously, it was applied to countries where the tax rate is significantly lower than the tax rate in Japan, but in the 2017 tax reform, it has been changed to a system that taxes more in line with the economic substance of foreign subsidiaries.

Specifically, corporations that carry out normal business activities even in low tax rate countries are excluded (economic activity standards), and even if they meet the economic activity standards, dividends and royalties called passive income (passive income) are excluded. Since income such as income is relatively easy to transfer, it may be subject to the combined tax system of foreign subsidiaries. In addition, holding companies can also be exempted if special provisions such as regional headquarters are met.

The combined tax system of foreign subsidiaries applies not only to corporations but also to individuals who are residents of Japan.

Labuan's tax system has been rapidly revised in the last few years under the influence of international tax coordination led by the OECD, and it is necessary to operate it with a more economic substance. On the other hand, for those who do business in ASEAN, Labuan has many advantages such as established legal system, wide range of products and services, cost efficiency and flexibility. Regarding the utilization of Labuan entities, it is important to advance tax planning and update Malaysia's tax system including Labuan from time to time.