Labuan Company vs Sdn Bhd: Which Structure Fits Your Malaysia Plans in 2026?

How the Labuan regime taxes a company in 2026

The Labuan Business Activity Tax Act 1990 taxes a Labuan entity on its Labuan business activity: trading or non-trading activity carried on in, from or through Labuan. Trading, which covers banking, insurance, trading, management, licensing and any other activity that is not non-trading, is taxed at 3% of chargeable profits: the net profits in the audited accounts. Shipping left the regime on 1 January 2025. Non-trading activity, holding investments in securities, shares, loans, deposits or other property, is not charged to tax. Royalties and other intellectual property income are taxed under the Income Tax Act 1967 instead.

Those rates depend on substance. The Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021, P.U.(A) 423/2021, set minimum full-time employees and annual operating expenditure in Labuan by activity: three employees and RM200,000 for banks and insurers; two and RM100,000 for fund managers; two and RM50,000 for administrative, accounting and legal services; one and RM20,000 for non-pure investment holding. A pure equity holding company needs no minimum staff but must spend RM20,000 and meet management conditions such as an annual board meeting in Labuan. An entity that misses its requirement pays 24%.

The test tightened in 2025. Amending regulations gazetted in September 2025, P.U.(A) 325/2025, replaced “full-time employees” with “fit and proper full-time employees”: staff must do work matching the entity’s activity, be competent, have no conflicting interests, be employed by the Labuan entity on permanent or contract terms, and physically work in Labuan. PwC, KPMG and Deloitte report that it applies from 1 January 2025. Guidelines from the Inland Revenue Board of Malaysia (LHDN) dated 5 November 2025 say receptionists, despatch clerks and cleaners do not count, nor do outsourced staff without a contract of service. Review shared or nominal staffing now.

Residents, ringgit, fees and reporting for a Labuan company

A Labuan company must be incorporated through a Labuan trust company, keep a registered office in Labuan and have audited accounts. The Labuan Financial Services Authority (Labuan FSA) regulates it and charges an annual fee of USD1,000 from 1 January 2026. Since April 2025 it may issue shares in any currency, including ringgit, and must keep a beneficial ownership register.

Under section 7 of the Labuan Companies Act 1990, a Labuan company may do business with Malaysian residents but must notify Labuan FSA within ten working days, subject to listed exemptions. It may not carry on business in ringgit except for listed purposes, such as administrative and statutory expenses or holding investments in a domestic company. A Malaysian customer can deduct only 3% of most payments to a Labuan company, and 75% of interest and lease rentals, under section 39(1)(r) of the Income Tax Act; the 2021 exemption order ended with year of assessment 2025 and its 2026 successor covers only GIFT commodity traders, so price Malaysian work with this in mind.

How a Sdn Bhd compares, and who each structure suits

A Sdn Bhd is taxed under the Income Tax Act at 24%, or 15% on the first RM150,000 and 17% on the next RM450,000 if it qualifies as an SME. Many foreign founders do not: since year of assessment 2024, the bands are denied where more than 20% of the ordinary share capital is held by foreign companies or non-citizens. In exchange, a Sdn Bhd can sell to Malaysian customers in ringgit without notifying anyone, and carries the usual domestic obligations: Form e-C, CP204 instalments, service tax where applicable and e-invoicing.

Staffing and banking differ too. A Sdn Bhd applies for Employment Passes through the Immigration Department; a Labuan entity goes through Labuan FSA’s own work-permit process. Expect any bank to ask how a Labuan company meets the substance rules and why the structure is used. Malaysia committed to exchange OECD Common Reporting Standard data from 2018, with Labuan financial institutions reporting under Labuan’s own 2018 regulations. Labuan entities in groups with revenue of EUR750 million or more in at least two of the four preceding financial years also fall within Malaysia’s 15% global minimum tax for financial years beginning on or after 1 January 2025, which can top up a 3% rate.

In practice, a Labuan company fits a trading, leasing, holding or financial business whose customers are mainly outside Malaysia and which can afford real staff and premises in Labuan. A Sdn Bhd fits a business that sells to Malaysian customers, earns ringgit, wants to hire in Kuala Lumpur or Penang, or could not fund Labuan substance from a modest profit. Some groups use both.

Questions to settle before you choose

• Where are your customers, and in which currency will they pay?
• Can you fund and prove fit and proper staff and operating spend in Labuan every year?
• Would a Sdn Bhd qualify for the SME bands, or would foreign ownership above 20% put it at 24%?
• Is the group within the global minimum tax rules, or controlled foreign company rules in the owners’ home country?
• Who will act as your Labuan trust company, bank and auditor, given the 3% tax rests on audited accounts?

What changed for Labuan companies in 2025 and 2026?

Since 2025 shipping has left the Labuan regime, returns are self-assessed on a current-year basis and staff must be fit and proper; in 2026 the Labuan FSA fee rose and relief for Malaysian payers narrowed. As at October 2026:

Date	Change
Year of assessment 2020	Flat RM20,000 option abolished: section 7 of the Labuan Act deleted by the Finance Act 2018
1 January 2025	Shipping operations removed from Labuan trading activity; power to require fit and proper staff (Act A1741)
Year of assessment 2025	Current-year basis and self-assessment: two returns for year of assessment 2025, then e-LE1 within 7 months of each year end
Financial years from 1 January 2025	15% global minimum tax reaches Labuan entities in groups with revenue of EUR750 million or more
9 September 2025	P.U.(A) 325/2025 gazetted: minimum staff must be fit and proper full-time employees
1 January 2026	Labuan FSA annual fee for a Labuan company rises from USD800 to USD1,000
31 March 2026	P.U.(A) 147/2026 renews relief from the section 39(1)(r) deduction limit to year of assessment 2030, for payments to GIFT commodity traders only
31 July 2026	First current-year e-LE1 due for 31 December 2025 year ends, or 31 August 2026 with LHDN’s e-filing extension

Budget 2027 is due to be tabled on 9 October 2026; any change to Labuan or SME rules applies only once it is legislated.

How many staff and how much spending does each Labuan activity need?

Each activity has a minimum number of fit and proper full-time employees and a minimum annual operating expenditure in Labuan, set by P.U.(A) 423/2021 (P.U.(A) 482/2021 for commodity traders) as amended in 2025. Missing either in a basis period means 24%.

Labuan activity	Staff in Labuan	Annual spending in Labuan
Insurer, reinsurer or takaful operator; bank or Islamic bank	3	RM200,000
Trust company	3	RM120,000
Underwriting, insurance or takaful manager	4	RM100,000
Insurance or takaful broker; first-party captive	2	RM100,000
Leasing, up to 10 related companies	2 per group	RM100,000 per company
Fund manager or administrator, securities licensee, money broker, factoring, credit token or company management	2	RM100,000
Administrative, accounting, legal, backroom, payroll, agency or management services	2	RM50,000
Investment holding other than pure equity holding	1	RM20,000
Pure equity holding	None	RM20,000, plus a board meeting, office, secretary and records in Labuan
Commodity trading company (GIFT), group of up to 5	3, at least 2 in Labuan	RM3 million in Malaysia, RM100,000 of it in Labuan

An activity in neither schedule, such as general merchandise trading, has no prescribed minimum, so confirm how LHDN will treat it before relying on 3%.

Labuan company or Sdn Bhd on RM2 million profit: a worked example

On RM2 million of profit, a Labuan services company that meets substance pays RM60,000, against RM435,000 for a qualifying SME Sdn Bhd and RM480,000 for a foreign-owned one, unless substance fails or the customers are Malaysian.

1. Labuan management-services company meeting its 2-staff, RM50,000 minimum: RM2,000,000 × 3% = RM60,000.
2. Same company with one of the 2 staff outsourced: RM2,000,000 × 24% = RM480,000.
3. Sdn Bhd more than 20% foreign-owned: RM2,000,000 × 24% = RM480,000.
4. Qualifying SME Sdn Bhd: RM150,000 × 15% = RM22,500; RM450,000 × 17% = RM76,500; RM1,400,000 × 24% = RM336,000; total RM435,000, or 21.75%.
5. Labuan saving: RM480,000 less RM60,000 = RM420,000 against the foreign-owned Sdn Bhd, or RM375,000 against the SME.
6. Government fees: USD1,000 a year to Labuan FSA, against RM150 for the Sdn Bhd’s annual return plus RM50 to lodge audited accounts with SSM.
7. If the profit came from RM2,500,000 of fees paid by Malaysian companies: RM2,500,000 × 97% = RM2,425,000 of their deductions disallowed, costing them RM582,000 at 24%, more than the saving.

Assumptions: year of assessment 2026; chargeable profit equals audited net profit; no incentives, withholding tax or global minimum tax. Labuan is worth it only if its staff, premises, trust company and audit cost less than the saving.

How to set up and run a Labuan company: a 2026 checklist

Use a Labuan trust company, staff and spend in Labuan from the first basis period, and file e-LE1 within 7 months of each year end. In order:

1. Match the business to its schedule item and budget for that item’s staff and spending minimums.
2. Appoint a Labuan trust company, through which documents are lodged with Labuan FSA.
3. Keep the registered office and a resident secretary in Labuan.
4. Employ staff directly on contracts of service, working in Labuan, and keep timesheets or attendance records.
5. For pure equity holding, hold a board meeting in Labuan at least once a year and keep records and minutes there.
6. Notify Labuan FSA within 10 working days of transactions with Malaysian residents, unless exempt.
7. Pay the USD1,000 annual fee and have the accounts audited by a Labuan FSA-approved auditor.
8. File e-LE1 on MyTax and pay within 7 months of the year end; send any documents LHDN specifies within 30 days after that.
9. Make any election to be taxed under the Income Tax Act within 3 months of the start of the basis period; it is irrevocable.

Late payment adds 10%; failing to file can bring a fine of RM20,000 to RM1 million or a penalty of three times the tax.

Common mistakes with Labuan companies

Most Labuan problems come from staffing that fails the 2025 test or from using Labuan to serve Malaysian customers.

• Counting outsourced or agency staff, or general duties such as cleaning, towards the staff minimum.
• Sharing one team across group entities without allocating staff to each entity.
• Claiming 3% on shipping after 1 January 2025, or on royalties and other intellectual property income.
• Billing Malaysian customers without pricing in the 97% deduction restriction.
• Filing on the old timetable instead of within 7 months of the year end.
• Assuming e-invoicing does not apply: the Labuan Act penalises failure to issue an e-invoice.
• Assuming a Sdn Bhd more than 20% foreign-owned can use the 15% and 17% bands.

Labuan tax terms explained

These terms appear in the Labuan legislation and LHDN guidance.

• Pure equity holding: holding only shares in other companies; no staff minimum, but RM20,000 of spending and management in Labuan.
• Fit and proper full-time employee: a competent employee of the Labuan entity, free of conflicts, doing office work physically in Labuan.
• Section 3A election: an irrevocable choice to be taxed under the Income Tax Act instead of the Labuan Act.
• e-LE1: a Labuan entity’s return of profits, filed on MyTax.
• GIFT: the Global Incentives for Trading programme for Labuan international commodity trading companies.