Labuan Company Experience

[AnthonyR]

Most of you have probably heard of Labuan, but it still seems to be somewhat of a rare setup in the offshore world. However, I've started the process and I thought it might be of interest to some of you on the forum to follow my journey.

As a bit of background, I'm a UK Chartered Tax Advisor, Trust and Estate Practitioner, Licensed Probate Practitioner and have run my own practice in the UK for the past 10 years. My wife and I love to travel and particularly love Asia. Over the last few years I've been increasingly advising clients around offshore moves where they can minimise their taxes and live a better lifestyle, so a couple of years ago I started to have the conversation with my wife about the advantages of doing it ourselves. Effectively it meant we could go from the UK rates of tax which are approaching 50%, to an offshore setup with circa 5% tax. On top of that, we love Malaysia, the cost of housing is 1/2 the UK, the cost of living is 1/3 of the UK and they have some fantastic British private schools (especially important bearing in mind 20% VAT).

Although it's not a massive difference, the VAT on school fees was (one of) the final straws. In Malaysia we can send our kid to a British owned private school in huge grounds, with great facilities equally or better to his current school, following the same syllabus, but with the VAT increase we save £250k over the life of his education... I can move to Malaysia, we can establish a Labuan company, which will be subject to 3% CT, I'll have to take a small salary and my dividends thereafter are tax free. My Labuan company will then bill the UK companies for my time on an hourly rate basis with a reasonable proportion of the income shifted (justifiably) out of the UK and into Malaysia. Any funds left back in the UK are subject to 25% CT (unless I contribute them into a pension) and dividends from the UK are tax free.

So last year I contacted a few agents and spoke with several about the practicalities, setup and running costs etc and eventually settled on a firm who had historic links to the UK and Jersey. They put in the application in November last year and we then sat back and waited. Just over a month later we had notice from the Labuan FSA that the company had been formed.

The next challenge was banking. They started the application with Maybank in January, but they were being difficult about the fact that I was the visible shareholder/director and currently non-resident, they then tried OCBC, had a video call with the onboarding team in April, but still couldn't get through. May it was suggested that the issue was simply that they don't like offshore shareholders/directors (although I can't get onshore until the company has a bank account to employ me...), so we put in place nominee shareholder/director agreements. Finally 3 months later at the start of September we got an account set up with Maybank. Although 3 weeks later they still haven't issued online banking registration.

I've now physically moved to Malaysia (family are back home for now) and I'm staying in AirBnBs until the end of the year when I'll head back for Christmas before travelling a bit around Europe and moving back to Malaysia in March to take on a longer lease on a property.

Apparently Labuan are starting a new 5 year director's visa which will come into effect from January next year, which will certainly be easier than the current 2 year visa with re-application every 18m.

Free free to ask me anything about the process - I'll try and keep this updated with any news/changes.

 

[Offct]

Thank you for sharing your experiences. Indeed, Labuan is rarely used.
May I ask you, what you are paying for the setup per year? I guess you also have a local office and employees to fulfill the substance requirements?

 

[AnthonyR]

Cost to set up was circa £6,500 with circa £5k ongoing costs. Substance requirements tend to be met through having local directors, with a local office and through the fact that I have to pay myself a RM10k a month salary.

 

[Xshore]

What is the minimum operating expense requirement for this type of company in Labuan?
For the work visa, do you have to rent a place in Labuan in addition to where you actually live?
How much do you pay the two required labuan workers, are directors sufficient, not full time workers required?
Is all ongoing requirement included in £5k yearly cost?

I used to have a Labuan company, before these substance requirement came into place.
Got a bank account opened easily with CIMB then, however its internet banking was so difficult to use. Just to check the balance of the account was very very complicated, and I had to have to users with different phone numbers in order confirm transfers.
Things seemed to change all the time with Labuan, that was part of why I closed the company.

Also keep in mind that Labuan is excluded from the tax treaty between the UK and Malaysia, so there are more stringent related party documentation requirements.

In Johor there is the new SFZ economic zone which advertises with 0-5% corporate tax. Might be an alternative to Labuan, but details yet to come.

 

[myshufflemix]

Nice share of your future venture, thread bookmarked.

 

[AnthonyR]

What is the minimum operating expense requirement for this type of company in Labuan?
For the work visa, do you have to rent a place in Labuan in addition to where you actually live?
How much do you pay the two required labuan workers, are directors sufficient, not full time workers required?
Is all ongoing requirement included in £5k yearly cost?

I used to have a Labuan company, before these substance requirement came into place.
Got a bank account opened easily with CIMB then, however its internet banking was so difficult to use. Just to check the balance of the account was very very complicated, and I had to have to users with different phone numbers in order confirm transfers.
Things seemed to change all the time with Labuan, that was part of why I closed the company.

Also keep in mind that Labuan is excluded from the tax treaty between the UK and Malaysia, so there are more stringent related party documentation requirements.

In Johor there is the new SFZ economic zone which advertises with 0-5% corporate tax. Might be an alternative to Labuan, but details yet to come.

Minimum operating expenditure is 50,000RM, which is more than covered by my salary. Plus there is the cost of running a small office, which is provided by the trustee company. In order to get the work visa you don't need to live in Labuan, but you do need to physically visit to pick it up and have an AGM once a year.

The employees part I'm still not entirely convinced about. The trust company I'm working with suggest it can be skirted around using them as directors. I'm not so sure. However, if need be we'll hire a couple of admin staff when the time comes.

On the Johor SFZ, that's something I'm quite interested in finding out more on as I live in Johor at the moment anyway. Don't really want to have to buy anything in Forest City if that's where it ends up heading though!

 

[Xshore]

Minimum operating expenditure is 50,000RM, which is more than covered by my salary.

And they confirm this is ok when you don't live in Labuan? I thought the 50k needed to be spent in Labuan. But good if it works like this.
What the tax rate for the 120k yearly salary?

 

[pieceofmind]

I'm exploring leveraging a Labuan company to get a residence in Malaysia and maybe switch from my Samoa corporation. If you do become a resident in Malaysia and are the UBO of the Labuan company, I'm not sure if the dividends are tax-free because the control and management of the company can be seen as locally sourced in Malaysia.

Having nominated directors, trustees, and admin can help with that, but it will require meticulous work and evidence to back it up, such as traveling to Labuan to sign papers, make decisions, meeting minutes, receipts, etc. Feels too close to home to have personal and corporate mixing.

In my case, I was planning on traveling from Malaysia to Singapore or using the APEC visa to travel around Asia to do control and management of the company outside of Malaysia, then come back to Malaysia to do the low level work I'm being paid a salary for. Did the trustee or tax attorneys mention anything like that?

 

[Xshore]

I'm exploring leveraging a Labuan company to get a residence in Malaysia and maybe switch from my Samoa corporation. If you do become a resident in Malaysia and are the UBO of the Labuan company, I'm not sure if the dividends are tax-free because the control and management of the company can be seen as locally sourced in Malaysia.

Having nominated directors, trustees, and admin can help with that, but it will require meticulous work and evidence to back it up, such as traveling to Labuan to sign papers, make decisions, meeting minutes, receipts, etc. Feels too close to home to have personal and corporate mixing.

In my case, I was planning on traveling from Malaysia to Singapore or using the APEC visa to travel around Asia to do control and management of the company outside of Malaysia, then come back to Malaysia to do the low level work I'm being paid a salary for. Did the trustee or tax attorneys mention anything like that?

Dividends are not taxed in Malaysia so that's no an issue. However there are rules now that can make the Labuan company taxed under the regular Malaysia tax laws instead of the 3% Labuan tax laws if you don't qualify. These rules are quite specific and require an office in Labuan, a certain amount of workers and money spent in Labuan yearly to qualify for the 3% Labuan tax.

 

[AnthonyR]

And they confirm this is ok when you don't live in Labuan? I thought the 50k needed to be spent in Labuan. But good if it works like this.
What the tax rate for the 120k yearly salary?

It seems that there is a bit of 'flexibility' between what the strict letter of the law is and what is acceptable in practice. The official answer is that there should be 50k RM of operating expenditure per year. This isn't defined, but salary of directors is generally accepted to be part of the operating expenditure. If you are non-resident the salary is taxed at a flat rate of 30%, if you are resident then it's a progressive rate which averages out at about 10-12%.

As for dividends, as Xshore states, Malaysia doesn't tax dividends, but you do have to prove substance - which is now an ongoing dispute between the local tax advisor and the trust company as to how strictly this needs to be monitored!

 

[pieceofmind]

Thanks for clarification, I stand corrected about Malaysian dividends being taxed. Since it’s a single-tier system, if the corporation was already taxed (3% in Labuan for example), it is not taxed again. Or if it’s foreign-sourced, but will be taxed when repatriated. Are the dividends from the Labuan corporation tax-free because it’s considered foreign-sourced or because of the Malaysian single-tier? Labuan jurisdiction is unclear to me if it’s a subset of Malaysia’s or considered offshore.

My main concern though is the control and management of the corporation, which I’m trying to figure out for my offshore corporation while residing in Malaysia, and seems to apply for Labuan corporations:

Under the new Section 3B of the LBATA 2020 Amendment, for the purpose of the double taxation agreements under Section 132 of the ITA:

1. A Labuan entity carrying on a business is resident in Malaysia for a YA if at any time during the basis year the management and control of its business is exercised in Malaysia; and
2. Any other Labuan entity is resident in Malaysia for a YA if at any time during that basis year the management and control of its affairs are exercised in Malaysia by its directors, partners, trustees or other controlling authority.

The UBO of the Labuan corporation or any offshore corporation has to be very careful while residing in Malaysia.

Also I’m trying to figure out if the minimum 2 salaried employees have to be a resident of Labuan, otherwise it’s another unnecessary expense just to fulfill. And I see they got rid of their flat tax rate option. The costs of the Labuan corporation seem pile up plus all the audit requirement headaches. The tax incentives keep dropping one by one not just for Labuan but for Malaysia too.

 

[uplana]

Also I’m trying to figure out if the minimum 2 salaried employees have to be a resident of Labuan, otherwise it’s another unnecessary expense just to fulfill. And I see they got rid of their flat tax rate option. The costs of the Labuan corporation seem pile up plus all the audit requirement headaches. The tax incentives keep dropping one by one not just for Labuan but for Malaysia too.

It might be worth considering whether your plan is actually feasible or if you should look for another destination where the costs are lower or it doesn't require as many resources to maintain.

 

[Xshore]

If you are non-resident the salary is taxed at a flat rate of 30%, if you are resident then it's a progressive rate which averages out at about 10-12%.

I believe this is only the case if you work IN Malaysia. If you're a non resident and working for the Labuan company outside Malaysia, then there is no tax in Malaysia. Also, you can't legally work IN malaysia without a working visa, so this would only be a problem if you start working late in the year and are not tax resident the first year, you'd have to pay 30% tax.

I just checked and there is still the exemption on tax for non citizens directors of Labuan companies, for the directors salary part (not any other salary). Did your service provider talk to you about how big part of your 10k myr monthly salary is a "directors salary"?

As for dividends, as Xshore states, Malaysia doesn't tax dividends, but you do have to prove substance - which is now an ongoing dispute between the local tax advisor and the trust company as to how strictly this needs to be monitored!

How is tax on dividends linked to substance? Are you talking about the substance requirement for Labuan companies? If you don't quality with the substance for the Labuan company it will be taxed under the regular 24% Malaysian tax regime, but there is still no tax on dividends.

 

[AnthonyR]

Yeah I will be working and living in Malaysia, likely tax resident and will have a director's employment pass, which requires a RM10k per month salary which is taxable under local rules. If I didn't need an employment pass then I wouldn't take a salary at all (unless I needed to spend the money for substance purposes).

On the dividend/substance point I was trying to answer two separate points, but did so in a single sentence it seems. No connection between them intended to be implied!

 

[Xshore]

Yeah I will be working and living in Malaysia, likely tax resident and will have a director's employment pass, which requires a RM10k per month salary which is taxable under local rules. If I didn't need an employment pass then I wouldn't take a salary at all (unless I needed to spend the money for substance purposes).

You should still be able to benefit from the tax exemption on the directors salary (the part of it that's for directors duties). Did your agent mention this?

 

[Moonlighter]

You have an exemption until YA2025 for director fees and it's questionable whether these benefits will be extended again. Last time they announced the extension just in December 2021 for another 4 years.

If you want to keep your employment pass, you have to draw a 10k MYR salary, which is not the same as a director fee and you have pay income tax on it.

 

[Xshore]

You have an exemption until YA2025 for director fees and it's questionable whether these benefits will be extended again. Last time they announced the extension just in December 2021 for another 4 years.

If you want to keep your employment pass, you have to draw a 10k MYR salary, which is not the same as a director fee and you have pay income tax on it.

Are you sure that immigration are looking at what part of this is salary and what part is directors salary? I'm asking because agents told me that the tax office can adjust the ratio of salary/directors salary depending on the actual circumstances. And the immigration and tax department might not be fully linked on these matters.

Also, if you receive a 10k x 12 months salary and don't live in Labuan, and don't take any other directors salary, then how can you claim that 50k is spent in Labuan, ref the substance requirements? It makes sense if (some of) it is a directors salary.

A lot if details around this is not so clear and might change. Not sure how much profit OP has, but there could always be a risk of an unexpected increase from 3% to 24% tax if the substance requirements are not approved.

This is one the main drawbacks with Labuan, unclear and rapidly changing rules.

 

[Moonlighter]

The 120k MYR is a requirement if you want to get an employment pass and the LFSA will request tax returns & salary slips upon renewal. With the EP you can live anywhere in west Malaysia, but you also need 250k MYR paid up capital to apply for it.

For the ESR you will need an office and two full time employees (director can be one) and a physical office in Labuan. On top of it you'll have accounting and audit requirements. Starting from July 2025 it is mandatory to issue e-invoices, which is a system directly connected to the LHDN cloud.

The LFSA also performs yearly substance checks, so be ready to travel to Labuan and sit in your office during that time. Over the last 10 years a lot of things changed in Labuan and the costs of running a company have increased significantly and the banking experience is below average.

Ultimately it depends on your specific situation if Labuan makes sense, if you are willing to adapt and have high enough profits to offset the yearly fixed operating costs.

 

[Xshore]

but you also need 250k MYR paid up capital to apply for it.

Is this the case now? Long time ago it was not necessary in Labuan, then it became required some time (8-10 years ago?) Then it was no longer required when the substance requirements started. And now it's required again?

Starting from July 2025 it is mandatory to issue e-invoices, which is a system directly connected to the LHDN cloud.

How does the e-invoices work when you invoice foreign clients?

The LFSA also performs yearly substance checks, so be ready to travel to Labuan and sit in your office during that time.

How long notice will you get before these "checks"?

 

[Moonlighter]

You can find the guidelines here and according to the FAQ the paid-up capital is still required.

e-invoice relaxation period is from July to December 2025 if your revenue is < 25M MYR. You can read about it here. Invoices for foreign clients can be issued over the platform as well, the same for vendor payments. I suggest you get a local accountant to deal with it.

The ESR division is new and has been established this year. The notice period is usually 2-3 weeks.