Is Forming a Company in Labuan Enough to Obtain Low Tax?
Overseas Companies and Compliance
Overseas Companies and Compliance
Prepared by: Constantinople
No. Incorporation in Labuan alone does not establish eligibility for a particular low rate. Genuine economic substance, local expenditure and employee conditions matter according to the type of activity. The formation service price and annual compliance costs are different; how the company will actually operate must be planned from the outset.
The Malaysian Inland Revenue Board's guide of 5 November 2025 requires full-time employees to perform suitable work and possess sufficient competence for their roles. Physical performance of the work in Labuan also matters. General service duties unrelated to the company's activity cannot always be assumed to satisfy the required number of qualified employees.
Having names on a payroll or a service package promising two staff members is therefore not an adequate review. Job descriptions, contracts, actual work and expenditure records are assessed together. Employee numbers and expenditure requirements are not identical for all Labuan companies. Compliance is investigated against the specific activity category and rules in force; no single salary range or blanket prohibition on all outsourced services is assumed.
Prepare activity contracts together with the local employee and expenditure budget. Labuan requirements and the Turkish connection are assessed separately from formation fees.
File review is a paid service. The scope and fee are set out in writing before work begins.
When do the three per cent and twenty-four per cent rates arise in Labuan?
The Malaysian Inland Revenue Board's employee guide explains that a relevant Labuan entity failing to satisfy the qualified full-time employee numbers and requirements cannot benefit from three per cent taxation for trading activity or non-taxation for non-trading activity. The statutory twenty-four per cent rate then becomes relevant. Classification of the activity and other conditions are checked separately.
A low formation price therefore does not replace the annual compliance budget. Genuine local operations, employees suitable for the activity category and annual operating expenditure must be calculated from the outset. The guide's date does not mean that a new company will qualify merely by having two payroll entries.
What must be documented concerning employees, outsourcing and salaries?
An employee's work must relate to the Labuan entity's activity, and appropriate competence, skills and experience are required. The work is actually carried out in Labuan and a contract of service with the entity is required. Under the guide, outsourced personnel do not count as employees satisfying the qualified full-time employee requirement. This does not mean that all externally procured services are prohibited entirely.
Records showing working time and location, job descriptions and remuneration documents should be retained. A fixed requirement of two employees, a particular diploma or a salary threshold of three to five thousand ringgit cannot be stated for every company; the activity rules and actual role are examined. If a group shares an office, consistent allocation of employees to each entity's activities also matters.
For details, see official sources: Malaysian Inland Revenue Board — Current Guides