Labuan Company vs Sdn Bhd: When Labuan Is the Wrong Answer

Labuan gets two kinds of coverage and both are useless.

The first ignores it. Open any Malaysian “business structures compared” page and the list runs enterprise, partnership, LLP, Sdn Bhd, Berhad — and stops, as if a federal territory with its own companies statute and its own regulator does not exist.

The second sells it. A headline tax rate, a promise of privacy, an offer to incorporate within days, and no mention of the fact that the entity must be administered by a licensed trust company, must satisfy employee and expenditure tests inside Labuan, and is still bound by s.7(1) of the Labuan Companies Act 1990 to carry on business only in, from or through Labuan.

This page is about the entity decision. Whether the Labuan regime is a good deal on tax is a separate question with its own page. The question here is narrower and comes first: is a Labuan company the right kind of legal person for what you are building?

For a large number of the businesses that get sold one, the answer is no.

What a Labuan company actually is

A different statute, a different regulator, a different register.

A Sdn Bhd is incorporated under the Companies Act 2016 and registered with the Companies Commission of Malaysia. A Labuan company is incorporated under the Labuan Companies Act 1990 (Act 441) and registered with the Labuan Financial Services Authority. The two systems barely touch. Almost nothing you know about the Companies Act 2016 transfers.

Under s.14(3) a Labuan company may be limited by shares, limited by guarantee, or unlimited. Section 46(1) gives its shares no par or nominal value. Section 87(1) requires at least one director. Labuan FSA’s published position is that the minimum number of shareholders is one, a single share suffices, and beyond that there is no minimum capital requirement.

So far it reads like a light-touch Sdn Bhd. Then you reach the administration.

You cannot run one yourself

Two sections make a licensed intermediary structural rather than optional.

Section 85(1) — every Labuan company shall at all times have a registered office in Labuan, “which office shall be the principal office of a Labuan trust company.”

Section 93(1)–(2) — every Labuan company shall appoint one or more secretaries, at least one of whom shall be a resident secretary; and no person other than an officer of an approved Labuan trust company, a Labuan company, or a domestic company wholly owned by the trust company, made available for appointment by the trust company, may act as resident secretary.

There is no self-administered Labuan company. Your registered office is the trust company’s office; your resident secretary is the trust company’s officer. If the relationship ends, s.93(2A) gives you thirty days from the effective date of resignation to appoint a replacement, and s.93(2C) applies s.151 if you do not.

That single dependency is the most underweighted fact in the entire Labuan sales pitch. Compare a Sdn Bhd, where you appoint and dismiss a company secretary freely, and the registered office is wherever you say it is.

The onshore question, answered against the amending Acts

Here is where most published guidance — including material still on official websites — is simply out of date.

What was repealed

Until recently, s.7 of the Labuan Companies Act 1990 contained three subsections that defined the offshore ring-fence:

• s.7(4) — no Labuan company shall carry on business in ringgit, save for narrow exceptions;
• s.7(5) — where a Labuan company carries on business with a resident, it must notify Labuan FSA of the transactions within ten working days;
• s.7(6) — a list of dealings exempt from that notification.

All three were deleted. Section 4(b) of the Labuan Companies (Amendment) Act 2022 (Act A1653) provides that s.7 of the principal Act is amended “by deleting subsections (4), (5) and (6)”. Act A1653 received Royal Assent on 31 May 2022 and was gazetted on 9 June 2022, and s.1(2) provides that subsection 4(b) is deemed to have come into operation on 1 January 2019.

The repeal was deliberate: those subsections were the ring-fencing features that international tax standards target — rules that shut a preferential regime off from the domestic market.

Then in 2025, the Labuan Companies (Amendment) Act 2025 (Act A1756) amended s.47(1)(a) by substituting for the words “shall be expressed in a currency other than ringgit” the words “shall be expressed in any currency”. The last ringgit restriction on share capital is gone. Act A1756 received Royal Assent on 8 April 2025 and was published in the Gazette on 22 April 2025. It contains no commencement provision, so under s.19(1) of the Interpretation Acts 1948 and 1967 it came into operation on 23 April 2025 — the date immediately following publication.

Why you still read the old rules everywhere

Because Labuan FSA’s own published texts still carry them.

The consolidated Labuan Companies Act 1990 on Labuan FSA’s legislation page, dated 23 August 2022, still prints s.7(4), (5) and (6) in full — three years after the amending Act that deleted them, and more than three years after their deemed commencement. Its FAQ page for Labuan companies still states that shares may not be denominated in ringgit, which Act A1756 changed.

If you are relying on a consolidation, check it against the amending Acts. Every guide that tells you to notify Labuan FSA within ten working days of dealing with a Malaysian resident, or that a Labuan company cannot invoice in ringgit, is quoting law that no longer exists.

What actually survives

Section 7(1), unamended:

A Labuan company may be incorporated for any lawful purpose and, subject to any other written laws on financial services applicable to Labuan, shall carry out business only in, from or through Labuan.

Read that carefully, because the distinction is the whole point. It is a requirement about where the company operates, not about who its customers are. Section 7(2) expressly permits a Labuan company to carry on business with a resident. What s.7(1) does not permit is running the business from an office in Kuala Lumpur with a Labuan letterhead.

Section 7(3) also survives, restricting offers and invitations to residents in relation to interest schemes under the Interest Schemes Act 2016.

Substance: the requirement that decides most cases

Section 2B of the Labuan Business Activity Tax Act 1990 conditions the Labuan regime on real presence. A Labuan entity carrying on a Labuan business activity must, for a Labuan trading activity, have an adequate number of full-time employees in Labuan and an adequate amount of annual operating expenditure in Labuan, as prescribed by the Minister by regulations. For a Labuan non-trading activity, the same two tests apply plus compliance with conditions on control and management in Labuan.

The current regulations are the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021, P.U.(A) 423/2021, gazetted 22 November 2021, effective from 1 January 2019, and revoking the 2018 regulations.

The control and management conditions

Labuan FSA’s circular on P.U.(A) 423/2021 sets out four, deemed to have come into operation on 1 January 2021:

1. a meeting of the board of directors is convened in Labuan at least once a year;
2. the registered office of the Labuan entity shall be situated in Labuan;
3. the secretary appointed under the Labuan Companies Act 1990 shall be resident in Labuan; and
4. the accounting and business records, including the minutes of board meetings, shall be kept in Labuan.

The employee and expenditure floors

These vary by category of entity. The First Schedule covers Labuan trading activity and runs to twenty items; the Second Schedule covers non-trading activity. Item 20 is the “Other Trading Entity” catch-all covering administrative, accounting, legal, backroom processing, payroll, talent management, agency, insolvency-related and general management services: two full-time employees and RM50,000 of annual operating expenditure, both in Labuan.

Across the two schedules the floor runs from one to four full-time employees and RM20,000 to RM200,000 of annual operating expenditure. The four-employee lines are underwriting managers and insurance managers; the RM200,000 ceiling applies to Labuan insurers, reinsurers and takaful operators (three employees). Most trading lines sit at two or three employees with RM100,000 to RM120,000 of expenditure. On the non-trading side, an investment-holding entity other than a pure-equity holding company needs one full-time employee and RM20,000, while a pure-equity holding company is exempt from the tax under the Labuan Business Activity Tax (Exemption) Order 2020, P.U.(A) 177/2020, subject only to the control-and-management conditions.

The “up to RM3 million” figure that circulates in practitioner summaries is not in P.U.(A) 423/2021 at all — it belongs to the separate Labuan International Commodity Trading Company (GIFT) regime, amended by P.U.(A) 326/2025. Get the current regulation for your category before modelling.

Since P.U.(A) 325/2025 (gazetted 2 September 2025), the schedule headings require a minimum number of “fit and proper full-time employees in Labuan”. Five conditions apply: the employee performs work aligned with the entity’s activity, has adequate and appropriate competency, has no personal interests or responsibilities that interfere with the duties, is employed by the entity on a permanent or contractual basis, and physically carries out the work in Labuan. LHDN issued implementing guidelines dated 5 November 2025. The minimum counts and expenditure figures themselves are unchanged; the “fit and proper” qualifier was added on top.

The consequence of failing

Section 2B(1A) is blunt. A Labuan entity that fails to comply with the regulations for a basis period is charged to tax at twenty-four per cent on its chargeable profits for that year of assessment — the net profits reflected in the audited accounts, under s.2B(1B)(a).

That is not a penalty on top. It is the loss of the entire reason the structure existed. Two employees and RM50,000 of Labuan spending is not a formality you can paper over from Mont Kiara.

The rate mechanics, the election under the Income Tax Act, and the deduction restrictions that apply to Malaysian payers are the subject of the separate Labuan tax page.

The compliance calendar runs on different clocks

If you migrate mental models from a Sdn Bhd, you will miss deadlines. Three of these run in unfamiliar directions.

Duty	Labuan company	Sdn Bhd
Annual return	Once each calendar year, not later than 30 days prior to the anniversary of incorporation (s.109(3))	Within 30 days after the incorporation anniversary (CA 2016, s.68)
Accounting entries	Within 90 days of completing the transaction (s.110(2))	Within 60 days (CA 2016, s.245(2))
Accounts laid before members	Not more than 9 months after the date to which they are made up (s.111(1))	Circulate within 6 months of FYE (CA 2016, s.258(1)(a))
Director’s solvency certificate	Within 30 days of the accounts being laid (s.111(1A))	No equivalent
Audit	Only if required by financial services law in Labuan, by the articles, or on a public offer (s.113(1)); Labuan FSA may compel one (s.113(1A))	Required unless the PD 10/2024 criteria are met
Records location	At the registered office or elsewhere in Labuan (s.110(3))	Registered office or notified place in Malaysia

The annual return is the one that catches people. A Sdn Bhd’s clock starts on the anniversary; a Labuan company’s clock ends thirty days before it.

Note also s.111(1A): a director must certify annually that the accounts show the company was solvent, that he is unaware of circumstances rendering them untrue, and that nothing since would render the company insolvent. There is no Companies Act 2016 equivalent for a private company, and it is a personal statement.

Beneficial ownership arrived in 2025

Act A1756 — in force from 23 April 2025 — inserted a new Part Va into the Labuan Companies Act 1990, defining a beneficial owner as a natural person who owns or controls the company, in whole or in part, through direct or indirect ownership or control of shares, voting rights or other ownership interest, or who exercises effective control and influence. Section 109b requires every Labuan company and foreign Labuan company to keep a register of beneficial owners recording name, address, nationality, identification, usual place of residence, and the dates of becoming and ceasing to be a beneficial owner.

Anyone still choosing Labuan for anonymity is working from a picture of the jurisdiction that has not been accurate for some years. Malaysia’s onshore beneficial ownership regime under the Companies Act 2016 and Labuan’s new Part Va now point the same way.

Side by side

	Labuan company	Sdn Bhd
Statute	Labuan Companies Act 1990	Companies Act 2016
Regulator	Labuan FSA	SSM
Shareholders	Minimum 1; no maximum published	Minimum 1, maximum 50 (s.42)
Directors	At least 1 (s.87(1))	At least 1, ordinarily resident in Malaysia (s.196)
Secretary	Resident secretary from a Labuan trust company (s.93)	Company secretary, citizen or PR, qualified under s.235
Registered office	Must be a Labuan trust company’s principal office (s.85)	Anywhere in Malaysia
Share capital	No par value (s.46); any currency since Act A1756	No par value; ringgit
Operating restriction	Only in, from or through Labuan (s.7(1))	None
Substance test	Employees and opex in Labuan; control and management in Labuan (LBATA s.2B)	None
Self-administration	Not possible	Possible
Beneficial ownership register	Required (Part Va, from Act A1756)	Required (CA 2016, Part II Division 8A)

When Labuan is the wrong answer

This is the section the vendors skip.

Your customers, staff and operations are on the peninsula. Section 7(1) requires business to be carried on in, from or through Labuan, and the substance rules count employees and spending in Labuan. A company whose entire team sits in Kuala Lumpur is not carrying on business in or from Labuan in any honest reading, whatever its registered address says.

You need a Malaysian operating licence. Distributive trade, manufacturing, premise and signboard licences, sector approvals from KPDN, MITI, BNM, the SC, MCMC or a local authority — these regimes are built around companies incorporated under the Companies Act 2016 and premises in the licensing authority’s area. A Labuan company is frequently outside them, and the structure that solved a tax question creates a licensing question.

You need onshore banking, credit or payment facilities. Bank onboarding for Labuan entities is materially harder than for a Sdn Bhd, and enhanced due diligence is the norm rather than the exception. This is not a legal impediment; it is a practical one that founders discover after incorporation, when the money has already been spent.

You need employment passes for a team in Malaysia proper. Immigration approvals are tied to the entity, its licensing and its establishment. A Labuan structure places your hiring approvals in a different place from where you want to hire.

The substance cost exceeds the benefit. Two Labuan-based full-time employees plus RM50,000 a year of Labuan operating expenditure plus trust company fees is a real annual number. Below a certain profit level, a Sdn Bhd on ordinary corporate rates costs less all-in — and comes with none of the structural friction above.

You will want to raise, sell or list. Investors, acquirers and their diligence counsel are fluent in the Companies Act 2016. A Labuan holding company on a cap table invites questions about substance, treaty access and regulatory standing that you will pay advisers to answer. Migrating later is possible but is a restructuring, not a form.

You are counting on treaty benefits. Access to Malaysia’s tax treaty network for Labuan entities is not uniform — several partners have limited or excluded Labuan entities by protocol. Do not assume the treaty position; verify it for the specific counterparty jurisdiction before the structure is built.

You want privacy. See Part Va above.

Where Labuan does make sense

To be fair to the jurisdiction: it is a purpose-built financial centre with a real statutory framework, and there are cases where it is the correct choice.

• Licensed financial activity — Labuan banking, insurance and reinsurance, leasing, money broking, fund management and digital financial services operate under the Labuan Financial Services and Securities Act 2010, with an authorisation route and capital regime distinct from the onshore one.
• Regional holding and treasury for a group whose operations are genuinely outside Malaysia, where a Labuan office with real staff is a sensible regional hub.
• Captive insurance and risk-financing structures for a multinational group.
• Shipping and cross-border leasing where the counterparties are non-Malaysian.
• Foundations and trusts under the Labuan Foundations Act 2010 and Labuan Trusts Act 1996, for succession and asset-holding purposes with no onshore operating footprint.

The common thread: the business genuinely operates from Labuan, or genuinely operates outside Malaysia. Where the business operates on the peninsula and the Labuan entity is a label, the structure is fragile.

Common mistakes

• Citing s.7(4) or s.7(5). They were deleted by Act A1653, deemed in force from 1 January 2019. So was the ten-working-day notification. Guides repeating them — and Labuan FSA’s own consolidated PDF — are quoting repealed law.
• Believing a Labuan company cannot deal with Malaysians. Section 7(2) permits it expressly.
• Believing a Labuan company cannot use ringgit. Not since Act A1653, and since Act A1756 the share capital may be expressed in any currency too.
• Treating substance as paperwork. Section 2B(1A) charges 24 per cent on chargeable profits for failure, which removes the entire point of the structure.
• Forgetting the control and management conditions. A board meeting in Labuan once a year, the registered office in Labuan, a Labuan-resident secretary and records kept in Labuan have been conditions since 1 January 2021.
• Diarising the annual return like a Sdn Bhd. Section 109(3) is thirty days before the incorporation anniversary.
• Assuming no audit means no accounts. Section 110 requires proper records, entries within ninety days, and records kept in Labuan; s.113(1A) lets Labuan FSA compel an audit.
• Choosing Labuan for confidentiality. Part Va now requires a beneficial ownership register.
• Planning to serve the domestic market through it. The customer restriction is gone; the operating-location requirement in s.7(1) and the substance tests are not.

What’s next

Work through four questions in order, and stop at the first no.

1. Where will the work actually be done? If the answer is not Labuan or outside Malaysia, s.7(1) and the substance rules are already against you.
2. Can you carry the substance floor? Employees in Labuan and annual Labuan operating expenditure, every year, evidenced. Price it against the benefit before incorporating, not after.
3. What licences and approvals does the business need onshore? Check whether they are available to a Labuan entity. This is where structures most often fail.
4. What does the exit look like? If you expect to raise or sell, ask counsel what a Labuan holding company does to diligence.

If the answers hold, the tax analysis is the next step and it belongs on its own page. If they do not, incorporate a Sdn Bhd. It is the boring answer, and for a business that operates in Malaysia it is usually the correct one.

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Verification status. AI-assisted draft, not yet reviewed by a subject-matter expert. Statutory references are to the Labuan Companies Act 1990 (Act 441) as published by Labuan FSA, read together with the Labuan Companies (Amendment) Act 2022 (Act A1653) and the Labuan Companies (Amendment) Act 2025 (Act A1756); substance requirements are from s.2B of the Labuan Business Activity Tax Act 1990 and Labuan FSA’s circular on P.U.(A) 423/2021. Where Labuan FSA’s consolidated text and the amending Acts conflict, we have followed the amending Acts and said so. Nothing here is legal or tax advice on a particular structure.