# Labuan: The Federal Territory With Its Own Tax Act

> A 91 km² island off Sabah that became a Federal Territory in 1984 and now hosts Labuan IBFC — a jurisdiction where a separate Act of Parliament, not the Income Tax Act 1967, decides how business profits are taxed.

- Category: states
- Language: en
- Status: published
- Updated: 2026-07-24
- Canonical: https://negaraku.md/en/states/labuan

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Two companies, same owners, same customers. One is incorporated in Kuala Lumpur and
pays corporate tax under the Income Tax Act 1967. The other is incorporated on an
island 10 km off the Sabah coast and is taxed at 3% under a completely different Act
of Parliament.

That is Labuan. It is not a loophole inside Malaysian tax law — it is a parallel
statute, and knowing which statute applies to you is the whole exercise.

## Key facts

| | |
| --- | --- |
| Status | Federal Territory, declared 16 April 1984 |
| Size | Labuan island covers about 91 km², roughly 10 km off the Sabah coast |
| Population | About 100,900 (2025, DOSM) — the smallest of any state or territory |
| Financial centre | Labuan International Business and Financial Centre (Labuan IBFC) |
| Regulator | Labuan Financial Services Authority, established 15 February 1996 |
| Governing tax law | Labuan Business Activity Tax Act 1990 (Act 445) |

## What Labuan IBFC actually is

Labuan IBFC is not a company or a building. It is a jurisdiction-within-a-jurisdiction:
Labuan-specific statutes, a dedicated regulator, and the entities registered under them.

The regulator is Labuan Financial Services Authority, created by the Labuan Financial
Services Authority Act 1996 (Act 545), in operation since 15 February 1996. Its
statutory objectives are to promote and develop Labuan as an international centre for
business and financial services, and to act as the central regulatory, supervisory and
enforcement authority for that industry.

The vehicles are listed in the Schedule to Act 445 — a Labuan company (incorporated
under the Labuan Companies Act 1990), a Labuan foundation, a Labuan trust, a Labuan
limited partnership or limited liability partnership, and licensed Labuan financial
institutions. Labuan FSA states that incorporation of a Labuan company must be done
through a Labuan trust company, with registration fees of RM1,000, RM2,000 or RM5,000
depending on the capital band.

## How the tax treatment actually differs

Everything turns on two definitions in section 2 of Act 445. A **Labuan trading
activity** includes banking, insurance, trading, management, licensing and shipping
operations — or any activity that is not a non-trading activity. A **Labuan
non-trading activity** means holding investments in securities, shares, loans,
deposits or other property in Labuan on the entity's own behalf.

| | Rest of Malaysia | Labuan business activity |
| --- | --- | --- |
| Governing Act | Income Tax Act 1967 | Labuan Business Activity Tax Act 1990 |
| Trading profits | Corporate tax under Act 53 | 3% of net profits per the audited accounts (s.4) |
| Investment holding profits | Taxed under Act 53 | Not charged to tax under Act 445 (s.9) |
| Sales tax | Applies | Labuan is a "designated area" (Act 806) |

Three carve-outs matter more than the headline rate.

**Mixed activity collapses into trading.** Section 2(2) deems an entity carrying on
both trading and non-trading activity to be carrying on a trading activity. The 0%
outcome is fragile.

**Intellectual property income is excluded.** Royalty and other income from the
commercial exploitation of an IP right is carved out of both section 4 and section 9,
and is taxed under the Income Tax Act 1967 instead.

**Substance decides everything.** Section 2B requires 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. Section 2B(1A) then charges tax at
**twenty four per cent** on chargeable profits for any year in which those regulations
are not complied with. Labuan is not a mailbox jurisdiction by design.

An entity can also make an **irrevocable** election under section 3A to be taxed under
the Income Tax Act 1967 instead — filed within three months of the start of the basis
period. Irrevocable means irrevocable.

## Common mistakes

- **Assuming 3% is automatic.** It is conditional on substance regulations that vary
  by activity. Confirm the current prescribed thresholds for your activity first.
- **Assuming a Labuan entity is automatically non-resident.** Section 3B treats a
  Labuan entity as resident in Malaysia for double taxation arrangement purposes if
  management and control are exercised in Malaysia.
- **Forgetting the audit.** Chargeable profits under section 4(2) are the net profits
  *reflected in the audited accounts* — the 3% presumes an audit exists.
- **Confusing "designated area" with "no indirect tax".** Under the Sales Tax Act 2018
  goods transported from Labuan into Malaysia are treated as if imported, and tax
  applies at that point.

## What's next

Read [the Labuan tax regime](/en/taxation/labuan-tax-regime) for the mechanics of
filing and the deadlines, and [Labuan company vs Sdn Bhd](/en/business/labuan-company-vs-sdn-bhd)
for a structure-by-structure comparison. For the baseline you are comparing against,
see [corporate tax rates](/en/taxation/corporate-tax-rates), and for the other
territory carved out of a state, [Kuala Lumpur](/en/states/kuala-lumpur).

## Sources

- Laws of Malaysia, Act 445 — Labuan Business Activity Tax Act 1990 — https://www.labuanfsa.gov.my/clients/asset_120A5FB8-61B6-45E8-93F0-3F79F86455C8/contentms/img/documents/Legislation_and_Guidelines/Legislation/2022/Draft%20ACT%20445%20BI%20update%202021%20-%20Website%20purpose%2012%20DEC%202022.pdf (Labuan Financial Services Authority)
- Laws of Malaysia, Act 545 — Labuan Financial Services Authority Act 1996 — https://www.labuanfsa.gov.my/clients/asset_120A5FB8-61B6-45E8-93F0-3F79F86455C8/contentms/img/documents/Legislation_and_Guidelines/Legislation/Principal_Legislation/Labuan-Financial-Services-Authority-Act-1996-Act-545.pdf (Labuan Financial Services Authority)
- Laws of Malaysia, Act 806 — Sales Tax Act 2018 (online reprint) — https://lom.agc.gov.my/ilims/upload/portal/akta/LOM/EN/Act%20806%20-%20Reprint%20Online%20(1-10-2020).pdf (Attorney General's Chambers of Malaysia)
- FAQ — Labuan Companies — https://www.labuanfsa.gov.my/areas-of-business/labuan-structures/labuan-companies/faq (Labuan Financial Services Authority)
- Population by state (open data) — https://storage.dosm.gov.my/population/population_state.csv (Department of Statistics Malaysia)
- Tinta Bicara Hari Malaysia: Kenali Wilayah Persekutuan — https://www.mkn.gov.my/web/ms/2022/09/13/tinta-bicara-hari-malaysia-kenali-wilayah-persekutuan/ (Majlis Keselamatan Negara)

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Source of truth: https://github.com/negaraku-md/NegaraKu.md
License: CC BY-SA 4.0