The 3% Labuan rate is a trading rate. A Labuan investment holding company that only holds investments on its own behalf is not subject to Labuan business activity tax, provided it meets the substance requirements for the year.
So the first decision in setting one up is what the company will do: hold its investments or trade them. That decision is taken before incorporation, because it fixes both the tax position and the spending in Labuan.
Key Takeaways
- The rate follows the activity. With substance, trading pays 3% and holding is not subject to the tax. Without it, 24%.
- A bond or loan changes the test. On our reading, one such item ends pure equity holding.
- Holding is for the company itself. Managing other people's investments is a licensed business.
Substance is the condition for both
Under the Labuan Business Activity Tax Act 1990, a trading company pays 3% of its audited net profits when it meets the substance requirements, while a company that fails the substance requirements is taxed at 24% on its chargeable profits instead.
Substance means full-time employees and annual operating expenditure in Labuan.
The amounts come from the substance regulations (P.U.(A) 423/2021, as amended), and the test is applied to each year separately. Our economic substance page explains how to meet it.
| What the company does | Labuan business activity tax | Minimum full-time employees in Labuan | Minimum annual operating expenditure in Labuan |
|---|---|---|---|
| Pure equity holding | Not subject, if substance is met | None required | RM20,000, plus the control conditions in Labuan |
| Other investment holding | Not subject, if substance is met | 1 | RM20,000 |
| Listed trading activities | 3% of audited net profits, if substance is met | From 2, set per activity | From RM50,000, set per activity |
Holding means holding for the company itself
The company has to hold the investments on its own behalf. The Inland Revenue Board's guidelines of 10 December 2025 list the investments a company can hold: securities, stocks, shares, loans and deposits, along with property located in Labuan. Land and buildings outside Labuan are not a Labuan business activity, so the Income Tax Act 1967 applies to their income. Our whitepaper on trading and non-trading activities sets out the classification in more detail.
Managing or dealing in investments for other people is a different business, and Labuan FSA grants licences for it. A company that holds investments and also trades is treated as a trading company.
Whether active buying and selling for the company's own account still counts as holding is another question. It will get its own answer. For a company that plans it, the table above may not apply.
One bond or loan can change the test
The guidelines define pure equity holding as holding equity and earning income solely in the form of dividends and capital gains. Take a company that holds only shares and earns only that income: it sits in the lighter row. Now let the same company hold a bond or a loan. Interest is neither a dividend nor a capital gain, and neither is rent. On our reading of the word "solely", one such item is enough to move the company into the other investment holding row, and that row asks for a full-time employee.
Two cases are less clear: interest on bank deposits and cash, and a fund holding. The guidelines mention neither interest nor fund holdings. Each is a question of its own.
The employee the other row requires has to meet conditions of their own. Under the Inland Revenue Board's guidelines of 5 November 2025, the employee must be fit and proper: office-related work, relevant competence and no conflict of interest. The employee must also hold a contract of service with the company itself and work physically in Labuan.
Staff supplied through an outsourcing agency do not count.
Pure equity holding carries control conditions instead: a board meeting in Labuan at least once a year, the registered office and resident secretary there, and the accounting and business records kept there.
What the company holds is settled before incorporation
Our view is that the first step matters most, because one item on the list can move the company from one row of the table to another.
- List what the company will hold, and confirm every item is held for the company itself.
- Check which row of the table the whole company fits.
- Plan the Labuan spending before the first year, and the employee if the company is other investment holding.
- Incorporate the company through a licensed Labuan trust company, which provides its registered office and resident secretary. Bring the list from step 1 to our corporate services team before this step.
This article covers the Labuan side only. What an owner pays in their own country on dividends or gains is a question for an adviser there.
The test repeats every year. A company that adds a bond in its second year is tested on what it does that year, bond included.
This is general information about Labuan tax law as it stood on 20 October 2026, not tax or legal advice. Review your position before acting.
Frequently Asked Questions
Is a Labuan investment holding company taxed?
Not under the Labuan Business Activity Tax Act 1990, if it only holds investments for itself and meets the substance requirements. A trading company pays 3% of audited net profits, and one that fails substance pays 24% on chargeable profits.
Does a Labuan investment holding company need staff in Labuan?
A pure equity holding company needs no full-time employee, but it must incur at least RM20,000 of operating expenditure and hold at least one board meeting in Labuan each year. Other investment holding needs the same RM20,000 and at least one fit and proper full-time employee in Labuan.
Can a Labuan investment holding company manage other people's money?
Not as an investment holding company, which holds on its own behalf. Labuan FSA grants licences for managing investments for other people.