Understanding Labuan Companies: Substance Requirements & Compliance in 2025

Labuan, a federal territory of Malaysia located off the coast of Borneo, has long been positioned as a mid-shore jurisdiction—offering a unique balance between low-tax benefits and international credibility. It’s particularly attractive for entrepreneurs, holding companies, fintech startups, and international consulting businesses.

But in recent years, Malaysia has tightened its regulatory framework around Labuan entities. So if you’re thinking of using a Labuan company for your international structure, it’s critical to understand substance requirements and ongoing compliance obligations.

What is a Labuan Company?

A Labuan company is a legal entity incorporated under the Labuan Companies Act 1990, and regulated by the Labuan Financial Services Authority (Labuan FSA). These companies can be used for a range of legitimate international business activities—from trading and investment holdings to fintech, consulting, and agency services.

One of the main draws has been Labuan’s low corporate tax regime, which, depending on the business model and election, can be either:

3% for Trading companies

0% for Pure Equity Holding companies

But the catch? You need to prove real economic substance in Labuan to enjoy these benefits. More on that below.

What Kinds of Businesses can Incorporate in Labuan?

To register your company in Labuan you must align with one of the prescribed business activities. While most businesses can establish themselves in Labuan, you might need to do some restructuring or make some changes to the way you are operating in order to qualify.

Here is a list of the prescribed Labuan business activities that apply to most businesses:

• Administrative services
• Accounting services
• Legal services
• Backroom processing services
• Payroll services
• Talent management services
• Agency services
• Insolvency services
• Management services

Businesses in the financial services industries – banking, insurance, fund managers etc can also incorporate in Labuan, but with higher substance requirements.

What are the Labuan Substance Requirements?

For the majority of businesses setting up in Labuan, you will be required to:

Have a Physical Office in Labuan

The office should match the nature and size of the business. Relying solely on a virtual office is not enough. While a small room in a coworking space can work, it must be a private office with its own door.

Employ Full-Time Staff

For trading companies, you must employ at least two full-time employees in Labuan.

Incur Adequate Annual Operating Expenditure

You must spend a certain amount annually in Labuan. For most businesses, the minimum threshold is RM 50,000. Higher thresholds apply for regulated activities such as insurance, banking, and fund management.

For pure equity holding companies, the minimum spend threshold is RM 20,000.

Failing to meet these substance requirements can lead to:

• Loss of the Labuan tax benefits
• Reclassification under the Malaysian Income Tax Act (ordinary corporate tax at 24%)

Other Compliance Obligations

Substance is just one part of the compliance picture. Here’s what else Labuan companies need to stay on top of:

Annual Reporting & Audited Accounts

Trading companies must prepare audited financial statements annually and file them with the Labuan FSA. Non-trading companies (like pure holding entities) may be exempt from audit but still need to file unaudited accounts.

Company Secretary & Registered Office

Every Labuan company must appoint a licensed Labuan trust company to act as the company secretary and maintain a registered office in Labuan. We provide this service in Labuan.

Bank Account Setup

Most Labuan companies will open offshore bank accounts in Malaysia or elsewhere in Asia (like Singapore). However, banks often request proof of real operations—especially substance.

We work with partner banks and can provide a letter of introduction, as well as set up the onboarding meeting with the bank on your behalf.

Tax Filing Obligations

Labuan companies must file:

• An annual tax return with the Inland Revenue Board (IRB)
• An annual return with Labuan FSA
• Employer-related tax filings if you have local employees

Regulatory Licensing (if applicable)

Some activities—like fintech, leasing, fund management, or insurance—require licensing by Labuan FSA. These come with more stringent substance and capital requirements.

Directors Visa

If you would like to utilize your Labuan company to obtain a work permit that allows you to reside in Malaysia, this permit is valid for two years and can be renewed indefinitely.

Labuan Marketing Office

If you wish to establish your personal base outside of Labuan, for example in Kuala Lumpur, you will need to apply for an LMO permit. Essentially, you will be setting up a marketing office in Kuala Lumpur, where you will work, while your staff will remain based in Labuan.

Is Labuan Still Worth It in 2025?

Yes—but only if you meet the substance requirements and run a legitimate international business that benefits from a Malaysian-based low-tax structure. For consultants, digital nomads with online businesses, or holding structures, Labuan can be a smart and compliant base.

It’s not a “set and forget” offshore haven. But if you’re willing to invest in the right setup—with local staff, a real office, and ongoing compliance—Labuan still offers solid advantages.

If your main concern is obtaining the directors work permit and you’re not overly worried about tax issues, you won’t need to stress about the substance requirements.

Our team in Labuan will provide you with support, so ongoing compliance won’t have to be a hassle.

Need Help Setting Up a Labuan Company?

At Offshore in Asia, we help entrepreneurs, consultants, and business owners navigate the practical side of setting up compliant structures in Asia. We can:

• Incorporate your Labuan company
• Set up real substance (office, staff, compliance)
• Assist with banking, licensing, and tax filings
• Ensure your structure remains bulletproof for cross-border operations

Contact us to discuss your goals and see if Labuan is the right jurisdiction for your needs.