When considering the establishment of a business in Malaysia, entrepreneurs often have to choose between setting up a company on the Malaysia or in Labuan. Both jurisdictions have their own distinct characteristics, advantages, and requirements, which can significantly impact business operations. Understanding the differences between Malaysia and Labuan companies is crucial for making the right choice based on business goals and objectives.

One of the most apparent differences lies in the location and jurisdiction. Companies incorporated inMalaysia is governed by the Companies Commission of Malaysia (CCM), making it the primary jurisdiction for businesses operating within the country. In contrast, Labuan is an international business and financial center under the jurisdiction of the Labuan Financial Services Authority (LFSA).

Another notable difference lies in the corporate structure. Malaysian companies must have a minimum of one director who is a natural person, at least 18 years old and resides in Malaysia. They are also required to appoint a company secretary and maintain a registered office within Malaysia. This office can either be the address of the company secretary or any other location within Malaysia. In contrast, Labuan companies must have at least one resident director, who can be a natural person residing in any country. Labuan also permits the appointment of a corporate director as an additional director alongside the resident director, providing greater flexibility in the company’s management structure. Furthermore, Labuan companies are required to appoint a secretary which is a Labuan Trust Company and maintain a registered office which must be the address of the Labuan Trust Company.

A company in Malaysia can be established with a paid-up share capital as low as RM1.00, while a Labuan company requires at least one share, with the capital denominated in any currency other than Malaysian Ringgit. Both Malaysian and Labuan companies issue shares without a par or nominal value.

In terms of taxation, companies incorporated in Malaysia are subject to a corporate tax rate of up to 24% on their chargeable income. This standard tax rate applies to businesses operating within Malaysia. Small and medium enterprises (SMEs) benefit from progressive tax rates that range between 15% and 24%, offering a measure of financial relief to smaller businesses conducting local operations.
In contrast, Companies incorporated in Labuan are subject to the Labuan Business Activity Tax Act 1990, which offers a beneficial tax framework. Under this act, businesses can take advantage of reduced tax rates of 3% or even enjoy tax exemptions, depending on the nature of their activities. For instance, companies involved in Labuan Trading Activities are taxed at a flat
rate of 3% on their net profits. Meanwhile, those engaged in Labuan Non-Trading Activities may qualify for tax exemptions, provided they meet the stipulated economic substance requirements. Labuan's status as an offshore centre provides businesses with more specialised tax advantages.

The types of business activities permitted also differ between the two locations. Companies in Malaysia are permitted to engage in a broad spectrum of legal business activities, although certain sectors are subject to regulation. To qualify for the preferential tax rates under the Labuan Business Activity Tax Act 1990, Labuan companies must conduct Labuan Business Activities, which are categorised into Labuan Trading Activities and Labuan Non-Trading Activities. If a Labuan company engages in Non-Labuan Business Activities, it will be subject to the tax provisions of the Malaysian Income Tax Act 1967.

In conclusion, the decision to incorporate in either Malaysia or Labuan depends largely on the business’s goals, operational needs, and target markets. Malaysia is ideal for companies focused on local business activities and requiring compliance with Malaysia’s regulatory frameworks. However, Labuan offers substantial tax advantages and greater flexibility, making it an excellent choice for international businesses. By understanding the key differences between these two jurisdictions, businesses can make a more informed decision that aligns with their long-term objectives.

Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.

See also:
Malaysia Company Incorporation Basic Package
Procedure and Fee for Registration of Branch Office in Malaysia
Labuan Company Incorporation Complete Package