Judicial Review Decision Provides Clarity for Labuan Trust Companies and Entities

Recent judicial decisions have brought clarity to the tax framework governing Labuan entities. In a judicial review initiated by the Association of Labuan Trust Companies (ALTC) and over 170 Labuan entities, both the High Court and the Court of Appeal ruled in favour of the applicants in their case against the Inland Revenue Board of Malaysia (IRB) and the Ministry of Finance (MOF). The decision affirms Labuan entities’ ability to apply the 3% tax rate on net profits under the Labuan Business Activity Tax Act 1990 (LBATA).

Dispute Over Taxation of Non-Listed Activities

The judicial review, which began in 2021, was initiated to challenge the legality of regulatory changes that had implications for Labuan’s tax regime. These included the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018, its amendments in 2020, and the 2021 Regulations.

The key issue arose when the IRB and MOF determined that Labuan entities engaged in “non-listed activities” would be subject to taxation under the Malaysian Income Tax Act 1967 (ITA) at a rate of 24%, rather than the 3% tax rate under LBATA. This interpretation created uncertainty and increased tax exposure for many Labuan businesses.

High Court Ruling

On 13 June 2022, the High Court ruled in favour of the ALTC and the Labuan entities, determining that:

• The 2018 and 2020 regulations were invalid.

• No retrospective tax obligations could be imposed under these regulations before the issuance of the 2021 Regulations (gazetted on 22 November 2021).

• The 3% tax rate under LBATA remained applicable to Labuan entities engaged in non-listed activities prior to the enforcement of the 2021 Regulations.

• The IRB and MOF’s official letters applying the 24% ITA tax rate to non-listed activities were nullified.

Court of Appeal Decision

Following the High Court ruling, the IRB and MOF appealed the decision. However, on 12 May 2023 and 26 September 2024, the Court of Appeal struck out these appeals. This means the High Court’s decision remains final, confirming the applicability of the 3% tax rate under LBATA for eligible Labuan entities.

Implications for Labuan Businesses

The decision provides greater clarity and reinforces Labuan’s position as a jurisdiction for international business. Key implications include:

• Regulatory certainty – Labuan entities now have a clear legal framework supporting the application of the 3% preferential tax rate on net profits.

• Investor confidence – Businesses considering Labuan as a jurisdiction for their operations can expect a more stable and predictable tax environment.

• Competitiveness – The ruling helps maintain Labuan’s attractiveness as a financial and business hub.

Looking Ahead

Alpadis Labuan remains committed to supporting businesses in navigating regulatory requirements and structuring their operations effectively. With this decision providing more clarity on Labuan’s tax framework, businesses can continue to leverage the jurisdiction’s regulatory and tax advantages with greater confidence.

For more information on how Alpadis can assist with your Labuan operations, contact us today.