How to set up a company in Malaysia (2026): Labuan vs Sdn Bhd, cost & tax

Overview

Malaysia offers two genuinely different corporate structures, and choosing the wrong one is the most common and most expensive mistake foreigners make. An onshore Sdn Bhd (Sendirian Berhad, i.e. a private limited company) is registered with the Companies Commission of Malaysia (SSM) and taxed under the Income Tax Act 1967. It is the right vehicle if you actually operate in Malaysia, sell to Malaysian customers, or want to sponsor an employment pass and live there.

A Labuan company is registered in the Labuan International Business and Financial Centre (IBFC), a federal territory off Borneo, and is taxed under the separate Labuan Business Activity Tax Act 1990 (LBATA). It targets international, non-Malaysian trade and pays 3% on audited trading profits, but only where it meets economic-substance conditions. Labuan is a low-tax midshore regime, not a paper offshore shelf company, and since 2019 it has been rebuilt around real presence.

Who it's for

The two structures suit almost opposite people. Pick the Sdn Bhd if Malaysia is your real operating base; pick Labuan only if your business is genuinely international and you can fund and staff the required substance in Labuan.

• Sdn Bhd: you sell to Malaysian customers, hire locally, or want an employment pass to live in Malaysia.
• Sdn Bhd: SME founders wanting the reduced 15%/17% rate on the first RM600,000 of profit.
• Labuan: international consulting, trading, holding or IP businesses with clients outside Malaysia and no Malaysian-source income.
• Labuan: founders who will actually set up a Labuan office and 2+ full-time staff, not a mailbox.
• Not for either: someone who wants a zero-substance shell to invoice from — Malaysia's rules will not deliver that, and a company run from your home country is likely taxable there.

Types of company

Foreigners overwhelmingly use either the Sdn Bhd or the Labuan company. A Sdn Bhd allows 100% foreign ownership in most sectors; a handful of regulated areas (banking, telecommunications, oil and gas, distributive trade, education, agriculture) still require local or Bumiputera participation. A Labuan company allows full foreign ownership and directorship with no local-partner rule.

Corporate tax & key taxes

How to set it up, step by step

For a Sdn Bhd the process runs through SSM's MyCoID portal, usually via a licensed company secretary:

1. Reserve a company name with SSM (name search + reservation fee).
2. Appoint at least one director who ordinarily resides in Malaysia — a citizen, PR, or a foreigner on a valid employment pass (many founders use a nominee resident director until they hold their own pass).
3. Prepare the incorporation documents (Section 14 super-form): directors, shareholders, share capital, registered address.
4. Lodge incorporation via MyCoID and pay the RM1,000 SSM fee; approval is typically 3-7 working days.
5. Appoint a licensed company secretary within 30 days of incorporation.
6. Open a corporate bank account, and register for income tax (LHDN) and SST if turnover exceeds the threshold.

For a Labuan company you must go through a licensed Labuan trust company — there is no self-filing option:

1. Engage a licensed Labuan trust company, which acts as your registered agent, provides the registered office and files with Labuan FSA.
2. Complete due diligence (KYC on all directors and shareholders) and choose your activity: trading (3%) or non-trading/holding (0%).
3. Incorporate via Labuan FSA — approval can be as fast as a few days once due diligence clears; 5-10 working days is typical.
4. Put substance in place: a physical Labuan office, at least two full-time employees resident in Labuan, and the required annual operating expenditure.
5. If you want to live in Malaysia, apply for a Labuan work permit (a 2-year renewable visa that lets the director reside in West Malaysia).
6. Open the corporate bank account and file the annual LBATA return with audited accounts.

Costs & timeline

Treat these as ranges and verify the current figures with SSM, Labuan FSA and your service provider before you commit — fees, the annual government charge and audit costs move, and the substance spend is a real recurring cost, not a one-off.

Substance, banking & the reality

Both routes now demand real substance, and banking is the practical bottleneck. The 3% Labuan rate is assessed year by year: to keep it, a trading company must maintain at least two full-time employees in Labuan and at least RM50,000 of annual Labuan operating expenditure. Miss it in any year and that year's profits fall to Malaysia's 24% rate — passing in 2025 does not protect you in 2026. Corporate bank accounts (onshore and in Labuan) involve serious due diligence, and Labuan accounts in particular can take weeks and are sometimes declined for thin-substance applicants.

Common mistakes

• Choosing Labuan for a business that actually sells to Malaysian customers — that income is taxed onshore at up to 24%, not 3%.
• Assuming Labuan is a zero-substance offshore shell: the 3% rate requires a real office, 2+ staff and RM50,000 local spend, every year.
• Forgetting the mandatory resident director for a Sdn Bhd, and the licensed company secretary within 30 days.
• Under-capitalising a 100% foreign-owned Sdn Bhd when you also need it to sponsor an employment pass.
• Ignoring CFC and place-of-effective-management rules in your home country — the biggest and most expensive oversight.
• Budgeting only the setup fee and missing the recurring audit, secretary/agent and substance costs.