MM2H vs Labuan for a Freelancer

For the first part...Can you work Free-Lance in Malaysia as long as you don't have Malaysian clients. I'd give a conditional yes. If you are working On-Line or sending work product abroad through the mail. courier or hand-delivering it I'd see no issue.

Obviously if you are buying and selling in Malaysia it will raise concerns. It's probably better to have a foreign bank and business address (as a drop) as well. You could then transfer any money into your local bank account as needed.

You'd be taxed abroad on the business but would probably constitute a Malaysian Tax Resident provided you reside 183 days or more per year in Malaysia.

If your business entirely consists of non-malaysian clients then I see no reason to incorporate in Labuan unless there might be some tax-perks. There are some nice deductions for a computer and other items I'd consider business expenses in the Malaysian personal income tax code...but these are deductions...so you need to be paying taxes and receiving local income to take advantage. The Labuan Business/Investors Visa requires having some Malaysian partners, although the way they set up the Directorship these individuals are more in the nature of "placeholders" that receive a fee. Read the fine print carefully though.