Labuan: Offshore Legal and Tax Regimes
In April 2009, Malaysia (Labuan) was added to the Organization of Economic Cooperation and Development's new 'blacklist' of jurisdictions which had not committed to implementing the internationally agreed standard in tax transparency.
The list, was published on April 2, following the G20 London Summit and was issued at the same time as a communique by government leaders which set out the major economies' vision of the future global regulatory and economic landscape. "We stand ready to deploy sanctions to protect our public finances and financial systems," read the communique, presented by British Prime Minister Gordon Brown, which went on to declare that: "The era of banking secrecy is over."
In response to the 'blacklisting' Malaysia said it was committed to internationally-agreed tax standards and should not be categorized with jurisdictions that have not.
Malaysia has since been elevated to the OECD's 'white list' of countries which have "substantially implemented" the internationally agreed tax standard.
In February 2010, new laws which, it is hoped, will substantially improve Labuan’s competitive edge in international financial markets came into effect.
A total of four new acts, together with radical amendments to a further four existing laws, will, it was said, completely change the way in which Labuan carries on its financial services business. With the enactment of the new laws, the Labuan Offshore Financial Services Authority was re-named the Labuan Financial Services Authority (Labuan FSA).
Dato Azizan Abdul Rahman, the Director-General of Labuan FSA said: “These far-reaching changes cover all financial activities in Labuan International Business and Financial Centre – from banking, insurance, leasing and company incorporation right through to the creation of Islamic financial products and services. Apart from that, the changes have taken into consideration all aspects so that we are ahead of accepted international standards and practices.”
The new laws allow for the creation of Labuan foundations, limited liability partnerships, protected cell companies (insurance and mutual funds), shipping operations, Labuan special trusts and financial planning activities. These complement the existing available range of products and services and aim to provide investors with a wider choice of financial products to maximise investment opportunities.
In January 2013, the Labuan FSA issued guidelines applicable to all Labuan international trading companies (LITCs) licensed to conduct international commodity trading business in the Labuan International Business and Financial Center (LIBFC) under the Global Incentives For Trading (GIFT) program.
The guidelines, which went into effect on January 1, 2013, and supersede those previously-issued on October 31, 2011, cover a Labuan international commodity trading business involved in the trading of physical and related derivative instruments of petroleum and petroleum-related products including liquefied natural gas (LNG), agriculture products, refined raw materials, chemicals and base minerals. An LITC can deal only with non-residents in any currency other than Malaysian ringgit.
In addition, within five years after the date it obtained its license, an LITC must have a minimum annual turnover of USD100m; minimum annual business spending of MYR3m (USD995,000) payable to Malaysian residents; and at least three professional Malaysian-resident traders employed with a minimum salary of MYR15,000 per month each.
Under the GIFT program, a general LITC is subject to a corporate tax rate of 3%, but an LITC set up purely as an LNG trading company is entitled to a 100% income tax exemption on chargeable profit for the first three years of its operation, provided the company is licensed before December 31, 2014.
The LITC is required to maintain a registered office in Labuan, which is the office of its Labuan trust company. However, the LITC is allowed to establish its operational office(s) anywhere in Malaysia, while being required to provide the details of that office to the LFSA upon commencement of business. It must also ensure that its business is conducted with a proper corporate governance and risk management framework in place.
Other tax incentives applicable for an LITC include a 100% exemption on fees paid to non-Malaysian directors of the LITC; a 50% exemption on gross employment income of non-Malaysian professional and managerial staff, including traders with the LITC; an exemption on dividends received by or from the LITC; an exemption on royalties received from the LITC; an exemption on interest received by residents or non-residents from the LITC; and a stamp duty exemption on all instruments for Labuan business activities and the transfer of shares.