In
April 2008, LOFSA released its
2007 Annual Report, highlighting the development
and progress of the Labuan International Business
and Financial Centre (IBFC) and the financial
performance of LOFSA.
According
to LOFSA, a strategic milestone was achieved
in 2007, with the repositioning and rebranding
of Labuan IOFC as Labuan International Business
and Financial Centre (IBFC).
It
observed that: "The new brand name of Labuan
IBFC marks its greater focus and its continuous
progress towards a vibrant and progressive international
business and financial centre."
"Labuan
IBFC has shown its agility to build new strengths,
leveraging on its comparative advantages, to
meet the emerging and more sophisticated demand
in the region."
The
report revealed that the Labuan IBFC continued
to record double-digit growth in the number
of new offshore companies, which totalled 6,297
in 2007.
The
offshore banking industry reported an expansion
in the loan assets, complemented by an improvement
in the asset quality.
The
total assets of offshore banks increased by
27.8% from USD21.1bn in 2006, to USD 27bn in
2007, and the offshore leasing business continued
as one of the main offshore financial activities,
to become one of the highest growing financial
industry in Labuan IBFC in 2007.
Total
new lease financing increased by 18.7%, resulting
in a cumulative financing of USD14.1bn. This
was boosted by strong activities in the oil
and gas sectors, as well as increased shipping
activities in the region.
The
report went on to reveal that the offshore insurance
industry continued to expand, particularly in
the reinsurance business sector, which grew
by 40.3% to USD919.2mn in 2007, of which 62.0%
were non- Malaysian premiums, signalling its
growing role as a reinsurance centre.
For
the year 2007, Islamic-based assets in the Labuan
IBFC continued to grow, to USD1.2bn, representing
an increase of 36.9% as compared to 2006. There
was strong interest from investors from the
Middle-East seeking to invest in the Asian region.
The
position of Malaysia as an International Islamic
Financial Centre (MIFC) has further enhanced
Labuan’s effort to promote Shariah compliant
trusts and foundations, as these products complemented
the Islamic financial products and services
that were already available onshore.
The
Labuan International Financial Exchange (LFX)
also recorded four new listings, bringing the
total number (as at 2007) to 31, with total
market capitalisation of USD15.1bn.
Going
forward, LOFSA identified several key strategic
programmes to advance Labuan as an International
Business and Financial Centre.
One
such initiatives was to elevate Labuan IBFC‘s
status to being the “gold standard for
holding company jurisdiction”.
LOFSA
also revealed that it was in the process of
streamlining all aspects of the existing legal
framework covering both conventional and Islamic
businesses to create a more "facilitative,
flexible and frictionless business environment".
Then
the following month, LOFSA announced the establishment
of Labuan IBFC Incorporated Sdn Bhd, (Labuan
IBFC Inc).
The
new entity, which is fully-owned by LOFSA, is
responsible for promoting Labuan as an International
Business and Financial Centre (IBFC).
The
main function of the Labuan IBFC Inc is to drive
market development, as well as to act as a facilitator
for investors seeking to participate in Labuan
IBFC. It will also undertake "targeted
and focused interface with potential investors".
According
to the Labuan IBFC Annual Report, released in
May 2009, Labuan IBFC maintained positive growth
in 2008 across all key business sectors, despite
the more challenging global environment, and
new measures were recorded to improve the flexibility
and business-friendliness of its tax and legal
framework, becoming effective in 2009 and beyond.
In
2008, company incorporation in the Labuan IBFC
grew by 9.1% to 6,868 originating from a total
of 85 countries, of which about 60% are from
Asia Pacific region, mainly for investment holding
purposes, special purpose vehicles, international
financial activities and trading activities.
The number is expected to increase further with
the enhancement of its delivery process, reduction
of annual fees from RM2,600 to RM1,500 and the
upgrading of the online registration system
and business approval process.
After
10% growth to more than 300 registered financial
institutions, the scope of Labuan IBFC products
and services now includes banking, investment
banking, leasing, insurance and insurance-related,
both conventional and Islamic, broken down as
follows:
Six
new banking licenses were issued in 2008. The
soundness of the Labuan banking industry is
reflected in the quality of assets, strong capitalisation
and earnings growth - the gross non-performing
loans ratio reduced from 2.0% to 1.9%, an average
risk-weighted capital ratio and core capital
ratio at 15.9% was mainatained with total assets
increasing by 7.5% to USD29.0bn; earnings grew
by 28.2%.
27
new leasing companies were approved in 2008.
Leased assets grew by 22.9% to USD17.4 billion,
underpinned by activities in oil and gas and
aviation.
During
the year, 16 new licensees were approved, comprising
two insurers, two reinsurers, two captives,
nine insurance brokers and one underwriting
manager. The insurance sector in Labuan achieved
a significant growth in 2008 recording gross
premiums of more than USD1bn. The net claims
to earned premium income ratio of the industry
improved significantly to 56.5% from 72.9% in
2007.
Foreign
representation in the insurance sector continued
to increase from 66.5% in 2007 to 69.5% in 2008.
Similarly, the non-resident insurance business
remained to have a higher share of 57% in 2008.
This reflects favourably the out-out business
conducted through Labuan IBFC.
The
insurance industry maintained an aggregate solvency
surplus of USD627.7m and margin of solvency
of five times above the minimum regulatory requirement.
Captive
insurance, a recognised niche business, saw
premiums increase by 47% to USD186.9m. There
were 32 captives insurers in Labuan IBFC as
the end of 2008.
Retakaful
gross contributions increased by 48.2% to USD162.3m,
driven by four full-fledged retakaful operators
and nine retakaful windows.
Five
new Islamic private funds were established in
2008, with an approved fund size of USD1.5bn
increasing the total Islamic private funds to
USD2.8bn or one-third of the total size of private
funds in Labuan IBFC.
The
Islamic banking sector, comprising 6 Islamic
banks and 3 banks with Islamic windows, saw
total deposits grow to USD337.3m from USD250m
in 2007.
In
order to enhance LOFSA’s regulatory function
and corporate governance, a separate marketing
entity, Labuan IBFC Incorporated Sdn Bhd was
established to undertake more focused marketing
activities for the Labuan IBFC.
Labuan
companies can now elect to be taxed under the
Income Tax Act 1967 or the Labuan Offshore Business
Activity Tax Act 1990, to reinforce the business-friendliness
and flexibility of Labuan IBFC.
As
part of the strategy to further facilitate the
use of Labuan as the platform for investment
into Malaysia and the region, LOFSA has also
simplified the procedures for Labuan companies
to deal with residents and invest into a domestic
company.
LOFSA
is committed to maintaining Labuan IBFC as a
preferred international business and financial
centre of high integrity and repute and improving
the facilitative environment.
Legislation
for a new improved legal framework is expected
to be tabled in the coming Parliament session.
LOFSA will complete upgrading the on-line company
registration system in 2009 improving its speed
and user-friendliness.
With
effect from 1 June 2009, Labuan holding companies
will be accorded the extra flexibility to have
a physical presence in Kuala Lumpur. Similarly,
Labuan banking institutions and insurance companies
that meet the predetermined criteria will also
be allowed to have a physical presence onshore
from 2010 and 2011, respectively.
This
section of the lowtax site describes the most
important types of offshore business activity
carried out from Labuan.
Offshore
banking can only be carried on in Labuan by
an offshore company or a foreign offshore company
incorporated or registered for that sole and
exclusive purpose, and by an office, branch
or subsidiary of a licensed Malaysian bank.
To
apply for an offshore banking licence, an application
needs to be made to the Labuan Offshore Financial
Services Authority (LOFSA) providing a guarantee
and minimum capital funds of RM10 million. An
annual fee of RM80,000 (at the time of writing)
is payable to the Central Bank no later than
15 January. Accounts have to be audited and
filed with the Central Bank annually.
An
offshore bank may conduct a wide spectrum of
financial activities, including the management
of investment portfolios, accepting foreign
currency deposits, borrowing or lending money
to Malaysian residents, making loans to foreigners
to purchase properties situated within Malaysia,
granting loans to non-residents, securitisation,
leasing, investment banking, Islamic banking
and others.
In
1999, in response to problems caused by the
Asian crisis in 1998, Labuan liberalised its
entry criteria for offshore banks. Other changes
included permitting offshore banks to trade
in ringgit instruments in the secondary market
which would allow them greater access to ringgit
business as well as to promote money market
operations in Labuan. They are also allowed
to purchase ringgit instruments in the primary
market using foreign currency.
In
August 2009, Petronas
issued a landmark dual-tranche USD4.5bn bond/sukuk,
domiciled in Labuan and managed by Bank Negara
Malaysia.
The Malaysian
national oil company’s issue consists
of a USD3bn 10-year fixed-interest USD bond
and USD1.5bn five-year sukuk (sharia-compliant
bonds). Foreign-currency issues out of the Labuan
International Business and Financial Centre
(LIBFC) have now been named “Emas”,
in an attempt to provide added exposure for
the LIBFC and Malaysia as a means of attracting
funds.
It was announced
that the Petronas issue was very successful,
having generated interest from a wide investor
base and being five times oversubscribed. The
sukuk was sold mainly to investors in Asia and
Europe, while the USD bond was also sold in
the US. The issue is expected to be listed on
the Labuan International Financial Exchange
and the Bursa Malaysia, and also on the Luxembourg
Stock Exchange.
It was hoped
that the issue’s success would show that
Malaysia could be utilized not only for the
origination of domestic ringgit bonds and sukuk,
but also for foreign-currency denominated bonds
and sukuk. The issuance of sukuk is becoming
of increasing importance worldwide.
The larger
goals are now said to be to offer a wider range
of services in the LIBFC through an amended
Labuan Financial Services Authority Act, and
to become an Islamic financial centre through
a Labuan Islamic Financial Services and Securities
Act. Both laws are currently before parliament.
Labuan Trust Management
A trust company must be incorporated or registered
under the Malaysian Companies Act before it
can be licensed to carry on a trust business
in Labuan. As the offices of the trust company
are privy to confidential information, there
are very strong secrecy provisions in the Labuan
Trust Companies Act prohibiting disclosure of
information unless requisitioned by a court.
A
trust company is required (at the time of writing)
to have a minimum authorised and paid up capital
of RM500,000 and RM150,000 respectively, and
to deposit RM100,000 with the Accountant-General
as a security deposit. A nominal annual licence
fee is payable.
A
Labuan trust company may act as a trustee, agent,
executor or administrator pursuant to its memorandum,
and may provide share registration services,
administer, manage or otherwise deal with property
as an agent or trustee, maintain an office,
agency or branch for another company, provide
management and accounting services, directors,
secretaries and registered offices of offshore
companies, and incorporate and register offshore
companies.
Labuan Insurance
The
Offshore Insurance Act 1990 provides the legislation
for licensing and regulating persons carrying
on offshore insurance businesses such as captive
insurance, direct insurance, reinsurance and
other insurance related activities such as underwriting,
insurance management and insurance broking.
The
offshore insurance business covers all type
of insurance business other than domestic direct
insurance except for the insurance of high net
worth individuals.
The
Government is determined to boost the captive
insurance business. An amendment to the Act
in April 1997 was made to lower the capital
requirement for the setting up of captive insurance
companies in Labuan from RM1m to RM300,000.
Steps were also taken to allow domestic insurance
brokers to establish offices in Labuan.
Offshore
insurance business may be carried on in Labuan
by an offshore company, a foreign offshore company
and a branch of a licensed Malaysian insurer.
The application for an offshore insurance licence
is vetted by LOFSA and approved by the Minister
of Finance.
An
annual licence fee is payable on or before 15
January as follows:
-
General insurance RM 30,000;
-
Life insurance RM 30,000;
-
Life and general RM 60,000;
- Captive
insurance RM 10,000;
-
Master-rent-a-captive and subsidiary rent-a-captive
RM13,000 and RM3,000 each.
There
are minimum working funds and solvency requirements
for offshore insurance business in Labuan. Rent-a-captives
have been introduced into Labuan.
In July
2009, it emerged that the Labuan International
Business and Financial Centre (IBFC) was developing
guidelines on shariah-compliant captive insurance
for completion in the next 6-9 months. Further
Labuan initiatives included provision for protected
cell companies and amendments to the 1996 Insurance
Act to allow for marine and aviation captive
insurance companies.
Speaking
at an industry briefing in Kuala Lumpur at the
time, Labuan IBFC chief executive officer Martin
Crawford said guidelines on Islamic captive
insurance are non-existent, as very few jurisdictions
have a legal framework to accommodate Islamic
finance with the necessary physical infrastructure.
Crawford considers that Malaysia's shariah traditions
and the comparatively low-cost nature of doing
business in Labuan augur well.
The Labuan
IBFC already had at that time 32 captive and
four rent-a-captive companies in operation and
was on course to register 40 captive insurance
companies by the end of that year. This compares
with 50 captives in the captive insurance market
of Singapore.
Legislation
for protected cell companies (PCC) has had its
first reading in Parliament and could become
effective in law by the first quarter of 2010.
A PCC is structured with core capital, cellular
capital, cellular assets and liabilities, and
core assets and liabilities. The various businesses
within each 'cell' are ring-fenced and insolvency
of one cell should not affect the solvency of
the whole entity or the performance of the other
cells. For any contract the PCC discloses which
cell is contracting or whether it is a 'core'
contract. 'Cellular' or 'non-cellular' shares
may be issued, depending on whether they represent
an equity interest in a specific business cell
or in the core assets. The entity keeps accounts
showing the corresponding patrimonial divisions
among the segregated cells and the core cell.
Under an
exemption from subsection 140(1) of the Insurance
Act, any marine and aviation risks, including
goods in international transit, can now be handled
by Labuan-based insurance companies, whereas
before April 1, 2009, the risks had to be insured
through a local onshore insurance company.
Labuan Investment Fund Management
Under
the Labuan Offshore Securities Industry Act
1998 the paid-up capital of a fund management
company must be at least RM 2m or its equivalent.
The
Labuan Offshore Securities Industry Regulations
1999 specified the procedure for registration
of an investment fund, and the fees payable
to LOFSA.
Presently,
approved instruments of Islamic financing are
given additional stamp duty exemption of 20%.
That exemption was to expire on December 31,
2009, but was extended to December 31, 2015
as a result of the 2009 government budget.
The 2009
budget also extended and expanded tax incentives
for the issuance of Islamic securities. Expenses
incurred in such issuance approved by the Securities
Commission are currently allowed as a deduction
for income tax purposes.
Investment
Management companies in Labuan, like all offshore
companies, have access to Malaysia's range of
double tax treaties;
for details of their tax treatment generally,
see Offshore Legal and Tax Regimes.
BACK TO TOP
Labuan Financial Exchange
The
Labuan Offshore Securities Industry Act 1998
laid down a basis for the opening of a securities
exchange and for the establishment and supervision
of investment management companies. The full
text of the Act can be found here.
Amendments
in the Labuan Offshore Security Industries (Amendment)
Act 2003 (LOSIA), which came into effect in
May 2003, included several updated provisions
relating to private funds and allowed fund managers
to manage and administer foreign funds in Labuan.
The
Labuan International Financial Exchange (LFX)
was officially launched in October 2000. It
is an offshore exchange wholly owned by the
Kuala Lumpur Stock Exchange and trades in financial
instruments such as equities, investment funds,
debt instruments and insurance-related instruments.
It is seen as one of the the key components
in promoting Labuan as an offshore financial
centre, and in particular as a prospective centre
for Islamic finance.
Malaysia's capital controls do not affect LFX
as dealings are carried out in US dollars.
LFX
has no restrictions on the type of financial
instruments and no pre-determined minimum quantity
for listing. Also, there is no requirement for
participants to have a physical presence in
Labuan. Trading is done on its electronic bulletin
board and trading agents place their interests
to buy or sell on the board and conduct their
own negotiations.
Labuan
was spurred on to launch the LFX exchange by
an announcement from neighbouring Brunei that
it was setting up an international offshore
financial centre of its own.
However,
it is in Islamic finance that Labuan is marking
out its track. Malaysia's 2002 US$600 million
Global Islamic Trust Certificates (Sukuk) was
a world first. The five-year Sukuk maturing
in 2007 listed on the Luxembourg Stock Exchange
and Labuan International Financial Exchange
(LFX) attracted wide participation from investors
in Asia particularly in the Middle East, the
United STates and Europe.
"Comparatively,
our Sukuk Al-Ijarah Trust Certificates were
very popular," said LFX's Datuk Noorazman
El Aziz. "For the first time, we have 27
new accounts from Middle East investors. They
are putting their money into the country for
five years.
"Sukuk
is our benchmark. After the launch, we had a
lot of people asking us about it. It is essentially
a good alternative to the Yankee or even Samurai
bonds. We are talking about yields here and
Sukuk offers it."
In
Janaury 2010, the Malaysian stock exchange,
Bursa Malaysia Berhad (BMB), and the Bahrain
Financial Exchange (BFX) announced the signing
of a memorandum of understanding (MOU) to develop
a joint commercial agreement between the two
exchanges to provide financial products to the
Islamic market.
The MOU
will involve a feasibility study to identify
shariah-compliant products, including a commodity
murabaha trading platform to satisfy short-term
financing needs. It will lay the foundation
for both exchanges to work jointly on increasing
the awareness of investment and liquidity management
opportunities in their respective Islamic markets
using acceptable shariah solutions.
BMB's Chief Executive Officer, Dato' Yusli Mohamed
Yusoff, who signed the MOU on behalf of the
Malaysian exchange, which also owns the Labuan
International Financial Exchange, said that
"the collaboration with BFX is aimed at
facilitating cross border development in the
Islamic financial markets, widening market reach,
exchanging technological expertise and building
a sustainable business model for both exchanges."
"This
is a major step towards consolidation in the
Islamic finance world,” he added. “As
both Exchanges come together on a single platform,
this will add to the strength of this industry.
This initiative will go a long way in addressing
the issues of standardization, innovation and
transparency, thus providing a new dimension
to the Islamic finance market."
In addition,
BFX board director, Arshad Khan, said: "This
initiative is a major development for the Islamic
finance market where the collaboration will
seek to offer a wider risk management portfolio
to global Islamic practitioners. By partnering
with Bursa Malaysia we can ensure that the products
offered are well defined, robust and fully shariah
compliant.”
The signing
ceremony was witnessed by Razif Abdul Kadir,
Deputy Governor of the Bank Negara Malaysia;
Nik Ramlah Nik Mahmud, Managing Director of
Malaysia’s Securities Commission; and
Abdul Rahman Al Baker, Executive Director, Financial
Institutions Supervision, of the Central Bank
of Bahrain.
LOWTAX.NET
