Labuan: Asia's Up-And-Coming Midshore Jurisdiction
Global Incorporation Guide [GIG] Editorial
January 17, 2017
Situated a few miles off the northern coast of Borneo in Malaysia and just 60 square miles in size, Labuan has quickly risen to prominence as one of the preferred platforms for investment into emerging economies of Asia-Pacific. This special feature attempts to understand why.
Situated in the heart of the fast-growing region of South East Asia, and close to a number of major cities and economic hubs such as Singapore, Hong Kong, Kuala Lumpur and Jakarta, Labuan is currently home to a population of almost 100,000, benefits from a benign corporate income tax system, a well-regulated financial regime, a deep-water port and a well-developed supporting infrastructure, including internet communications.
Labuan's economic existence has traditionally depended on its port and position at the confluence of Eastern Asians trade routes. Latterly, oil and gas exploration and their supporting industries were the main contributors to the island's economy. However, these are fast being superseded by financial services, and tourism is also a growing industry as the island's year-round tropical climate, coral reefs and sandy beaches become more well-known.
The Labuan International Business and Finance Centre (IBFC)
The financial services industry in Labuan has taken root thanks to the creation of the Labuan International Offshore Financial Centre in 1990, along with the passing of a batch of offshore laws and the creation of LOFSA (Labuan Offshore Financial Services Authority). With the passage of new laws to govern its business environment in 2010, LOFSA has since re-branded itself as Labuan FSA (Labuan Financial Services Authority), and the center itself as the IBFC (Labuan International Business and Finance Centre).
Despite the challenging global economic environment, the Labuan IBFC has recorded healthy growth over the past few years, and the island has quickly grown as a major conduit for Foreign Direct Investment into several local countries, particularly South Korea and Malaysia itself.
Labuan was established as an international offshore financial center in October 1990, but 2002 was probably the year in which the territory established itself irrevocably as a premier player.
As in other low-tax financial centers, the banking, insurance, and wealth management industries are all well represented in Labuan. The jurisdiction is also looking to position itself as a major regional center for trading and leasing in the oil and gas industry, and for Islamic Finance.
Labuan's relatively short history as a financial center has been one of more or less unbroken success. Labuan now hosts around 700 licensed institutions across the finance industry, representing growth of 10 percent per year since the financial center's inception.
Labuan banks are in the business of providing credit facilities, receiving deposits, investment banking services, building credit and credit token business, development finance business, leasing business, factoring, money broking, Islamic banking business, or such other activities as are approved by the Minister of Finance, Malaysia.
All Labuan banks are governed and regulated under the Labuan Financial Services and Securities Act 2010.
At the end of 2015, there were 53 banks in Labuan, with assets of USD47.4bn.
Low start-up costs, a stable political environment and the availability of skilled workers continue to attract international insurance companies to Labuan from all over the world.
Labuan insurance business includes life, general, reinsurance, captive insurance, insurance management, underwriting management and insurance broking, but does not include domestic insurance business; and it is transacted in foreign currency. Labuan insurers may carry on reinsurance of domestic insurance business in Malaysian currency and such other business as may be specified by the Labuan FSA.
In 2015, 16 new licenses were approved by the Labuan FSA, including six insurance brokers, two underwriting managers, two general (re)insurers, two life (re)insurers, three captive insurers and one retakaful operator. Insurance entities from Switzerland, Qatar and the United Arab Emirates established insurance operations in Labuan in 2015.
At the end of 2015, there were 209 insurance and insurance-related licensees in Labuan.
The Labuan IBFC is also positioned to capitalize on the growth of the oil and gas industry in Asia, and is fast becoming the financing hub for the region's oil and gas business.
The number of leasing companies in Labuan increased by 17 to 374 in 2015, with leasing assets growing by 15 percent that year to USD51.8bn. The oil and gas and aviation sectors were responsible for the vast majority of these assets, at 73 percent and 25 percent, respectively.
More than 70 percent of these assets were held by leasing companies originating from South East Asia and the Asia-Pacific regions. Leasing companies from the Europe and the Americas represented 13 percent and 12 percent of assets respectively in 2015.
Trusts and Wealth Management
Labuan IBFC offers a comprehensive array of wealth management products suitable for high net-worth individuals, family offices and other wealth managers needing structures for efficient wealth transfer and inheritance management.
The relevant Acts related to wealth management include the Labuan Trusts Act 1996 and the Labuan Foundations Act 2010 that permit the establishment of a wide diversity of structures such as trusts and foundations for the management of international and approved Malaysian assets.
The presence of international trust companies in the Labuan IBFC has established a greater cross-border network to provide the range of services, including shared services to meet the demands of sophisticated clients worldwide.
At the end of 2015, there were 43 licensed trust companies in Labuan.
The Labuan IBFC is being positioned as the leading center for Islamic finance and wealth management in the Asia Pacific region. Labuan's situation is helped a great deal by the fact that it is part of Malaysia, which is itself attempting to become a hub for Islamic Finance.
The wide range of Islamic financial products and services available in Labuan IBFC includes Islamic banking, Islamic capital markets, takaful, retakaful, Islamic funds, waqf and Islamic trust administration. These products and services are offered under various Shariah-compliant schemes by the Islamic financial institutions in Labuan.
The Labuan Islamic Financial Services and Securities Act 2010 streamline procedures and requirements for all Shariah-related activities in the Labuan IBFC.
The Government of Malaysia provides a number of tax breaks in the area of Islamic Finance, including tax exemptions for foreign Islamic fund managers. Expenses for the issuance of Islamic securities are also tax deductible.
The Offshore Companies Act 1990 provides for the establishment of offshore companies and the registration of foreign offshore companies in Labuan. In addition, a foreign company incorporated under the laws of another country may apply to be registered as being continued in Labuan.
Every offshore company may be a company limited by shares or by guarantee. The aforementioned companies may participate in offshore activities and enjoy the attractive tax treatment provided under the Labuan Offshore Business Activity Tax Act 1990 (see below).
Residents and non-residents of Malaysia are permitted to establish offshore companies in Labuan. An offshore company may carry out any business that is lawful in Malaysia in, from or through Labuan, but banking, insurance and insurance-related businesses, fund management, leasing, factoring and company management would require the offshore company to be licensed. Shipping operations in Malaysia are prohibited.
Malaysians can also own Labuan companies, and legislation permits foreign-owned offshore companies to invest in Malaysia subject to certain conditions.
Laws came into effect in February 2010 allowing 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.
Regular Malaysian companies can be used in Labuan, but will not receive the tax and other privileges accorded to Offshore Companies.
In line with the Malaysian government's move to liberalize the financial sector, Labuan holding companies have been permitted to set up an operational and management office in the capital city of Kuala Lumpur since 2009.
The Labuan Offshore Business Activity Tax Act 1990 provides for the reduction or complete exemption of income tax in respect of certain business activities carried on by offshore companies in Labuan.
Chargeable profits derived by an offshore company from an offshore trading activity are subject to tax at a rate of three percent.
Alternatively, an offshore company which carries on an offshore trading activity may, within three months from the commencement of any calendar year, elect to be charged to tax of MYR20,000 (USD4,480) for that year of assessment.
An offshore company which carries on an offshore non-trading activity is exempt from income tax altogether.
The Malaysian Income Tax Act 1967 applies to any activity other than offshore business activity carried on by an offshore company, i.e. it pays normal taxes.
However, a company registered under the Labuan Companies Act 1990 (and exempt from Malaysian income tax) can make an irrevocable election to be taxed under the Malaysian Income Tax Act.
Under this Act, corporations are taxed at 24 percent (25 percent prior to 2016), however all foreign-sourced income is exempted from tax. In addition, there is no capital gains tax, except for transactions involving certain landed properties in Malaysia.
A significant advantage of electing to be taxed under the Income Tax Act 1967 is that it provides more certain access to Malaysia's extensive network of double tax avoidance treaties, which includes around 70 agreements.
Global Incentives For Trading (GIFT) Scheme
Under the GIFT program, a general Labuan International Trading Company (LITC) is subject to a corporate tax rate of 3 percent, but an LITC set up purely as a liquefied natural gas (LNG) trading company is entitled to a 100 percent 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 percent exemption on fees paid to non-Malaysian directors of the LITC; a 50 percent 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.
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 payable to Malaysian residents; and at least three professional Malaysian-resident traders employed with a minimum salary of MYR15,000 per month each.
Eight LITCs were approved to carry on international commodity trading in Labuan in 2015, bringing the total number of LITCs to 43. More than half of these companies were involved in the trading of petroleum and related products, followed by agricultural products (16 percent), and chemical products (14 percent).
Almost 80 percent of LITCs originated from South East Asia, with the remainder from the Middle East and Africa, Europe, and the Far East.
Compliance With International Standards
The Labuan FSA is a member of international organizations, including the International Association of Insurance Supervisors, Group of International Financial Supervisors, and Asia/Pacific Group on Money Laundering, while Labuan IBFC is a full signatory to the International Organization of Securities Commission's Multilateral Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information.
In addition, Labuan FSA has signed the multilateral convention agreement with the European Securities and Markets Authority to strengthen investor protection and cooperation between jurisdictions.
As a part of Malaysia, Labuan is also committed to the latest standards in international tax transparency; Malaysia signed the Multilateral Competent Authority Agreement on January 27, 2016, re-confirming its commitment to begin automatically exchanging financial account information with other states from 2018 under the Common Reporting Standard. The Labuan Offshore Business Activity Tax Act 1990 was also amended recently to permit automatic information exchanges.
That same month, Malaysia also signed the Multilateral Competent Authority Agreement for the automatic exchange of Country-by-Country transfer pricing reports. CbC reports will include information relating to the global allocation of a multinational company's income and tax payments, together with other indicators of the location of economic activity within the multinational group.
Malaysia is adjudged by the Financial Action Task Force to have a good level of compliance with internationally-agreed recommendations to combat money laundering and terrorist financing.
According to the Labuan IBFC, the jurisdiction has demonstrated its commitment to uphold the principles of financial transparency by facilitating numerous requests for information from foreign authorities and domestic agencies.
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