Labuan is becoming one the leading offshore centers of Asia. Today it is a base for more than 60 banks, numerous IBC’s and captive insurance companies, the Labuan International Financial Exchange (LFX), an international Islamic money market.
Federal Territory of Labuan is part of Malaysia, with the Prime Minister’s Department responsible for its administration. Official language is Bahasa (Malaysia), but English is widely spoken. Official currency is Malaysian Ringgit, though offshore companies are normally prohibited to make transactions in local currency.
In November 1989 Labuan was declared an International Offshore Financial Center and in October 1990 first offshore companies laws were enacted. Labuan Offshore Financial Services Authority (LOFSA) is responsible for administration of the offshore industry in Labuan.
Tax Benefits of Labuan Offshore Companies
Labuan Offshore Company (LOC) incorporated and registered under Offshore Companies Act of 1990 and the Labuan Offshore Business Activity Tax Act of 1990 are allowed to carry on any lawful business in, from and through Labuan, except with residents of Malaysia. To conduct business such as banking, insurance, fund management, leasing, factoring and company management offshore companies need to obtain a special license. They are prohibited to involve in shipping operations in Malaysia.
Offshore companies enjoy a special taxation treatment comparing to other Malaysian companies. There are two types of activity that define a tax regime of an offshore company: trading and non-trading. Non-trading companies, such as those holding equities or involved in other investment activities, are tax-exempt.
Trading companies are subject to taxation. They may pay a flat fee of RM 20,000 per annum or elect to pay a 3% income tax to the Inland Revenue Department. The company is allowed to choose the lowest amount to its own advantage. It may also choose to pay the same amount flat fee as its annual registration fee to the Registrar of Companies instead of Inland Revenue Department. In this case the company is not required to appoint an auditor and file financial statements.
Holding and Investment Companies in Labuan
Labuan offshore companies are commonly used for investment purposes, in particular to China, Korea and Indonesia. It is also known as good vehicle for cross border investments from Europe into Asia.
Generally, if a Labuan offshore company invests in a high tax country it might be tax efficient in case there is a concessionary double tax treaty in place.
Holding companies incorporated in Labuan can be tax beneficial under the same condition. They also proved to be a good vehicle for avoidance of the inheritance tax, capital gains tax, ease of sale of the property by means of transferring the company’s shares rather than its property.
Labuan Insurance and Captive Insurance Companies
The Offshore Insurance Act 1990 (OIA) provides for establishment and licensing of a wide range of insurance activities including captive insurance, direct insurance (life/general/composite), offshore reinsurance, insurance manager, underwriting manager and insurance broker.
Labuan also intensively develops its captive insurance opportunities. A protected cell company (PCC) structure was recently adopted and endorsed. Set-up costs are nearly twice lower than those of similar offers by most of jurisdictions competing for captive insurance market.
Offshore Trusts in Labuan
Labuan Offshore Trusts are being governed by the Labuan Offshore Trusts Act 1996. Any offshore trust validly created in Labuan or abroad may be registered with LOFSA. Offshore trust entity set-up in Labuan provides for the whole range of tax and non-tax advantages from using offshore trust structures, including saving on inheritance tax, avoidance of probate, continuity of the trust structure over the settlor’s death, general asset protection from creditors and spendthrifts.
Labuan Double Tax Treaties
Malaysia has signed more than 60 double tax treaties. Many of them have tax sparing provisions when dividends paid from profits tax exempt in Labuan are deemed to be payed from the profits subject to taxation in Malaysia. This allows the beneficiary to claim tax credit at home.
Many of the treaties have been signed before the offshore legislation in Labuan was enacted, which means that Labuan companies may enjoy same tax treatment as traditional Malaysian companies within the frames of such double tax treaties. A number of countries though have their own domestic anti-avoidance regulations that do not allow Labuan offshore companies benefit from the treaty.
Generally, it is assumed that those Labuan offshore companies that are paying 3% tax on audited profits should be considered tax residents of Malaysia. However, a professional advice from a local expert in the beneficiary’s country should be sought in each particular case.
There also exists a so-called “Malaysian Satay” structure consisting of three entities: foreign subsidiary company owned by a Malaysian company being hold it its turn by a Labuan parent company. The structure allows the Labuan offshore company to receive dividends from the foreign subsidiary through the intermediary Malaysian company finally tax-free.
- Labuan offshore companies are subject to a separate exchange control from Malaysian companies with no limitation of movement of capital. They are allowed to conduct business operations in any currency except for the national currency Malaysian Ringgit.
- There is no capital duty and no stamp duty either, which makes transaction costs lower.
- 100% foreign ownership is permitted. The company can be formed by one or more shareholders, which can be corporate entities or an individuals, of any nationality and residence. Bearer shares or no-par value shares are not allowed.
- The company may have one or more directors appointed and there are no requirements to their nationality or residence. Board meetings may take place anywhere unless proof of residence is required. For these purposes meetings are to be held in Labuan.
- All offshore companies must employ a local trust company providing the registered address and resident secretary service. The company is also to keep its books and records at the registered office.
- Foreign companies incorporated and existing under the laws of another country may register to continue business in Labuan.
There is no public register of directors and shareholders. Information about ownership is kept in strict confidentiality subject to the Secrecy Act provisions and cannot be revealed without High Court order. Hearings against any offshore company are held in camera.
Labuan is not the cheapest Offshore Financial Center but it has a good geographical location, developed professional and financial infrastructure, wide range of offshore services, favorable tax regime and high level of privacy. Besides, it is a low-profile, less-known jurisdiction, which contributes to the matters of privacy and makes it even a more attractive base for international business.