Labuan was set up as an International Offshore Financial Centre (IOFC) in 1990. Its offshore industry is regulated by the Labuan Offshore Financial Services Authority (LOFSA). Situated in the centre of the Asia Pacific region, roughly equidistant from Bangkok, Jakarta, Kuala Lumpur, Manila, Singapore and Hong Kong, the island of Labuan is strategically located between the growing economies of China and India. Since its inception, there has been a steady and significant growth in the development of Labuan as an IOFC, not only in terms of growth in the offshore financial sector, but also in its infrastructure and growth in the local economy of the island.
Moving forward, the Labuan IOFC needs to be more dynamic and to redefine its position as an IOFC. To this end, LOFSA embarked on a redefinition of the Labuan IOFC, a business review, and a thorough review of the entire legislation framework governing Labuan IOFC.
In consultation with its appointed consultants, the Labuan IOFC redefined its value proposition as an International Business and Financial Centre (IBFC). In January 2008, the Labuan IOFC rebranded itself as the Labuan IBFC, with the aim of repositioning itself as Asia's most connected, convenient and cost-efficient IBFC.
To ensure that the Labuan IBFC maintains its position as an IBFC and to promote a more robust and dynamic environment to meet developments and challenges, a thorough review of the entire legislation governing the offshore industry in Labuan is underway. As part of the business review, new company structures will be introduced to cater for the demands of users in the offshore environment. These exciting changes will be announced by LOFSA once the current review of relevant legislations has been finalised and amendments to the legislations have been put in place.
As starters, the following changes have been implemented by LOFSA:
1.A More Flexible Tax Framework
Given that investors in Labuan undertake a wide range of financial services, a flexible tax regime is necessary. In this regard, Labuan offshore companies are now given the option to elect to be taxed either under the domestic tax regime under the Income Tax Act 1967 (ITA) or the preferential offshore tax regime under the Labuan Offshore Business Activity Tax Act 1990 (LOBATA).
This means that the Labuan offshore company can elect to either:
An illustration of this is as follows:
A Labuan offshore company is set up to invest in the shares of a company in the People’s Republic of China (PRC). The dividend received by the Labuan offshore company would be subject to 10 per cent withholding tax in PRC instead of 20 per cent because of the application of the provisions of the double tax treaty (DTA). This would mean that the Labuan offshore company would be able to receive 90 per cent of the dividend paid in PRC when received in Malaysia.
Furthermore, Clause 28 of Schedule 6 of the ITA provides for exemption of tax on income derived from sources outside Malaysia and received in Malaysia. That would mean there would be no more tax payable by the Labuan offshore company on the dividend received from PRC. The same clause also provides that the recipients of the dividend paid out of this exempt income are also not subject to any further tax in Malaysia. Hence, the 90 per cent dividend received from the PRC company would remain intact without being reduced by any form of taxation.
However, a Labuan offshore company electing to be taxed under ITA also has its drawbacks. They are:
This flexible tax framework is definitely a great step forward in enhancing the competitiveness of Labuan as an IBFC. There are not many international financial centres in the world which have such a wide DTA network as Malaysia, and hence Labuan. Allowing the Labuan offshore companies to make use of all of Malaysian DTAs would definitely attract more investors, who are eager to obtain maximum returns for their investments, to use Labuan as their preferred business and financial jurisdiction.
To provide the Labuan IBFC with a more cost-effective environment for businesses and to remain competitive, the annual fees of RM2,600 payable to LOFSA by Labuan offshore companies are reduced to RM1,500. In addition, most, if not all, the fees for the statutory filings with LOFSA are waived. The new pricing structure is competitive with other offshore financial centres' pricing structures. Furthermore, the costs of operations and professional services in Labuan have always been low and will remain so for the foreseeable future. It is estimated that the above expenses are only one third of those of the major international financial centres like Hong Kong and Singapore.
With effect from 1 August 2008, LOFSA has granted a blanket approval to Labuan offshore companies to conduct business with Malaysian residents. They can also invest in Malaysian domestic companies (companies incorporated under the Companies Act 1965) subject to such shareholding not constituting a controlling interest in the domestic company, and can wholly own a domestic company to conduct offshore business (‘Satay Structure’ – where the domestic company is not allowed to conduct business in Malaysia, but can invest or conduct business offshore). Previously, Labuan offshore companies were required to seek LOFSA's approval before they could undertake the aforementioned activities and the time frame for approval could be a month or more. With this blanket approval, LOFSA's delivery system is enhanced. However, the Labuan offshore companies are still required to notify LOFSA of their dealings with the residents.
As part of LOFSA's initiative to enhance its delivery system, LOFSA has recognised the need to enhance key processes to improve efficiency and effectiveness. Enhanced technology has been implemented, which has improved the incorporation process. Labuan offshore companies could now be incorporated within 1–2 working days. The implementation of an electronic payment system this year has also enabled speedier incorporation and reduction of manual processing time. All these administrative but effective measures have meant increased efficiency in LOFSA's delivery system and thus contribute to the Labuan IBFC's competitiveness in the global environment.
In order to effectively reach out for the targeted investors in the Labuan IBFC, the marketing functions of LOFSA were transferred to a new subsidiary of LOFSA. The Labuan IBFC Incorporated Sdn. Bhd. came into operation in May 2008. It was specifically set up to handle and to focus on marketing and promotional efforts for the Labuan IBFC and to drive market development, as well as facilitating investors seeking to participate in the Labuan IBFC.
The preceding paragraphs list some of the key initiatives undertaken by LOFSA to enhance the delivery system, increase the competitiveness of the Labuan IBFC, and create and enhance a more robust and energetic business environment for investors and potential investors. In the pipeline and on the drawing board is a comprehensive review of the existing legal framework within the Labuan IBFC. The review will serve to change the existing legislations to create a facilitative, flexible and frictionless environment, and address any legal impediments that deter investors from using the Labuan IBFC. At the same time it will ensure that the Labuan IBFC remains a balanced and well-regulated jurisdiction and remains in the good books of various international organisations such as the International Monetary Fund (IMF) and the Asia/Pacific Group on Anti-Money Laundering (APG).
Although LOFSA has carved out a niche market with its Islamic and Syariah-based financial products, it is not resting on its laurels but still actively and aggressively seeking out and introducing new Islamic financial products and services. One of the products is a Syariah-compliant trust for private wealth management. LOFSA has issued guidelines for the creation of this Syariah-compliant trust. This product will complement the existing Islamic financial products and services in Malaysia.
Labuan IBFC will also strive to become a leading holding company jurisdiction of choice within the Asia Pacific region. Malaysia has an extensive tax treaty network with more than 60 countries and potential investors wishing to derive benefits under the tax treaties can utilise Labuan offshore companies for this purpose.
The thrust of the Labuan IBFC is its proactive and committed regulator, innovative products, and the full support of its offshore intermediaries and players. Amid the current financial turmoil around the world, the Labuan IBFC will certainly rise to the global challenges ahead.
Chin Chee Kee JP, Executive Chairman, Noblehouse International Trust Ltd, Labuan, Malaysia