The Malaysia International Ship Registry and Shipping Business Through Labuan

The names Panama, Malta or Liberia usually come to a ship owner’s mind when considering registering their ships or vessels using international foreign ship registry. These international ship registry jurisdictions have been long established and have a very good reputation for convenience, low entry cost and less hassle registration. But not many ship owners out there realise that they can also register their ships or vessels through Labuan.

The Federal Territory of Labuan is an island, located off the East Coast of Malaysia. Labuan is a free port island and was designated as Malaysia’s International Business and Financial Centre (‘IBFC’) hub in 1990. Labuan is one of the major and most well-known international business and financial centres in the Asian region. Labuan has a strategic geographical position in the middle of the Asia-Pacific region with excellent supporting infrastructure, telecommunications and transportation services.

The introduction of the Malaysia International Ship Registry (‘MISR’) is expected to develop Labuan's status as a major international business financial centre. The Port of Labuan was declared the official port of registry for the MISR on 17 August 2006. With the introduction of the MISR, it is hoped that Labuan will be seen as a preferable international port of registry and will be in a position to compete with other more established international ports of registry and thereby boost the development of the maritime industry in Labuan.

The MISR is governed under Part IIC of the Malaysian Merchant Shipping Ordinance, 1952. The Act provides the requirements for registering a ship or vessel under the MISR. The Labuan Marine Department, the regulated agency appointed by the government, is responsible for registration under the MISR.

Why MISR?

• Competitive entry cost and annual fee compared to other international ship registry jurisdictions.
• The age of the ships or vessels qualified for the registration under the MISR must not exceed 15 years if it is a tanker or a bulk carrier, or not more than 20 years for any other type of vessels.
• The ship must weigh not less than 1,600 gross tonnages and must be fitted with mechanical means of propulsion.
• Foreigners are allowed to hold 100 per cent equity in the company owning the ship or vessel.
• Malaysia has been a member of the International Maritime Organization (‘IMO’) since 1971 and is a party to all major IMO conventions on ship safety and marine pollution. Malaysia was also elected as one of the council members of the IMO under Category C, which is made up of 20 countries that have special interest in maritime transport or navigation.
• There is no restriction on the nationality of the crews. However, all crew must meet the standards of the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW) 1978.
• The White List identifies the countries that have demonstrated a plan which complies with the STCW Convention and Code as revised in 1995. Malaysia is categorised as one of the ‘White List’ countries and deemed to be giving "full and complete effect" to the revised STCW Convention (STCW 95).
• Malaysia is a non Flag of Convenience (‘FOC’) registry. Ships with a flags of convenience registry are likely to be targeted by the special enforcement of the countries visited by them.
• Marine Insurance services in Malaysia cover almost all kinds of vessels through Labuan such as ferries or ro-ro, fast ferries or hovercraft, liners, carriers cargo and tankers to name a few. Marine policies are also available to cover for Marine Hull, Marine cargo and Total Loss Cover. The insurance companies available in Malaysia provide competitive rates, comprehensive coverage, bigger capacity, flexible terms and comprehensively written wordings.
• There is a wide range of Classification Societies available in Malaysia, which are all approved by the Malaysian Government to conduct surveys and certifications of ships on behalf of the Malaysian Government, such as:

• American Bureau of Shipping (ABS)
• Bureau Veritas (BV)
• Det Norske Veritas (DNV)
• Germanischer Lloyd (GL)
• Lloyd's Register of Shipping (LRS)
• Nippon Kaiji Kyokai (NKK)
• Korean Register of Shipping (KR)
• China Classification Society (CCS)
• Indian Register of Shipping (IRS)
• Russian Maritime Register of Shipping (RS)
• Registro Italiano Navale (RINA)
• Ship Classification Malaysia (SCM)

Registration of Vessel

Ship owners who wish to register their vessels under MISR are required to form or incorporate a company in Labuan. The vessels must be registered under the new company’s name in order to qualify for the MISR registration purposes. A registered ship manager with the Marine Department must be appointed for registration purposes as required in the Merchant shipping Ordinance, 1952. The ship manager will be responsible for handling the registration of the vessel.

A vessel may be provisionally registered. The Provisional Certificate is valid for a maximum period of one year and thereafter for permanent registry.

Shipping Business through Labuan

Labuan is one of the Organisation for Economic Co-operation and Development (OECD's) white-listed jurisdictions. In January 2008, the name of Labuan Offshore Financial Centre was rebranded to Labuan International Business and Financial Centre, which reflects the jurisdictions’ growth and international status. As of to date, Labuan IBFC is home to more than 300 international financial institutions from over 90 countries. Labuan IBFC is a well regulated jurisdiction and meets the high standards of sophisticated financial services. It has the reputation as an experienced, well known, efficient and safe jurisdiction to conduct business.

A Labuan Company can be used for MISR registration purposes or to conduct shipping business. Shipping companies can enjoy the competitive tax rate and benefits offered by Labuan IBFC by incorporating a Labuan Company to conduct their business. A Labuan Company can be formed approximately within one day. There must be at least one shareholder and one director, which can be an individual or a corporation. One hundred per cent foreign ownership of the Labuan Company is permitted.

Following are the key benefits enjoyed by a Labuan Company in Labuan IBFC:

• A Labuan Company can be incorporated within approximately one day.
• There is no annual return filing fee. The minimum annual renewal fee is MYR 1,500 per year.
• There is no requirement for authorised share capital.
• A Labuan Company must have at least only one shareholder and one director to incorporate the Labuan Company.
• Directors’ and shareholders’ meeting can be conducted anywhere in the world.
• It can enjoy dual resident status – resident for tax purposes and non-resident for Exchange Control purposes.
• There are stronger secrecy and confidentiality provisions in Labuan IBFC
• There is a competitive tax rate of three per cent or a flat rate of MYR 20,000 (approximately US$ 6,500) for trading companies.
• There is no capital duty, which makes transaction costs lower.
• Dividends paid out by the Labuan Company is exempted from tax.
• Income from fees received by a non-citizen individual in his/her capacity as a director of the Labuan Company is exempted from tax.
• Non-citizens employed in a managerial capacity in a Labuan Company in Labuan enjoy an income tax exemption of up to 50 per cent of gross employment income.

Shipping companies can form or incorporate a Labuan Company for the following purposes:

• To conduct shipping operations through Labuan; or
• Leasing business on a bareboat charter basis

Shipping Operations

The Labuan Business Activity Tax Act (‘LBATA’), 1990 recognises shipping operations as a Labuan business activity, provided the operations are carried out in Labuan and outside Malaysia. Therefore, any income derived from the shipping operations is eligible to be taxed at the preferential tax rate of three per cent from net audited profit or a flat rate of MYR20,000. In addition, all incentives under the income tax and stamp duty exemptions will be applicable to the Labuan company which carries out shipping operation activities.

Section 2 of the Labuan Business Activity Tax Act (‘LBATA’), 1990 recognise shipping operations in Labuan IBFC as the following:

1. the transportation of passengers or cargo by sea; or
2. the letting out on a charter of ships on a voyage or time charter basis;

Leasing Business

Shipping companies may use the Labuan Company to conduct leasing business, provided the leasing business is conducted on a bareboat charter basis. Section 86 of the Labuan Financial Services and Securities Act (‘LFFSA’), 2010 defines ‘Leasing Business’ as business of letting or sub-letting property on hire for the purpose of the use of such property by the hirer regardless of whether the letting is with or without an option to purchase the property, including charters of ships, and ‘charters of ships’ means bareboat charters only and does not include the transportation of passengers or cargo by sea or the charter of ships on a voyage or time charter. A Labuan Company carrying out leasing business can opt to pay three per cent tax from the net audited profit or a lump sum of MYR 20,000 for the taxation in Labuan.

Below is a diagram of a basic Labuan Leasing structure:

Conclusion

Labuan IBFC has the potential to be a major international ship registry jurisdiction. The island of Labuan provides world class facilities to support the shipping business and operations, while at the same time offers a lot of benefits to the shipping companies which conduct their business through Labuan IBFC.

For more information on :

MISR - www.marine.gov.my

Formation of Company –www.labuanborneotrustees.com

Labuan shipping activities –www.labuanfsa.gov.my and www.labuanibfc.my