SiTiTRUST
& Admininstrator Ltd.

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LABUAN IOFC, MALAYSIA

The island of Labuan, which lies to the northeastern coast of Borneo, was once part of the Sultanate of Brunei. It was ceded to the British in 1846 with James Brooke as its first governor.

The Japanese took possession of Labuan on January 3, 1942 but restored it to the Allied Forces on June 10, 1945.

Labuan gained its independence on September 16, 1963 when it, being part of Sabah joined the newly formed Federation of Malaysia. On March 8, 1984 the Sabah State Legislature enacted the law which handed Labuan to the Federal Government. In October 1990 several laws were introduced turning Labuan into an International Offshore Financial Centre (IOFC). It was recently renamed International Business and Financial Centre (IBFC)

Labuan's offshore legal framework and Malaysia's extensive double taxation treaties had made Labuan an ideal place for structuring intermediate offshore holding and trading companies.

Labuan has also created a niche as a centre for Islamic investments and financing and is now poised to become a centre for the establishment and administration of collective investments scheme and special purpose vehicles both for Sharia compliant and conventional business structures.

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LEGAL FRAMEWORK

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OFFSHORE BUSINESS ACTIVITIES

The Labuan Offshore Financial Services Authority or LOFSA was established on February 15, 1996 as the single body corporate to regulate and supervise the conduct of offshore financial services in Labuan IBFC.

In the supervision of the IBFC, LOFSA administers seven major sectors, namely, banking, insurance, trusts, securities, company incorporation and registration, limited partnership and Islamic finance and instruments.

LOFSA has successfully established Labuan as a respectable and progressive intergrated offshore financial centre supported by a legal framework conducive for the developmet of the IBFC

Offshore companies carrying on the following business in Labuan are required to obtain the relevant license from LOFSA.

Offshore banking including investment banking and leasing.

Offshore insurance including reinsurance, insurance broking and captive insurance.

Offshore dealing in securities, fund management, administration and custodianship.

Offshore mutual fund including unit trust fund.

Offshore company management.

Offshore public trusts.

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TAXES

The Labuan Offshore Business Activities Tax Act 1990 sets out the tax treatment of offshore entities. The Act divides offshore companies into two categories :-

Non-trading or investment holding Labuan companies which are not liable to tax and,

Labuan trading companies which are liable to tax but with a choice of either paying an annual flat rate of RM 20,000 or 3% of the company's audited net profit.

Malaysia has entered into 42 effective Double Taxation Agreements as at 26 April 2000. Most tax treaty partners recognise Labuan offshore companies as Malaysia taxpayers and would apply the provisions of the DTA on Labuan offshore companies.

There are many Exemption Orders made under the Income Tax Act 1967 which include exemptions from tax on dividends received by an offshore company, and interest received from an offshore company by a resident person (other than persons licensed to carry on business under BAFIA 1989, the Islamic Banking Act 1983, the Insurance Act 1963 or the Takaful Act 1983).

Exemptions from stamp duty have also been made on the following instruments :-

OFFSHORE BANKING

Offshore banks may carry on a wide range of banking business in foreign currencies including offshore investment banking business, Islamic banking business and such other activities as prescribed by the Minister of Finance.

Offshore banks are required to maintain substantive physical presence in Labuan and are not permitted, among others, to open an account for a customer, whose identity is not known to the banks, dealing in Malaysia currency except as permitted by Bank Negara Malaysia, or accepting cash cheques and opening a chequing account.

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LEASING

Leasing is indeed another growing sector in Labuan with a number of international players already using Labuan for this purpose. Offshore companies incorporated or registered in Labuan, leasing companies registered under the Banking and Financial Institution Act 1989 and special-purpose vehicles (SPVs) incorporated in Labuan to facilitate inter-company leasing transactions are eligible to apply for leasing licenses.

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MUTUAL FUNDS

The law on mutual funds regulates the dealing of securities in Labuan and provides for the establishment of a facility for the listing of securities on an exchange. This led to the establishment of the Labuan International Financial Exchange (LFX) in July 30, 1999.

Mutual funds may be established either in the form of an offshore company, unit trust or a partnership. Mutual funds are further categorised as either private fund or public fund. The consent of or registration with LOFSA is required for the establishment of a Labuan private fund or public fund respectively.

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INSURANCE

The insurance sector in Labuan had shown tremendous growth in recent years. The insurance laws in Labuan provide for the establishment of a complete spectrum of insurance activities such as direct insurance for life and general, offshore reinsurance, captive insurance, insurance management, underwriting management and insurance broking.

Captive insurances are gaining popularity with more and more residents and non-residents conglomerates alike resorting to self-insurance.

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OFFSHORE COMPANIES

Offshore Companies are the more popular vehicles when setting up a business in Labuan although limited partnerships are gaining momentum.

The share capital of a Labuan offshore company may be denominated in any currency other than Malaysian Ringgit. An offshore company may have a single shareholder. Other attractions include a single director and the ability to re-domicile offshore companies from Labuan elsewhere or vice-versa. Offshore companies are required to keep their books in Labuan and an audit is not mandatory under certain instances.

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LIMITED LIABILITY PARTNERSHIP

A limited liability partnership is an alternative to setting up offshore companies. An offshore limited partnership consists of not less than two partners of whom one must be a general partner and at least one shall be a limited partner.

An offshore limited partnership may be in the form of a general offshore limited partnership, an offshore professional partnership and an offshore project partnership, thus making the partnership ideal vehicle for projects or ventures meant for a specific period of time.

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TRUSTS

Trusts business in Labuan is relatively new and therefore has huge potential.

Offshore trusts in Labuan may continue to exist for a period not exceeding one hundered years unless otherwise stated in the trust instrument, which effectively permits the trusts to be in perpetuity.

Registration of trust is not mandatory in Labuan thus its confidentiality is guaranteed.

The laws also allow the re-domiciliation of foreign trusts to Labuan and vice-versa. The term of the trust may determine its proper law and the subsequent change of that proper law, thus enabling a trust to first test the suitability of a particular jurisdiction and change to another should the need arises. Statutory recognition has been given to the role of protectors and the letter of wishes and there are sufficient provisions on the protection of assets held under trusts.