Labuan Investment Guide

Introduction Of LABUAN

n April 2009, Malaysia (Labuan) was added to the Organization of Economic Cooperation and Development’s new ‘blacklist’ of jurisdictions which had not committed to implementing the internationally agreed standard in tax transparency.

The list, was published on April 2, following the G20 London Summit and was issued at the same time as a communique by government leaders which set out the major economies’ vision of the future global regulatory and economic landscape. “We stand ready to deploy sanctions to protect our public finances and financial systems,” read the communique, presented by British Prime Minister Gordon Brown, which went on to declare that: “The era of banking secrecy is over.”

In response to the ‘blacklisting’ Malaysia said it was committed to internationally-agreed tax standards and should not be categorized with jurisdictions that have not.

The Prime Minister Datuk Seri Najib Tun Razak explained on April 2, 2009, that Malaysia had sent a statement to the OECD leaders to reaffirm its commitment to subscribe to the OECD standard for the effective exchange of information (EOI).

Najib, who is also Finance Minister, was responding to reports that Malaysia and its offshore jurisdiction, Labuan International Business and Financial Centre (IBFC), has been categorized as “jurisdictions which have not committed to the internationally-agreed tax standards.”

In a statement, Labuan Offshore Financial Services Authority (LOFSA) welcomed the approach by the G20 and OECD to take measures to stamp out tax evasion. LOFSA said since its inception, the jurisdiction has met the highest international standards and has received positive assessments by the International Monetary Fund (IMF) under its Offshore Financial Sector Assessment Programme.

In addition, Labuan IBFC has been affirmed as a “low-risk” jurisdiction for money laundering by the Asia Pacific Group on Money Laundering which is a division of the Financial Action Task Force and an associate body of OECD.

LOFSA said existing EOI provisions have already met OECD requirements. Efforts are also taken to tighten them further through the legislative process. Malaysia, as the world’s 19th largest trading nation, has double-taxation agreements with 69 countries.

These agreements have specific terms on the EOI which were in fact drafted by OECD. These terms commit Malaysia to cooperate with regulators to eradicate tax evasion.

Malaysia has since been elevated to the OECD’s ‘white list’ of countries which have “substantially implemented” the internationally agreed tax standard.

In February 2010, new laws which, it is hoped, will substantially improve Labuan’s competitive edge in international financial markets came into effect.

A total of four new acts, together with radical amendments to a further four existing laws, will completely change the way in which Labuan carries on its financial services business. With the enactment of the new laws, the Labuan Offshore Financial Services Authority will be re-named the Labuan Financial Services Authority (Labuan FSA).

Dato Azizan Abdul Rahman, the Director-General of Labuan FSA said: “These far-reaching changes cover all financial activities in Labuan International Business and Financial Centre – from banking, insurance, leasing and company incorporation right through to the creation of Islamic financial products and services. Apart from that, the changes have taken into consideration all aspects so that we are ahead of accepted international standards and practices.”

The new laws allow 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. These complement the existing available range of products and services and aim to provide investors with a wider choice of financial products to maximise investment opportunities.

Labuan Tax Treatment of Offshore Operations

The Labuan Offshore Business Activity Tax Act 1990 (as amended in 2004) 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 3%.

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 M$20,000 for that year of assessment.

An offshore company which carries on an offshore non-trading activity is exempt from income tax altogether.

The Income Tax Act 1967 applies to any activity other than offshore business activity carried on by an offshore company, ie they pay normal taxes.

The following income is traditionally exempt from tax in the hands of a Malaysian or foreign recipient:

  • a dividend received by, or received from an offshore company;
  • distributions received from an offshore trust by the beneficiaries;
  • royalties received by a non-resident or another offshore company;
  • interest received from, or by, an offshore company under certain circumstances and amounts received from an offshore company for providing services.

No withholding tax is applicable to items of income specifically exempt from tax.

Stamp duty for the transfer of shares and preparation and filing of Memorandum and Articles of Association by an offshore company has been waived.

A number of other tax privileges were available at the time of writing:

  • 65% of income from offshore entities from the rendering of legal, accounting, financial or secretarial services, including that of a trust company as defined in the Labuan Trust Companies Act, 1990 is exempted from tax.
  • Income earned from renting a “qualifying asset” to an offshore company in Labuan is exempt from tax for an amount of up to 50% of the income received for a period of 5 years. Thus a developer can expect to only pay tax on 50% of the income received from a building rented out to offshore companies.
  • 50% of the housing and regional allowances given to residents working in the public sector and offshore companies in Labuan are exempted from tax.
  • Second tier dividends declared out of dividends received from an offshore company by a domestic company are exempted from tax.
  • Distributions made by an offshore trust are not subject to income tax in the hands of the beneficiary.
  • Royalties paid by an offshore company to a non-resident person or another offshore company are not subject to income tax and hence are not subject to withholding tax.
  • Interest paid by an offshore company to a nonresident person or another offshore company is not subject to income tax. However, where the interest accrues to a banking, finance company or insurance business carried on by the nonresident person in Malaysia, that interest will be subject to income tax as part of business income.
  • Interest paid by an offshore company to a resident person, other than a person carrying on a banking, finance company or insurance business in Malaysia, is not subject to income tax.
  • Technical or management fees paid by an offshore company to a nonresident or another offshore company is not subject to income tax.

In May 2007, it emerged that the Malaysian Finance Ministry was working with the financial authorities of Labuan to establish a new tax structure aimed at attracting more companies to the Labuan International Offshore Financial Centre (IOFC).

Speaking at the release of the Labuan Offshore Financial Services Authority (Lofsa) annual report for 2006, Tan Sri Dr Zeti Ahktar Aziz, Bank Negara Governor and Lofsa chairman, said that new tax initiatives would be included in the 2008 budget, due to be announced in September 2007, along with new company forms to better cater for the requirements of offshore investors.

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