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Latest Development of Tax Regime in Labuan

Labuan Companies

All Labuan companies are governed by the Labuan Companies Act 1990 and companies incorporated in Labuan, carry out either a trading or a non-trading activity in, from or through Labuan.

Labuan companies share the following corporate characteristics:

Share capital
Permitted Currencies In any foreign currency except Ringgit Malaysia
Minimum share issue One share in any denomination in foreign currency
Regulatory fees
Annual fees Regulatory Fees;
USD800 for Labuan companies
USD1,500 for Foreign Labuan companies
Directors
Minimum number One
Residency requirements Resident director is optional
Corporate directors Allowed
Meetings/frequency Per Articles of Association
Shareholders
Bearer shares Not allowed
Minimum number One
Public share registry There are no public records of Labuan companies
Meetings/frequency Yes, at least one annually
Accounts
Annual return Filed annually not later than 30 days from the anniversary of the date of the incorporation of the Labuan company
Audit requirements Optional, but required for Labuan companies opting to pay 3% tax per annum on audited net profits and licensed companies such as banks, insurance entities and trust companies
Others
Registered office Yes, must be in Labuan, which shall be the principal office of a Labuan trust company
Domicile Change in domicile is permitted

A Labuan company:

  • May be a company limited by shares or by guarantee
  • May participate in business activities and enjoy attractive tax benefits provided under the Labuan Business Activity Tax Act 1990
  • May carry out any business that is lawful in Malaysia either in, from or through Labuan
  • Would need to be licensed if it intends to undertake specific businesses including banking, insurance/insurance-related, public fund management, leasing, factoring and company management

Additional characteristics of a Labuan company:

  • It must have a resident secretary
  • It may issue shares of different classes and of different rights
  • Amalgamation by merging two or more companies into one is allowed
  • No par value and treasury shares are allowed

Malaysian residents are permitted to establish Labuan companies and with limited notification to Labuan FSA (post transaction), Labuan companies can deal with Malaysian residents.

In addition, Labuan companies can own controlling stakes in a Malaysian domestic company and transactions conducted by a Labuan Company must be in currencies other than Malaysian Ringgit (MYR), except as permitted by the relevant legislations and authorities.


Labuan Trading Company

A Labuan Trading Company can be defined as a Labuan Company which conducts trading activities. The definition of a Labuan trading activity is found in Section 2 of the Labuan Business Activity Tax Act 1990 which states a "Labuan trading activity" includes banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a Labuan non-trading activity.

Sections 4 and 7 of the same Act provides that Labuan Trading Companies have a yearly election of either paying a flat tax rate of MYR20,000 per annum, or 3 per cent of audited net profit.


Labuan Non Trading Company

A Labuan Non Trading Company can be defined as a Labuan Company which conducts non trading activities, which is defined in Section 2 of the Labuan Business Activity Tax Act 1990, as activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties by a Labuan entity on its own behalf. Section 9 of the same Act provides that Labuan Non Trading Companies are not subjected to tax.


Labuan Chargeable Company

A company registered under the Labuan Companies Act 1990 can make an irrevocable election to be taxed under the Malaysian Income Tax Act 1967, which allows it more secure access to treaty benefits signed between Malaysia and other countries. It's worth noting that Malaysia has close to 80 treaties, one of the largest tax treaty networks in Asia Pacific.

Under Malaysian Income Tax Act 1967, corporates are taxed at 25%, however all foreign-sourced income is exempted from tax.  In addition, there is no capital gains tax, except for transactions involving certain landed properties in Malaysia.


Setting Up a Marketing Office in Kuala Lumpur and Johor Bharu

The role of a Marketing Office is limited to facilitate meetings with clients and to establish contacts with potential clients. No maintenance of books and records (including trading activities) shall be done through, from or in the Marketing Office.

All Labuan companies, including those licensed under the laws relating to financial services in Labuan IBFC may apply to set-up a Marketing Office in Kuala Lumpur and/or in Johor Bahru. 

Labuan companies that have an existing Kuala Lumpur Marketing Office may also apply to establish another Marketing Office in Johor Bharu. With the exception of insurance brokers and captives, all Labuan companies with such a Marketing Office are required to maintain a Management Office in Labuan.


Co-Located Labuan Holding Companies

In line with the Malaysian government's move to liberalise the financial sector, Labuan Holding companies were permitted to set up an operational and management office in the capital city of Kuala Lumpur.

A co located Labuan Holding company in Kuala Lumpur brings with it an array of practical benefits, such as accessibility to all the largest markets in Asia and access to the infrastructure, human capital, professional advisors and service providers, as well as recreational and residential facilities that are available in Kuala Lumpur.

Labuan Trust

Trust company refers to a company registered under the Labuan Companies Act 1990 and satisfies requirements detailed in Section 62 the Labuan Financial Services and Securities Act 2010.

The role of Labuan trust companies is to incorporate, register, manage and conduct secretarial duties for entities registered under the Labuan Companies Act 1990, Labuan Limited Partnerships and Limited Liability Partnerships Act 2010, Labuan Foundations Act 2010 and Labuan Trust Act 1996.

Hence, a Labuan Trust Company must itself be registered by an existing Labuan trust company or a Labuan Managed Trust Company.

In addition a Labuan trust company may provide:

  • the registered office for a Labuan company or entity
  • lodgment services of any documents or reports required under Labuan laws
  • management and accounting services to a Labuan company or entity

It may also act as directors, secretaries, agents, officers of a Labuan foundations, company or entity and may also make available any of its trust officers for appointment as resident director and resident secretary to a Labuan company or entity. A Labuan trust company may also act as manager to a managed trust company or a private trust company.

It is a requirement that a trust company establishes a functional office in Labuan and have at least two approved trust officers, one of whom is domiciled in Labuan. The trust officers are employees of the trust company who have met Labuan FSA's requirements of a trust officer, which includes fulfilling the fit and proper person criteria and passing an exam set by Labuan FSA.

Other activities that a trust company may carry out include being a trustee, agent, executor or administrator pursuant to the objectives of the trust company. A company that seeks to register itself as a trust company must itself be a company incorporated or registered under the Labuan Companies Act 1990. The name of the company shall include the word 'Trust', 'Trustee' or other such words as approved by the Registrar.

Labuan Leasing

Leasing means the business of letting or sub-letting property on hire for the purpose of the use of such property by the hirer, regardless whether the lease is with or without an additional option to subsequently purchase the said property, or other such business as approved by the Minister of Finance, Malaysia.

This reference to property includes any plant, machinery, equipment or other chattel attached or to be attached to the ground. With the exception to the transportation of passengers or cargo by sea or the letting out on charter of ships on a voyage or time charter basis, Labuan leasing companies are allowed to carry on leasing of ships on a "bare boat" basis.

All Labuan leasing companies are regulated under Section 86 of the Labuan Financial Services and Securities Act 2010 and are deemed Labuan Trading Companies as defined in Section 2 of the Labuan Business Activity Tax Act 1990. As such, all Labuan leasing companies have a yearly election of either paying a flat tax rate of MYR20,000 per annum or 3 percent of audited net profit.

An application for leasing in Labuan will be considered from a Labuan company incorporated or registered under the Labuan Companies Act 1990 or a Special Purpose Vehicle which facilitates leasing transactions, including inter-company transactions.

Labuan Banks

As much as half of the world's capital is estimated to flow through international business and financial centres, making banking activity the most important in these centres.

Labuan International Business and Financial Centre has grown to become the home for more than 60 banks, including 14 investment banks up to the end of 2010.

ABanks licensed to operate in Labuan can conduct transactions with Malaysian residents as of January 19th, 2010. Under the co-location guideline issued in early 2010, Labuan banks can now co-locate an office (or offices) in any part of Malaysia.

This liberalisation is expected to drive the sector to even greater growth as banks that previously did not have a presence in Labuan now have a tremendous opportunity to do so given the added incentive of operating onshore.


Banks

All Banking entities set up in Labuan IBFC are governed and regulated under the Labuan Financial Services and Securities Act 2010, Part VI, specifically provisions contained in Sections 87 to 100.

All Labuan registered Banks, are deemed Labuan Trading Companies as defined in Section 2 of the Labuan Business Activity Tax Act 1990, and have a yearly election of either paying a flat tax rate of MYR20,000 per annum, or 3 percent of audited net profits.

Labuan banks are in the business of providing credit facilities and receiving deposits, investment banking service, building credit business, credit token business, development finance business, leasing business or such other activities as approved by Labuan FSA.

All Labuan Banks are not allowed to accept deposits or provide withdrawals in cash.


Islamic Banks

Labuan Islamic business is the business of receiving deposits on current account, deposit account, saving account or any other account in compliance with Shariah principles as may be specified by Labuan FSA, conduct Labuan Islamic financial business as defined under Section 60 of Labuan Islamic Financial Services and Securities Act 2010 including the following business in compliance with Shariah principles:

  • Islamic building credit business
  • Islamic credit token business
  • Islamic development finance business
  • Islamic leasing business
  • Islamic factoring business
  • Islamic money-broking business
  • Such other business as Labuan FSA with the approval of the Minister of Finance may specify

Investment Banks

Labuan investment banking is defined under the Labuan Financial Services and Securities Act 2010 as the business of:

  • Providing credit facilities
  • Providing consultancy and advisory services relating to corporate and investment matters or making investments on behalf of any person
  • Undertaking foreign exchange transactions, interest rate swaps, dealings in derivative instruments or derivative financial instruments or any other similar risk management activities
  • Labuan Islamic Investment banking activities
  • Labuan financial business, or
  • Such other business as Labuan FSA may specify.

Labuan Islamic investment banks are allowed to operate as full-fledged Islamic banks except accepting deposits. The followings are the range of businesses allowed to be undertaken by a Labuan Islamic investment banks:


Islamic Investment Banks

Labuan investment banking is defined under the Labuan Financial Services and Securities Act 2010 as the business of:

  • Providing financing facilities in compliance with Shariah principles;
  • Providing consultancy and advisory services relating to corporate and investment matters, including dealing in securities, or making and managing investments on behalf of any person, in compliance with Shariah principles;
  • Undertaking foreign exchange transactions, profit rate swaps, dealings in Islamic derivative instruments or Islamic derivative financial instruments which are in compliance with Shariah principles or any other similar risk management activities;
  • Labuan Islamic financial business; or
  • Such other business as the Labuan FSA, with the approval of the Minister of Finance may specify.

Co Located Banks

Eligible Labuan banks and investment banks were accorded the flexibility to establish their office or offices in other parts of Malaysia other than their offices in Labuan under the co-location guideline issued in 2010.

A Labuan Bank given approval to establish a Co-located Office under this Guideline must continue to have an office in Labuan with suitable number of staff to perform the functions assigned to the Labuan office. The application for approval to set up the Co-located Office must be submitted to Labuan FSA prior to its establishment.

Qualifying Criteria:

The application for approval under this Guideline can be made by any Labuan Bank licensed under the Labuan Financial Services and Securities Act 2010. Each applicant has the choice between the two co locating options below, subject to compliance with pre-determined criteria:

Option Eligibility Criteria
Option 1
The Labuan bank may carry out any operations at the Co-located Office, except for the following which will remain in Labuan:
  • Booking centre
  • Maintenance of records

The applicant bank must have:
  • an average total asset for three (3) years preceding the application of not less than USD1 billion;
  • an average percentage of loan granted to non-residents to the total outstanding loan for three (3) years preceding the application, of not less than 50%;
  • an average percentage of deposit from non-residents to the total deposit for three (3) years preceding the application, of not less than 50%; and
  • a minimum number of 10 staff.
Option 2
The Labuan bank may only carry on specific operations as may be approved by Labuan FSA, apart from marketing activities.
All other operations to be retained in Labuan.

The applicant bank has been in operation in Labuan for not less than three (3) years at the time of the application.

Labuan Bank that co-locates under this Guideline is allowed to conduct the following business activities at the Co-located Office:

  • Banking business as permitted under the Labuan Financial Services and Securities Act 2010 or any other relevant legislation, and
  • Any other banking businesses as may be permitted from time to time
Labuan Protected Cell Companies

A Labuan Protected Cell Company is a limited company which has been separated into legally distinct cells, which allows the assets and liabilities of individual cells to be separated from one another. This flexible structure allows each cell to own part of the company's overall share capital whilst at the same time maintaining sole ownership of its own distinct cell. Legally each Protected Cell Company is deemed a single entity.

All Labuan Protected Cell Companies are regulated under the Labuan Companies Act 1990, Part VIII(B), specifically provisions contained in Sections 130N to 130 Z(C) and are deemed Labuan Trading Companies as defined in Section 2 of the Labuan Business Activity Tax Act 1990. As such, all Protected Cell Companies have a yearly election of either paying a flat tax rate of MYR20,000 per annum, or 3 percent of audited net profits.

A Protected Cell Company is incorporated as a Labuan Company or may be converted from an existing Labuan Company limited by liability, and has the ability to form 'cells'. These cells of a Protected Cell Company may comprise:

  • A single core cell for holding non-cell assets or general assets
  • Any number of cells with the intention of segregating and protecting the assets of each respective cell

As such, the provisions of the Labuan Companies Act 1990 apply with the necessary modifications required to create the cells of a Protected Cell Company. (These modifications are dealt with in the later part of this section).

Neither the core cell nor the individual cells created are deemed separate legal entities, nonetheless, each cell remains legally separated from any other cell and each has sufficient attributes to carry on business independently under the 'umbrella' of the Labuan Protected Cell Company.

A Protected Cell Company therefore has the ability to hold assets or investments segregated into numerous classes to cater for differing objectives of individual investors, while at the same time preserving the independence of each cell.

A Labuan Protected Cell Company can be designed to conduct:

  • Insurance business
  • Captive Insurance business
  • Mutual Fund business

All three businesses may be conducted under either the conventional system or in accordance with Islamic principles, by ensuring Sharia compliance in all its dealings. As such Protected Cell Companies relating to Takaful, Islamic Captives and Islamic Funds, must ensure all Sharia principles relating to their businesses segments are adhered to. Please note however that the following requirements detailed below relate solely to conventional captives.

Labuan Financial Excahnge (Capital Markets)

The Labuan Financial Exchange (LFX) was established as a cost effective and practical alternative to existing exchanges in the region. It has proven itself to be an efficient funding mechanism for international companies operating in Asia-Pacific. Wholly owned by Bursa Malaysia, LFX plays a complementary role with respect to its parent company, in attracting international investors to the country.

Among the many advantages of LFX for global investors are the ability to list both conventional and Islamic instruments, the availability of multi-currency securities and instruments, flexibility of trading and freedom from selective controls.

LFX Offers

Timely approval for licensing and listing applications, subject to conditions being metSingle point of contact with statutory regulators via the Labuan Financial Services Authority (Labuan FSA) Access to information 24 hours a day, due to its being an Internet-based trading platform.

For further information, click here to go to LFX website.

Shipping Operation and Ship Registry

Ship Registry in Malaysia

Malaysia International Ship Malaysia Ship
  • Ownership: Majority foreign owned
  • Corporation incorporated in Malaysia*
  • An office in Malaysia
  • Must appoint a ship manager who is a Malaysian citizen or a company incorporated in Malaysia
  • Port of registry:
    Labuan
  • Vessel >1600 GT
  • Vessel age:
    <15 years for tanker and bulk carrier
    <20 years for others
  • Ownership: Majority Malaysian owned
  • Corporation incorporated in Malaysia*
  • Principal Office in Malaysia
  • Management is mainly in Msia
  • Majority Msian shareholders and directors
  • Port of registry:
    Port Klang
    Penang
    Kuching
    Kota Kinabalu
  • No restriction on tonnage (some are exempted from registration)
  • No restriction on vessel's age except >20 years need to submit additional reports.

* To qualify under LBATA, the shipping company must be incorporated or registered under Labuan Companies Act 1990

Please refer to the links below to obtain more information about shipping, licensing and registration:

Labuan International Commodity Trading Company

The Global Incentives for Trading (GIFT) programme is a framework of incentives for traders of specified commodities to use Malaysia as their international trading base to undertake international commodity trading business in Labuan IBFC.

The international commodity trading business under the GIFT programme is the trading of physical and related derivative instruments of

  • Petroleum and petroleum-related products including liquefied natural gas (LNG);
  • Agriculture products;
  • Refined raw materials;
  • Chemicals; and
  • Base minerals,

in any currency other than Ringgit.

Under the GIFT programme, a Labuan International Commodity Trading Company (LITC) must be established and licensed by the Labuan Financial Services Authority (Labuan FSA). An annual licence fee amounting to RM40,000 is payable to Labuan FSA upon the grant of licence. The LITC is allowed to establish its operational office(s) anywhere in Malaysia.

A LITC is required to meet the following criteria after five (5) years from the date of license:

  • Minimum annual turnover of USD100 million;
  • Minimum annual business spending of RM3 million payable to Malaysian residents; and
  • To employ at least three professional traders with a minimum salary of RM15,000 per month each and being resident of Malaysia in a calendar year for a year of assessment under the Income Tax Act 1967.

LITCs will be subject to a corporate tax rate of 3% of chargeable profits as reflected in the audited accounts under the Labuan Business Activity Tax Act 1990 as per the relevant exemption order. Further, a LITC set up purely as an LNG trading company would be entitled to a 100% income tax exemption on chargeable profit for the first three (3) years of its operation provided the company is licensed before 31 December 2014. Thereafter, the LITC will be subject to the abovementioned 3% corporate tax rate.

There are other tax exemptions for LITCs as follows:

  • 100% exemption on director fees paid to non-Malaysian director of the LITC.
  • 50% exemption on gross employment income of Non-Malaysian professional, managerial staff including traders with the LITC.
  • Exemption on dividends received by or from the LITC.
  • Exemption on royalties received from the LITC.
  • Exemption on interest received by resident or non-resident from the LITC.
  • Stamp duty exemption on all instruments for Labuan business activities, M & A of Labuan company and transfer of shares.

Towards the establishment of LITCs, the Labuan FSA has issued a guideline detailing the parameters relating to the establishment and operation of LITCs under the GIFT programme and available for download below. Kindly note this version of the guideline dated 1 January 2013 supersedes the version issued on 31 October 2011.

Transitional period

Existing Labuan companies currently undertaking the trading business in petroleum and petroleum-related products including LNG are required to be licensed as an LITC by 30 June 2013.

Existing Labuan companies that are currently undertaking trading business in the specified commodities other than petroleum and petroleum-related products including LNG are required to be licensed as an LITC by 31 January 2014.


Attachments
Title Download File
LITC - Guidelines
LITC Company Annual Update Submission Form
Labuan Limited Partnerships and Labuan Limited Liability Partnerships

The governing legislation for establishment of Labuan partnerships is the Labuan Limited Partnerships and Labuan Limited Liability Partnerships Act 2010 and Shariah-compliant partnerships are governed by the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA), under Part X, Section 111 to 112.There are two forms of partnerships in Labuan IBFC, namely:

  • Limited partnerships
  • Limited liability partnerships

All Labuan limited partnerships and Labuan limited liability partnerships are expected to carry on business in any currency other than the Malaysian currency except as permitted by the relevant authorities.

LIMITED PARTNERSHIPS

A limited partnership is a business entity comprising two or more partners who operate or manage a business together. The minimum number of partners for a Labuan limited partnership is two partners i.e. one general partner and one limited partner and the maximum number of partners allowed is 50 partners.

Partners may be a corporation except for firms which are set up to offer professional services, in which case, it must consist of natural persons and supplemented with professional indemnity insurance coverage issued by an insurer approved by Labuan FSA.

a) General Partner

A general partner shall have all the rights and powers and shall be subjected to all the restrictions and liabilities of a partner. Therefore, they have management control; share the right to use partnership property; share the profits of the firm in predefined proportions; and have joint and several liabilities for the debts of the partnership.

b) Limited Partner

A limited partner contributes capital to the partnership but do not participate in the daily operations of the company. The limited partner shall not be liable as a general partner unless the limited partner participates in the management of the Limited partnership.

Registration Requirements

The general process for registering a limited partnership involves the following:

  • The applicant must appoint a Labuan trust company for the registration, which would conduct due diligence on the applicant. All documentation required to be submitted to Labuan FSA must be filed through a Labuan trust company.
  • A Labuan LP shall have either the words 'Limited Partnership', 'Ltd.P.', 'LP' or 'L.P' as part of its name (any other abbreviations in romanised characters or words in the applicant's national language which connotes a limited partnership or any abbreviation as maybe approved by Labuan FSA).
  • The name maybe in foreign characters, alphabet or language provided that an accurate and certified rendition of the name in the English language is clearly stated in all its documents.
  • The application for registration must be accompanied by the relevant documents and payments.
Operational Requirements
  • A Labuan limited partnership must have a registered office in Labuan, which shall be the registered office of a Labuan trust company. A register showing the particulars of the Labuan limited partnership as well as its constituent document must be kept in this office.
  • A limited partnership has the duty to keep proper accounting and records which could sufficiently and accurately explain its transactions and financial position. These records must be kept at the registered office or any other suitable place in Labuan and accessible by all partners for inspections at all times.
  • Unless otherwise required in the partnership agreement, the accounts of limited partnership shall not be required to be audited.

LIMITED PARTNERSHIPS

A limited liability partnership is a corporate body formed vested with the powers of a natural person and has legal personality separated from its partners. The partnership has perpetual succession and any change in the partnership shall not affect the existence, rights or liabilities of the Labuan limited liability partnership. In addition to having a common seal, the Labuan limited liability partnership is capable of entering into litigation and being in possession or dispossession of movable and immovable property.

Registration Requirement

The general process for registering limited liability partnership involves the following:

  • The applicant must appoint a Labuan trust company for the registration, which would conduct due diligence on the applicant. All documentation required to be submitted to Labuan FSA must be filed through a Labuan trust company.
  • A Labuan LLP shall have either the words 'Labuan Limited Liability Partnership', '(Labuan) L.L.P.' or 'Labuan LLP' as part of its name (any other abbreviations in romanised characters which connotes a limited liability partnership may be approved by Labuan FSA).
  • The name may be in foreign characters, alphabet or language provided that an accurate and certified rendition of the name in the English language is clearly stated in all its documents.
  • The application for registration must be accompanied by the relevant documents and payments.
Operational Requirements
  • An individual or a corporation may be a partner in a Labuan limited liability partnership. The minimum number of partners to form a Labuan limited liability partnership is two persons.
  • There must be at least one designated partner who shall assume the responsibilities of all matters and is personally liable to any penalities if found contravening the Act.
  • A limited liability partnership has the duty to keep proper accounting and records which could sufficiently and accurately explain its transactions and financial position. These records must be kept at the registered office or any other suitable place in Labuan and accessible by all partners for inspections at all times.
  • Unless otherwise required in the partnership agreement, the accounts of limited liability partnership shall not be required to be audited.
  • An annual solvency certificate is expected to be filed with Labuan FSA on or before the anniversary registration date of the partnership.

Fees

The annual fee is payable to Labuan FSA upon application. Subsequent payment of annual fee is payable on or before each anniversary of the date of its registration.

Labuan Insurance Companies

The insurance sector continued to expand in 2010 with the total number of approved insurance entities increasing to 169 and for the third consecutive year, gross premium generated surpassed USD1 billion.

During the year, 22 new licences were approved, comprising nine insurance brokers, seven underwriting managers, three reinsurers, two captive insurers and one general insurer.

The recent legislative review allows for the establishment of Protected Cell Companies - not only for captive Insurers but for all forms of insurance. In March 2011, the guideline on co-location was extended to allow Labuan insurance and takaful entities to establish marketing offices anywhere in Malaysia. These moves demonstrated the jurisdiction's commitment towards the growth the insurance sector in Labuan IBFC.