New laws which, it is hoped, will substantially improve Labuan’s competitive edge in international financial markets came into effect in February 2010. 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 is part of Malaysia, and Malaysian company law applies there. Most foreign companies wanting offshore status in Labuan will use Offshore Company or Limited Partnership status, see below. These offshore forms are subject to Malaysian Company law except as described below. Regular Malaysian companies can be used in Labuan, but will not receive the tax and other privileges accorded to Offshore Companies.
Generally, companies incorporated in Malaysia are regulated by the Malaysian Companies Act, 1965. The types of companies are:
Foreign investors normally conduct their businesses in Malaysia
in the form of a private company limited by shares.
Incorporation of a company requires an application to be made to the Registrar of Companies to approve the proposed name by submitting the following forms:
1. Memorandum and Articles of Association
2. Statutory declaration of compliance with the Companies Act
3. Certificate of identity
4. Consent to act as director
5. Statutory declaration by persons before appointments as directors
Companies pay registration fees based on the amount of authorized capital, and both filing and stamping fees apply for submission of the above documents.
A company must have a minimum of two directors and one secretary, having their principal or only place of residence in Malaysia. A register of directors is kept at the registered office of the company and is available for public inspection.
Audited profit and loss accounts and annual returns are required.
Partnerships and sole proprietorships must register with the Registration of Businesses before they can begin to operate. There is a registration fee and an annual renewal fee.
In July 2008, the Labuan Offshore Financial Services Authority (Lofsa) announced that its aim was to have 50,000 companies registered in the financial centre by the year 2012.
Malaysia's Deputy Finance Minister Datuk Ahmad Husni Hanadzlah made the comment as he wound down a debate on the Labuan Offshore Financial Services (Amendment) Bill 2008 in parliament, explaining that Labuan would reach its target by focusing on niche areas such as private equity and Islamic finance.
According to Ahmad there were 6,425 offshore companies registered in the Labuan Financial Centre as of March 2008. There were also 58 banks with total assets of USD26.6bn, 132 insurers with more than USD60mn in capitalisation, 106 leasing companies with USD16bn in leases, 22 fund management companies and 46 listed instruments worth USD16.1bn.
Private companies, denoted as "Sendirian Berhad" or "Sdn. Bhd.," may be limited or unlimited. A private limited company restricts the right to transfer its shares, limits its membership to no more than 50, prohibits public subscription to its shares, and prohibits invitation to the public to deposit money with the company for fixed periods or payable by call
A private company may be classified as an 'exempt private company' if its shares are not beneficially owned directly or indirectly by any corporation and it has not more than 20 members. An exempt private company need not submit its balance sheet and profit and loss account with its annual return, and it may make loans to directors and companies in which the directors own interests.
In a company limited by guarantee, the liability of members is limited to a specified amount undertaken to be contributed to assets on the company's termination. These are generally nonprofit organizations.
Public limited companies, denoted as "Berhad" or "Bhd.," are companies whose shares may be offered to the public for subscription. Companies may apply to the stock exchange for permission to have their shares listed. A public company is a company other than a private company. A public company must be issued a certificate by the Registrar of Companies (ROC) before it can commence business. It is required to issue a prospectus that is approved by the ROC before it can invite the public to purchase shares in the company.
A listed company on the Kuala Lumpur Stock Exchange is required to have an independent audit committee.
Companies incorporated outside Malaysia that do business
in Malaysia are classed as Foreign Companies by the Companies
Act. Before local establishment, a Foreign Company is required
to deposit the following with the Companies Registry:
1. A certified copy of its certificate of incorporation
2. A certified copy of the charter, statutes, and/or articles of the company that define its constitution.
3. A list of its directors and secretary
4. A memorandum of appointment stating the names and addresses of two or more persons resident in Malaysia authorized to act legally and responsibly on the company's behalf
A Foreign Company is required to lodge with the ROC within two months of its AGM, a copy of its balance sheet made up to the end of its last financial year and supporting documents, if applicable. In addition, it must lodge an audited statement showing the assets used in and the liabilities arising out of its operations in Malaysia and an approved auditor's report which complies with the provisions of the Companies Act.
The registration of a foreign branch in Malaysia requires an application to be made to the ROC to approve the proposed name of the intended branch.
The foreign company's Memorandum and Articles
of Association (duly translated in English if it is in a
foreign language) and certain other prescribed documents
relating specifically to the foreign company must be submitted
together with the application.
Upon approval of the proposed name, the Memorandum of Appointment of Agent or Power of Attorney appointing at least one person residing in Malaysia as the local agent and other prescribed documents relating to the registration of a foreign branch must be lodged with the ROC.
On payment of a registration fee, which depends on the amount of the authorised share capital (converted to Ringgit Malaysia) of the foreign company, a Certificate of Registration of a Foreign Branch will be issued by the ROC. The registration fee payable is the same as the fee payable by a Malaysian company (see above). The certificate is conclusive evidence of the existence of the foreign branch. The registration of a foreign branch generally takes three to six weeks.
The Offshore Companies Act 1990 (OCA) provides for the establishment of offshore companies and the registration of foreign offshore companies in Labuan. In addition, a foreign company incorporated under the laws of another country may also apply to be registered as being continued in Labuan. Every offshore company may be a company limited by shares or by guarantee. The abovementioned companies may participate in the offshore activities and enjoy the attractive tax treatment provided under the Labuan Offshore Business Activity Tax Act 1990.
Amendments to modernize the OCA started to be considered in 2006.
It is a requirement under the OCA that an offshore company must employ the services of a trust company, which is a company incorporated under the Companies Act 1965 and registered under the Labuan Trust Companies Act 1990, to provide trust company services to the offshore companies. The trust company provides the registered office, Resident Secretary and performs the secretarial duties of the offshore company, such as lodgment of any documents required under the OCA, and also makes available any of its Trust Officer for appointment as Resident Director.
Residents and non-residents of Malaysia are permitted to establish offshore companies in Labuan. The offshore company may carry out any business that is lawful in Malaysia in, from or through Labuan, but banking, insurance and insurance-related businesses, fund management, leasing, factoring and company management would require the offshore company to be licensed. Shipping operations in Malaysia are prohibited.
An offshore company must have at least one director and Resident Secretary who must be a Trust Officer of a trust company. There is no minimum capital requirement and the company may issue shares of different classes and of different rights but no bearer shares are allowed. Offshore companies are required at all times to have a registered office in Labuan. No person in an offshore company could divulge to others any information concerning share holding, management and any business, financial or other transactions of the company.
An Offshore Company (or an Offshore Foreign Company) is only permitted to carry on business in, from or through Labuan. An Offshore Company traditionally may not:
Manufacturing activities are normally carried out by companies incorporated under the Malaysian Companies Act. An activity which is neither offshore trading nor offshore non-trading will be subject to tax under the regular tax regime.
Offshore insurance and banking businesses are permitted to maintain a marketing office in Kuala Lumpur until the Government decides that the management office should be relocated in Labuan.
An Offshore Company is not treated as carrying on business with residents of Malaysia if:
Offshore Companies are allowed to have names in a foreign language, provided they use the Latin alphabet. The words: Bank, building society, insurance, assurance, reinsurance, fund management, investment fund, trust, trustees, Chamber of Commerce, university, municipal or their foreign language equivalents require approval.
To denote limited liability, any of the following are permitted: Corporation, Incorporated, Limited, Sociètè Anonyme or Sociedad Anonima or the relevant abbreviations. If the Malaysian word Berhad is used then it must be preceded by "(L)" to denote that the company is incorporated in Labuan.
The following are some of the features of an Offshore Company:
Offshore Companies that are trading can elect to pay 3% on net audited profits or the sum of RM 20,000. Offshore Companies that do not trade do not pay tax. Non-trading (i.e. investment and holding companies) and trading companies which elect to pay tax of RM 20,000 p.a. are not required to file financial statements, and do not have to employ an auditor unless they are offshore banks or insurance companies.
A trading company which pays 3% of audited net profits is required to appoint an auditor and file audited financial statements.
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.
"With the new incentives, LOFSA will be able to compete with other offshore centres in the Asia-Pacific region and the world," Zeti told reporters.
“We want to be competitive and relative to other offshores as the environment is changing very significantly," she added.
In September 2007, the measures were unveiled by the Prime Minister.
Abdullah stated in his 2008 budget speech that in future, companies registering in the Labuan offshore sector would have the option of having their offshore business income taxed under the Income Tax Act 1967, in addition to under the Labuan Offshore Business Activity Tax Act 1990.
"In the light of greater global competition, we need to ensure that Labuan remains competitive as an international offshore financial centre. Given that investors in Labuan undertake a wide range of financial services, a flexible tax regime is necessary," the Prime Minister explained.
The Labuan Offshore Business Activity Tax Act 1990 (as amended 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%. 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, meaning that they pay normal taxes.
The registration fee payable by an Offshore Company is RM1,000 to RM5,000 depending on its authorised capital; an Offshore Foreign Company pays RM6,000. In addition, the annual fee for an offshore company at the time of writing is RM1,500 (Approx: USD430) for an offshore company and RM5,300 (USD1,395) for a foreign offshore company.
An offshore limited partnership can be set up in Labuan and consists of not fewer than two and not more than 20 partners. There must be at least one general partner. An offshore limited partnership can be formed for the purposes of a specific project or for carrying on an offshore professional partnership (which is restricted to the fields of accounting, actuarial science, engineering, law and other fields that may be prescribed).
The Labuan Offshore Limited Partnership Regulations 1999 specified the process for setting up a Limited Partnership, and the fees payable to LOFSA.
An offshore trust can be created by a will or other instrument of writing including a unilateral declaration of trust. The duration of an offshore trust shall not exceed 100 years unless otherwise provided in the terms of the trust. A foreign trust may be enforceable, recognised or registered in Labuan. Similarly, a Labuan offshore trust can be transferred to another country.
Labuan trusts are regulated under the Labuan Offshore Trusts Act 1996 ("the Act"). The Act was gazetted and commenced operation on 31 October 1996. An offshore trust which is validly created in accordance with the Act, whether in Labuan or abroad, may be registered with the Labuan Offshore Financial Services Authority. A registered offshore trust is subject to the provisions of the Act.
In November 2001, the Association of Labuan Trust Companies Malaysia (ALTCM) persuaded the Board of the Labuan Offshore Financial Services Authority (LOFSA) to change the status of Labuan trust firms from domestic to offshore companies.
Previously, trust companies in Labuan were incorporated under the regular Companies Act unlike other offshore entities which are incorporated under the Offshore Companies Act 1990 which meant that the trust companies paid higher taxes. By being offshore companies the trust firms are able to enjoy a more attractive tax structure, having to pay only a 3 per cent tax of their net audited profit.
In February 2008, an Exposure Draft was published to provide guidance on the requirements to be observed by all offshore trusts created under the Labuan Offshore Trusts Act 1966 (LOTA) and managed under Shariah principles. The Exposure Draft aimed to ensure that Shariah compliant offshore trusts created in the Labuan IBFC are based on necessary requirements under LOTA and Shariah principles.