Labuan
by
Stuart Gray, December 2004
IMPORTANT
WARNING:
The contents of this report have been compiled in good
faith by Investorsoffshore.com to provide assistance
to investors, but do not constitute investment advice
or recommendations. Investors should not rely upon the
information given in order to choose types or routes
of investment but should make their own independent
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has taken reasonable care in researching and presenting
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When
we think of the word ‘offshore,’ the names
‘Bermuda’, ‘Cayman Islands’,
or perhaps ‘Switzerland’, are the ones that
would probably come to mind before ‘Labuan’.
In
a way that is unsurprising, as Labuan, situated a few
miles off the northern coast of Borneo in Malaysia and
just 60-odd square miles in size, is one of the newer
additions to the list of the world’s offshore
jurisdictions.
Situated
in the heart of the fast growing South Eastern Asian
region, and close to a number of major cities and economic
hubs such as Singapore, Hong Kong, Kuala Lumpur and
Jakarta, Labaun, currently home to a population of around
75,000, benefits from a benign income tax regime, a
well regulated financial regime, a deep water port and
a well developed supporting infrastructure, including
internet communications, and could well soon be giving
other more established financial jurisdictions a run
for their money, particularly in the field of Islamic
finance.
Used
by the British as a coaling station in the days of empire,
Labuan’s economic existence has traditionally
depended on its deep water port and position at the
confluence of Eastern Asian’s trade routes. Latterly,
oil and gas exploration and their supporting industries
were the main contributors to the island’s economy.
However, these are fast being superseded by financial
services, and tourism is also a growing industry given
the island’s year-round tropical climate, coral
reefs and sandy beaches.
The
financial services industry in Labuan has taken root
thanks to the creation of the Labuan International Offshore
Financial Centre in 1990, along with the passing of
a batch of ‘offshore’ laws. The offshore
companies established on Labuan in 2006 included 60
banks, 112 insurance companies, 68 leasing companies
and 30 trust management companies. Moreover, the island
has quickly grown as a major conduit for Foreign Direct
Investment into a number of local countries, particularly
South Korea and Malaysia itself.
Tax
For
income tax purposes, Labuan is considered part of Malaysia
and therefore Malaysian tax rules apply to individuals
working in Labuan, although there are many exemptions
available to individuals and companies. One becomes
a resident of Malaysia for taxation purposes after having
physically spent 182 or more days in the country for
one calendar year. Individuals will also be resident
for tax purposes under the following circumstances:
-
They are physically present in Malaysia for less than
182 days during a calendar year, but that time is
connected to physical presence of at least 182 consecutive
days in either the preceding or succeeding calendar
year. (Periods of temporary absence are considered
part of a period of consecutive presence if the absence
is related to the individual's service in Malaysia,
personal illness, illness of an immediate family member
or personal trips of 14 days or less.)
-
They are in Malaysia during the calendar year for
at least 90 days and have been resident or present
in Malaysia for at least 90 days in any three of the
four preceding years.
- They
have been resident for the three preceding calendar
years and will be resident in the following calendar
year. This is the only case in which an individual
is considered resident though not physically present
in Malaysia.
Individual
income tax for residents in Malaysia is charged at a
rate of 28% on income over RM250,000 per year (US$65,800),
with the first RM2,500 of income exempt from taxation.
In between there are several tax brackets which are
as follows:
-
to RM 5,000, 1%
-
to RM 20,000, 3%
-
to RM 35,000, 7%
-
to RM 50,000, 13%
-
to RM 70,000, 19%
-
to RM 100,000, 24%
-
to RM 250,000, 27%
-
0ver RM 250,000, 28%
A
non-resident individual is liable to tax at the rate
of 28% although they are not entitled to any tax reliefs.
However, non-residents can claim rebates in respect
of levies paid to the government for the issuance of
an employment work permit.
Meanwhile,
companies established in Malaysia, regardless of whether
they are domestic or foreign in origin, will be faced
with a corporate tax charged at a flat rate of 28%.
While this is somewhat higher than other economic centres
in the region such as Hong Kong and Singapore, one major
advantage of the Malaysian income tax system is that
it is territorial, so only income accrued in, derived
from or remitted to Malaysia is liable for tax.
However,
individuals and corporate entities doing business in
Labuan are entitled to a number of tax privileges and
deductions as a result of the offshore regime. The following
income is exempt from tax in the hands of a Malaysian
or foreign recipient:
-
Dividends received by, or received from an offshore
company;
- Distributions
received from an offshore trust by the beneficiaries;
- Royalties
received by a non-resident;
- Certain
interest payments received from an offshore company
including those from an offshore company for providing
services.
- 65%
of income from offshore entities from the rendering
of legal, accounting, financial or secretarial services
-
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.
-
50% of the housing and regional allowances given to
residents working in the public sector and offshore
companies in Labuan
-
Second tier dividends declared out of dividends received
from an offshore company by a domestic company
-
Royalties paid by an offshore company to a non-resident
person
-
Interest paid by an offshore company to a non-resident
person
-
Interest paid by an offshore company to a resident
person (except those engaged in banking, finance or
insurance in Malaysia)
-
Technical or management fees
The tax system is also favourable for companies carrying
on offshore trading activities in Labuan, and firms
can opt to pay tax each year at the rate of 3% of their
net audited profits, or a fixed sum of RM20,000.
Entry
To encourage the development of the offshore centre,
a liberal immigration policy has been adopted by Labuan,
and multiple entry visas are issued to expatriates who
have been granted employment permits to work with offshore
companies.
By
comparison, the immigration procedures of mainland Malaysia
are tougher. Foreign nationals may not obtain residence
permits in Malaysia, which only grants temporary visas
to tourists, students and foreign nationals attending
business conferences. Those wishing to enter the country
to work for a Malaysian firm must apply to the Department
of Immigration through their employer, which will usually
issue a visa for a period of two to three years, renewable
for a similar duration.
These employment visas are issued on a case-by-case
basis and can take up to one month to be approved.
Offshore
Business Sector
Labuan
offers a range of financial services including offshore
banking, insurance, trust business, fund management,
investment holding and investment banking, all overseen
by LOFSA, the Labuan Offshore Financial Services Authority,
which was established in 1996 as a single regulatory
agency and a one-stop agency for the offshore centre.
From
the banking and trust perspective, strong confidentiality
rules are enshrined in the original legislation creating
the Labuan IOFC, giving the jurisdiction something of
a competitive edge over other financial centres in the
market for high-net-worth and offshore investors.
Whilst
Labuan has been ostensibly an offshore centre since
1990, it has only been in the last two years or so that
there has really been significant growth in the number
of offshore firms registered in the jurisdiction. The
year 2002 was particularly significant. After conducting
some well-targeted roadshows in Hong Kong, mainland
China and other regional business hubs, company registration
grew by 30%. It was also a year in which the Labuan
International Financial Exchange (LFX) emerged as a
regional force and Labuan began to be talked about as
a major global Islamic Finance centre.
LFX
The
Labuan Financial Exchange was officially launched in
October 2000. It is an offshore exchange wholly owned
by the Kuala Lumpur Stock Exchange and trades in financial
instruments such as equities, investment funds, debt
instruments and insurance-related instruments. The LFX
has no restrictions on the type of financial instruments
and no pre-determined minimum quantity for listing.
There is also no requirement for participants to have
a physical presence in Labuan, and trading is conducted
using an electronic bulletin board in which trading
agents place their interests to buy or sell on the board
and then undertake their own negotiations.
The
exchange is seen as one of the key components in promoting
Labuan as an offshore financial centre, and also holds
the key to Labuan’s development as an engine in
the world’s growing Islamic capital market.
Islamic
Finance
Whilst
Labuan has succeeded in attracting conventional business
interest from all over the globe, its most exciting
potential area of future growth is in catering for the
growing demand for Islamic finance products, and the
jurisdiction has already made significant strides in
this area. Setting a global precedent, in 2002 Malaysia's
US$600 million Global Islamic Trust Certificates (Sukuk),
was listed on the LFX and the Luxembourg Stock Exchange.
The five-year Sukuk maturing in 2007 attracted wide
participation from investors in Asia, the Middle East,
the United States and Europe.
In
a bid to extend its reach into the Islamic finance arena,
in January 2004 the LFX signed a Memorandum of Understanding
with the Bahrain-based Islamic International Financial
Market, allowing Labuan to tap into the vast Middle
Eastern market. The MoU promotes the development of
channels of communications and exchange of information
in addition to fostering collaboration in the listing
and active secondary trading of Islamic financial instruments.
Subsequently,
the LFX has gone on to list the first governmental Sukuk
of Qatar, in addition to the first Sukuk of the Kingdom
of Bahrain, further strengthening its position as a
facilitator of the Islamic capital markets.
So,
in summary, Labuan could be said to be something of
a hidden gem for the offshore investor, both on the
individual and corporate level. With its benign tax
regime, strong confidentiality rules and strategic location
at the heart of the fast growing South East Asian economies,
in addition to easy access to several major cities,
a well developed infrastructure and the Malaysian government
committed to the island’s economic success, Labuan
may not be Asia’s best-kept secret for much longer.
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