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A GUIDE TO LABUAN IBFC The Labuan International Business and Financial Centre (

A GUIDE TO LABUAN IBFC The Labuan International Business and Financial Centre (Labuan IBFC) was established more than 25 years ago to complement: • The activities of the domestic financial market in Kuala Lumpur; and • The development of economic activities in Labuan, a federal territory in Malaysia. The Labuan Financial Services Authority (Labuan FSA) is the one-stop regulator for the jurisdiction while its wholly-owned subsidiary, Labuan IBFC Inc Sdn Bhd, promotes and markets Labuan IBFC as the preferred international business and financial centre in Asia Pacific. Labuan IBFC offers a wide range of structures and solutions. The diagram below illustrates the main areas of focus: Company Incorporations Insurance Insurance, Reinsurance, Captive, Takaful and Retakaful Fund Management Private Wealth Management OFFERED WITHIN A CONVENTIONAL OR ISLAMIC FRAMEWORK THE LABUAN LEGISLATION Four Acts were enacted in 2010 by the Malaysian Parliament and comprehensive amendments were made to four existing Acts during the same year. As a result, Labuan IBFC is now governed by the following legislations: • Labuan Companies Act 1990 • Labuan Business Activity Tax Act 1990 • Labuan Trusts Act 1996 • Labuan Foundations Act 2010 • Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 • Labuan Financial Services and Securities Act 2010 • Labuan Islamic Financial Services and Securities Act 2010 • Labuan Financial Services Authority Act 1996 THE LABUAN TAX FRAMEWORK The tax laws relating to Labuan entities are set out in the Labuan Business Activity Tax Act 1990 (LBATA). According to Section 4(1) of LBATA, tax shall be charged at a rate of 3% a year on the net audited profits of a Labuan entity carrying on a trading activity. In the instance of a Labuan entity carrying on a non-trading activity, no tax will be applied for that assessment year. A Labuan non-trading activity is defined as activity relating to the holding of investments in securities, stocks, shares, loans, deposits or any other properties situated in Labuan and held by a Labuan entity on its own behalf while a Labuan trading activity includes banking, insurance, trading, management, licensing, shipping operations or any other activity. The concessionary tax treatment offered by LBATA is also complemented by Statutory Orders exempting Labuan companies from taxation, withholding taxes and stamp duty as well as partial exemption from salary taxes in certain cases. Foreign exchange control rules, foreign ownership limitations, capital gains tax, estate or inheritance taxes and indirect taxes which may apply in Malaysia, do not apply to Labuan companies or structures. Should a Labuan company or structure prefer not to be taxed under LBATA, it may make an irrevocable election to be taxed under the Income Tax Act 1967 (ITA). The Malaysian Inland Revenue Board has issued guidelines on the tax treatment (including compliance requirements) for Labuan entities that elect to be taxed under the ITA. The advance ruling provisions provided by the Inland Revenue Board is also available to Labuan entities under LBATA. LABUAN COMPANIES OPERATING IN MALAYSIA A Labuan company may apply to Labuan FSA to establish marketing offices in Kuala Lumpur or Iskandar Malaysia to carry out its marketing activities without losing its Labuan business activity status. Labuan banks and Labuan insurance companies, subject to Labuan FSA’s approval and conditions, may also set up co-located offices in any part of Malaysia to carry out permissible Labuan business activities. A Labuan holding company may apply to Labuan FSA to co-locate its operational and management office in Kuala Lumpur, provided it makes an irrevocable election to be taxed under the ITA instead of LBATA. The co-located office is allowed to provide management services, management of surplus funds and provision of credit facilities, and trading or invoicing activities. Depending on the nature of the activities, the services can be extended to related companies in and outside of Malaysia and to non-related companies outside of Malaysia. DOUBLE TAXATION AGREEMENTS (“DTAS”) Malaysian tax-paying residents have access to an extensive double taxation agreement (DTA) network, which contributes to a dynamic and conducive business environment. Labuan entities with Malaysian tax residency status may also access the majority of Malaysia’s DTA network. Where a Labuan company elects to be taxed under the ITA, this election may, in some cases, facilitate access to the benefits offered under some of the DTAs. The current tax treatment under the ITA exempts foreign sourced income from tax with the exception of companies undertaking banking, insurance, sea or air transport businesses. This would give Labuan entities more flexibility to structure their business transactions efficiently while giving investors a more liberal business and exchange control environment. The provision of the Labuan Acts, in addition to the Organisation for Economic Co-operation and Development’s recognition that Malaysia complies with the international standards for transparency and exchange of information between countries have strengthened Labuan IBFC’s position as a major regional and global international business and financial centre. Description Tax Treatment Labuan Non-Trading Activity Holding of investments in securities, stock, shares, loans, deposits or any other properties situated in Labuan and held by a Labuan entity on its own behalf Not subject to tax 3% of net profits per audited accounts Same tax treatment as Labuan Trading activity, i.e.: 3% of net profits per audited accounts Tax under domestic income tax act – 24% Labuan Trading Activity Includes banking, insurance, trading, management, shipping operations, licensing or any other activity which is not a Labuan non-trading activity Carrying out both Labuan Trading and Non-trading activities - Deemed to be Labuan Trading Activity Non-Labuan Business Activities FOCUS AREAS INCORPORATION OF COMPANIES HOLDING COMPANIES The favourable investment and tax regime in Labuan IBFC, coupled with Malaysia’s extensive DTA network and a modern approach to company law, make the jurisdiction an attractive location to hold investments. Its well-established banking and financial system, modern communication and infrastructure make it an attractive location to establish a holding company. A Labuan holding company that derives its investment income from a non-trading activity is not subject to tax under LBATA. These tax positions are enshrined in the LBATA and readily accessible. Payments of dividends, interest, service fees and royalties by the Labuan company to non-residents are also exempt from Malaysian withholding tax. A typical holding company structure using a Labuan entity and its corresponding tax profile is shown in the diagram below. Tax Profile: • Income from investments is not subject to tax in Labuan • Able to enjoy certain tax exemptions (e.g. no withholding tax on dividends/ interest/royalty payments from Labuan holding company to foreign company) • Liberal exchange control environment in Labuan • No stamp duties on instruments executed by Labuan holding company • Access to benefits under Malaysia’s DTAs Holding Companies Foreign Company Labuan Holding Company Foreign Company Dividend distribution tax exempt in Labuan Debt/Equity Withholding tax exemptions Income is tax exempt in Labuan Debt/Equity Withholding tax treaty rates FOCUS AREAS INCORPORATION OF COMPANIES TRADING COMPANIES The diverse activities and ownership structure of Labuan entities is testimony of Labuan IBFC’s appeal as a leading international business and financial centre in the region. Labuan IBFC is committed to strengthening its position as a jurisdiction of choice within Asia Pacific for international trading companies. Strategically situated in the Asia Pacific region, sharing a common time zone with many large Asian cities and a member of the ASEAN trade bloc, Labuan IBFC provides an ideal business environment for trading companies. Labuan trading companies may mitigate the risk of creating a taxable business presence in other countries through the Permanent Establishment Article of Malaysia’s DTAs. A typical trading company structure using a Labuan entity and its corresponding tax profile is shown in the diagram below. Trading Companies Labuan Entity as Trading Company (Labuan) Foreign Company Non-resident customers Non-resident suppliers Dividend distribution tax exempt in Labuan Withholding tax exemptions Sales Goods Tax Profile: • The Labuan entity can enjoy minimum tax under LBATA • Able to enjoy certain tax exemptions (e.g. no withholding tax on dividends/ interest/royalty payments from Labuan entity to foreign company) • Liberal exchange control environment in Labuan • Access to benefits under Malaysia’s DTAs, in particular Permanent Establishment Protection Shipping Companies FOCUS AREAS INCORPORATION OF COMPANIES SHIPPING COMPANIES Labuan companies are allowed to undertake shipping operations. “Shipping operations” are defined as the transportation of passengers or cargo by sea or the letting out of a charter of ships on a voyage or time charter basis. Labuan shipping operations must either be carried out of or in Labuan, or outside of Malaysian waters. There are a number of tax benefits for a ship owner operating out of Labuan IBFC; in particular, the Labuan shipping company can enjoy tax efficiencies under the LBATA. Further, under Malaysia’s DTAs and limited shipping agreements, a Labuan registered vessel may benefit from paying reduced or even no tax in the jurisdictions it visits. The diagram below illustrates how a shipping company might typically operate through a Labuan company. Foreign Company Foreign Company Labuan Shipping Company DTA International Shipping Operations Owned or Leased DTA International Shipping Operations No DTA • Transportation of passengers and cargo uploads/Industriel/ a-guide-to-labuan-ibfc-company-incorporations-fund-management.pdf