Incorporating in Labuan
Country and Foreign Investment
Labuan is Centrally Located in Sotyh-East Asia
Labuan is part of Malaysia and is well located in the centre of the ASEAN region. 92 sq km in size, with a population of about 85,000, Labuan is mostly flat, with a good harbour and an airport served by MAS and other airlines. Labuan was used by the British as a coaling station during the 19th century, and was eventually incorporated into the Malaysian Federation. Ethnically, Labuan has a mixed Asian population; Bahasa Malaysian is the official language, but English is widely used. The climate is tropical and there are extended monsoon periods.
LOFSA Runs the Offshore Sector
The Government sees Labuan’s future in terms of its financial sector, and in 1990 created the Labuan Offshore Financial Services Agency (although ‘Offshore’ has since been dropped from the title) alongside a batch of ‘offshore’ laws. Labuan companies can make use of Malaysia’s extensive double tax treaty network, and as a result the island has become a preferred conduit for FDI to a number of ASEAN countries. A stock exchange was established in 2000, aiming particularly at the listing of Islamic financial debt issues, and has had considerable successes.
. . . and the tax regime is benign.
Malaysian taxes are moderately high, although on a territorial basis, but Labuan offshore companies engaged in trade pay 3% tax or can elect to pay a fix sum of RM20,000 (approx. US$6,500); all other offshore companies are exempt. There are many incentives and exemptions which make it possible for most mainland Malaysian profits to be repatriated through Labuan without tax. Many expatriate workers can take advantage of personal tax incentives.
LOFSA is encouraging e-commerce
LOFSA is determined that Labuan should become a successful e-commerce hub, and has built e-commerce infrastructure which can be used by incoming e-commerce operations, as well as by the island’s new financial markets.
Entry and Residency
To facilitate offshore activities in Labuan, a liberal immigration policy has been adopted. Multiple entry visas are traditionally issued to expatriates who have been granted employment permits to work with offshore companies in Labuan.
Foreign nationals may not usually obtain residence permits in Malaysia. Malaysia issues the following temporary permits:
– Tourist passes for visitors to Malaysia; these may be obtained at the port of entry;
– Transit visas, which are valid for one month;
– Business passes for foreign nationals attending business meetings; these may be obtained at the port of entry;
– Student passes for students attending approved educational institutions.
The nationality of the passport holder is considered in determining whether to issue these permits.
Any person who wishes to enter Malaysia to take up employment with a Malaysian company or firm must apply for an employment pass from the Department of Immigration.
Employment passes are issued for a specified period, usually two to three years, and are renewable for an additional two to three years.
Employment passes are granted on a case-by-case basis, generally for positions that require special technical knowledge or expertise not available locally or for positions that cannot be filled by local Malaysian citizens.
To obtain employment passes, expatriates must have a valid passport from their home country, a contract from their employer, a cover letter and three passport-size photos.
The employer of an expatriate must submit an application to the Department of Immigration and await a decision, which may take one month. After the employer receives a letter of approval, it must submit the passport of the employee and pay for the employment pass and the levy. The levy is applicable only to expatriates earning less than a designated amount per month or to expatriates holding employment passes valid for less than two years.
Licensed manufacturing companies that wish to hire expatriates must present copies of their manufacturing licenses. Service companies with foreign equity of more than 30% must seek the approval of the Foreign Investment Committee before hiring expatriates. Companies engaged in construction and project management must register with the Construction Industry Development Board before hiring expatriates. Companies engaged in the retail, trade, wholesale and direct-sales sectors that have foreign equity of more than 30% must seek the approval of the Committee on Wholesale and Retail Trade before hiring expatriates.
It is illegal to work without a valid employment pass; therefore, a foreign national may not work in Malaysia until he or she has received a work permit and all other necessary documents.
To obtain an extension, expatriates must submit new applications for extension three months before the expiration of their passes.
Expatriates who have not completed their terms of contract but wish to take up employment with other companies must leave the country for six months before taking up new employment.
A foreign national may start a business in Malaysia by registering a company locally. For companies that sell to the domestic market or render services within the country, a local joint venture may be required.
Companies that export at least 80% of their manufactured goods may be entirely foreign-owned. It is common for foreign nationals to head these operations.
In 2003, the Malaysian government decided to make it easier for companies to hire skilled foreigners, allowing for automatic approvals to be granted for the recruitment of highly skilled workers where there is no available local expertise.
From June 2003, the government further relaxed rules on employing expatriates, granting that manufacturing companies with foreign paid-up capital of at least USD2m be automatically permitted ten expatriate positions, with those to include five key posts. Under the amended rules, expatriates could be employed for up to ten years for executive posts and five years for non-executive posts.
Manufacturing companies with foreign paid-up capital of USD200,000–2m, meanwhile, were permitted automatic approval for up to five expatriate posts, including at least one key post.
Under the guidance of LOFSA (the Labuan Offshore Financial Services Authority) the Malaysian authorities have poured hundreds of millions of dollars into improvement of Labuan’s physical infrastructure, which is now fully up to modern standards. Excellent office and light-industrial premises are available, and state-of-the-art telecommunications include an Internet Gateway which provides a e-commerce platform.
Professional support for offshore development is well developed in Labuan: most of the top accounting and consultancy practices have offices there, along with a good range of lawyers. Malaysian accounting standards approved by the local accounting bodies are adaptations of the international accounting standards approved by the International Accounting Standards Committee.
Compared with some other regional financial centres, Labuan is comparatively cheap. This is both in terms of cost of physical facilities such as rentals as well as the rate of professional fees charged by accountants, lawyers and other professional service providers.
A strategic milestone was achieved in 2007, with the repositioning and rebranding of Labuan IOFC as Labuan International Business and Financial Centre (IBFC).
According to LOFSA, the new brand name of Labuan IBFC “marks its greater focus and its continuous progress towards a vibrant and progressive international business and financial centre.”
“Labuan IBFC has shown its agility to build new strengths, leveraging on its comparative advantages, to meet the emerging and more sophisticated demand in the region,” LOFSA stated.
There has been strong growth in the number of offshore companies registering in Labuan in spite of the global financial crisis. Labuan is especially popular as a place to locate lease financing activities, while offshore banking and Islamic finance activities have also recorded marked growth. Labuan is also becoming a popular domicile for offshore insurance operations, especially in the area of captive insurance.
The position of Malaysia as an International Islamic Financial Centre (MIFC) has further enhanced Labuan’s effort to promote Shariah compliant trusts and foundations, as these products complemented the Islamic financial products and services that were already available onshore.
LOFSA has identified several key strategic programs to advance Labuan as an International Business and Financial Centre.
One such initiative was to elevate Labuan IBFC’s status to being the “gold standard for holding company jurisdiction”.
LOFSA has also streamlined the existing legal framework covering both conventional and Islamic businesses to create a more “facilitative, flexible and frictionless business environment”.
Labuan IBFC Incorporated Sdn Bhd, (Labuan IBFC Inc), which is fully-owned by LOFSA, is responsible for promoting Labuan as an International Business and Financial Centre.
The main function of the Labuan IBFC Inc is to drive market development, as well as to act as a facilitator for investors seeking to participate in Labuan IBFC. It also undertakes “targeted and focused interface with potential investors”.
Features of Labuan IBFC
Highly flexible tax framework
Progressive legislative environment
Competitive pricing structure
Well-developed infrastructure with satellite telecommunication
Low cost of operation
Shares the same time zone with other major Asian cities
Quick Fact Sheet on Labuan Companies
|Public disclosure on beneficial owner’s info||No|
|Must a director be resident of Malaysia||No|
|Are corporate directors/ shareholders allowed||Yes|
|Are nominee directors/ shareholders allowed||Yes|
|Location of Meetings||Anywhere|
|Resident secretary required||Yes|
|Share capital currency||Any except MYR|
|Minimum paid-up share||One|
|Bearer shares||Not permitted|
|Who can own a LC||No restriction of ownership|
|Accounts to be prepared||Yes|
|Requirement of audit||No, except for licensed entity|
|Filing of annual return||Yes|
|Filing of tax returns||Yes|
|Taxation rates :|
|Labuan trading activity||3% of net audited profits or RM20,000|
|Labuan non-trading activity||Nil|
|Migration of Domicile||Yes|
|Timeframe for Incorporation||1-2 days|
Tax Regime in Labuan
Labuan was declared as tax free zone and International Financial Center in 1990, and has established Financial Services Authority (LFSA) to support Labuan Entity incorporations and various applications in financial related licenses. Thus, Labuan jurisdiction is known as Mid- shore where Labuan entity has two different tax implication such as Income Tax Act 1967 (onshore tax) and Labuan Business Act 1990 (offshore tax) depending on nature of transaction (i.e transaction with domestic company or international business transaction). Nevertheless, looking at Labuan Business Tax Act 1990’s implication, a Labuan Entity can make its election tax system annually either to pay 3% (audited account is required) or flat payment of RM20,000 (approximately USD6,666), under the same act, a Labuan Entity’s tax implication is defined as following:-
Labuan Trading Company
A Labuan Trading Company can be defined as a Labuan Company conducts trading activities which includes banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a Labuan non-trading activity. Labuan Trading Companies have a yearly election of either paying a flat tax rate of MYR20,000 per annum, or 3%* of audited net profit. * A trading company, which pays 3% of audited net profits, is required to appoint an auditor and file audited financial statements.
Labuan Non Trading Company
A Labuan Non Trading Company can be defined as a Labuan Company which conducts non trading activities such as activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties. A Labuan Non Trading Companies are not subjected to tax. In such a special tax implication, tax certificate is also made available to Labuan Entity which has reduced possibility to be challenged by any local tax authority on Permanent Establishment for a business transaction. Therefore, you can operate your business with worries free.
Registering in Labuan
The benefits of Labuan Company, Limited Partnership, Limited Liability Partnership, Protective Cell Company, Trust, Foundation and other Entities.
Naming a Labuan Company
You may incorporate your new Labuan Company’s name with its ending as following:
(a) the word “Corporation” or the word “Incorporated” or the abbreviation “Corp.” or “Inc.”;
(b) the word “Limited” or the abbreviation “Ltd.”;
(c) the words “Public Limited Company” or the abbreviation “P.L.C.”;
(d) the words “Societe Anonyme” or “Sociedad Anonima” or the abbreviation“S.A.”;
(e) the words “Aktiengesellschaft” or the abbreviation “A.G.”;
(f) the words “Naamloze Vennootschap” or the abbreviation “N.V.”; and
(g) the words “Perseroan Terbatas” or the abbreviation “P.T.”