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Labuan looks to benefit from Malaysia's financial services liberalization
December 1, 2009
Labuan, a rising star as a destination for international financial services in the Asia Pacific Region, appears to be in a strong position to benefit from a sweeping wave of financial services liberalization measures recently announced by the Prime Minister’s Office of the Malaysian government.
The scenic tropical island, located off the coast of the state of Sabah on the island of Borneo, has long been home to a growing number of corporate holding companies, fund & asset managers, captive insurance organizations and Islamic financial institutions.
As of June 1 2009, Labuan Holding Companies (LHCs) (as incorporated under the Offshore Companies Act 1990) will be able to establish operational and management offices in Kuala Lumpur, affording them the opportunity to choose Malaysia as their regional corporate headquarters for accessing the dynamic and growing economies of Southeast Asia. Offshore banking institutions and insurance companies will likewise have the opportunity to establish a physical presence in Malaysia in 2010 and 2011 respectively.
'This set of liberalization measures will dramatically change the landscape of business, not only in Labuan but in all Malaysia' says Martin Crawford, Chief Executive Officer of Labuan International Business and Financial Center (IBFC). 'There are many compelling reasons for businesses and financial firms to want to set up and manage their regional Asian operations from Malaysia as opposed to the traditional business centers of Hong Kong or Singapore'. Crawford cites the relatively affordable cost of living in the capital of Kuala Lumpur, a good social infrastructure including schools, parks and attractive housing options, and a diverse range of cultural, culinary and other lifestyle options for expatriates and their families. The new Labuan measures are part of a broad array of liberalization measures in general services, the financial sector and other areas of the economy announced over the past weeks by the office of Malaysian Prime Minister Datuk Seri Mohd Najib Tun Razak. For example, foreign equity limits in investment banks, insurance companies, Islamic banks and takaful (Islamic insurance) entities will increase from the present level of 49% to 70%. New commercial and Islamic banking licenses for foreign entities as well as enhanced scope for foreign financial operators to expand their Malaysian branch networks are also part of the raft of new liberalization measures.
'It is also important to note that liberalization applies, not only to the Labuan and onshore foreign financial institutions themselves, but also to that supporting intellectual services infrastructure that is so essential to successful business centers' observes Labuan IBFC’s Crawford. He notes as an example of this that up to five leading international law firms with expertise in Islamic finance will be able to obtain permission to establish practices in Malaysia. Islamic finance, a global industry worth over $800 billion in asset volume and growing at rates of over 15% per year, is one of the bright lights of the Malaysian financial sector: the country is a leader and pioneer in a broad range of Islamic financial services including banking, sukuk (capital markets instruments), takaful and wealth management. Labuan, as a leading diversified international financial center, has played a key role in developing innovative, tax-efficient structures for issuers and investors in Islamic financial instruments and strategies.
Under the new liberalization measures pertaining to Labuan Holding Companies, these entities are expected to effectively retain substantially all the regulatory and tax benefits they enjoy currently while at the same time having the opportunity to maintain a physical presence in the country’s capital city.
In order to ensure the effective operation of this new system a joint working group comprised of representatives from Labuan Offshore Financial Services Agency (LOFSA), the island’s regulatory agency, and the Companies Commission of Malaysia (Surhanjaya Syarikat Malaysia SSM) will address the tax and regulatory issues to govern LHCs that opt to take advantage of the physical presence option. Holding companies electing to pursue this route will make an irrevocable election to be taxed under the Malaysia Income Tax Act (MITA) of 1967 (pursuant to Section 3A of the Labuan Offshore Business Activity Tax Act of 1990), will conduct non-Malaysian Ringgit business only, and will comply with a handful of other requirements governing the conduct of business, filing of audited financial accounts and convening of Annual General Meetings in Malaysia.
Although they will be taxed under MITA, physical-presence LHCs will continue to enjoy zero taxation on offshore income and capital gains, as well as zero withholding tax on foreign payments of interest, royalties, technical fees and leasing. Additionally LHCs under MITA's auspices should be able to enjoy access to the 69 tax treaty arrangements that apply to Malaysian onshore companies, although final negotiations are still in process. 'The devil is always in the details' says Labuan IBFC’s Martin Crawford. 'We continue to work through the details and communicate them to our companies and their tax advisors, and expect that we will start to see good results and a groundswell of interest after the measures become legal on June 1'.
Of course, as Crawford adds, the tax advantages while important are by no means the sole consideration for companies considering the new Labuan alternative. 'With rents and other costs in Hong Kong and Singapore remaining sky high, with the many strategic advantages to locating in the heart of the world’s most dynamic economic region, and with the strong tailwinds of commitment to economic liberalization working to support a strong multiyear growth trajectory, Malaysia should indeed become the second corporate home of choice for many of the world’s leading as well as up-and-coming enterprises'.
The scenic tropical island, located off the coast of the state of Sabah on the island of Borneo, has long been home to a growing number of corporate holding companies, fund & asset managers, captive insurance organizations and Islamic financial institutions.
As of June 1 2009, Labuan Holding Companies (LHCs) (as incorporated under the Offshore Companies Act 1990) will be able to establish operational and management offices in Kuala Lumpur, affording them the opportunity to choose Malaysia as their regional corporate headquarters for accessing the dynamic and growing economies of Southeast Asia. Offshore banking institutions and insurance companies will likewise have the opportunity to establish a physical presence in Malaysia in 2010 and 2011 respectively.
'This set of liberalization measures will dramatically change the landscape of business, not only in Labuan but in all Malaysia' says Martin Crawford, Chief Executive Officer of Labuan International Business and Financial Center (IBFC). 'There are many compelling reasons for businesses and financial firms to want to set up and manage their regional Asian operations from Malaysia as opposed to the traditional business centers of Hong Kong or Singapore'. Crawford cites the relatively affordable cost of living in the capital of Kuala Lumpur, a good social infrastructure including schools, parks and attractive housing options, and a diverse range of cultural, culinary and other lifestyle options for expatriates and their families. The new Labuan measures are part of a broad array of liberalization measures in general services, the financial sector and other areas of the economy announced over the past weeks by the office of Malaysian Prime Minister Datuk Seri Mohd Najib Tun Razak. For example, foreign equity limits in investment banks, insurance companies, Islamic banks and takaful (Islamic insurance) entities will increase from the present level of 49% to 70%. New commercial and Islamic banking licenses for foreign entities as well as enhanced scope for foreign financial operators to expand their Malaysian branch networks are also part of the raft of new liberalization measures.
'It is also important to note that liberalization applies, not only to the Labuan and onshore foreign financial institutions themselves, but also to that supporting intellectual services infrastructure that is so essential to successful business centers' observes Labuan IBFC’s Crawford. He notes as an example of this that up to five leading international law firms with expertise in Islamic finance will be able to obtain permission to establish practices in Malaysia. Islamic finance, a global industry worth over $800 billion in asset volume and growing at rates of over 15% per year, is one of the bright lights of the Malaysian financial sector: the country is a leader and pioneer in a broad range of Islamic financial services including banking, sukuk (capital markets instruments), takaful and wealth management. Labuan, as a leading diversified international financial center, has played a key role in developing innovative, tax-efficient structures for issuers and investors in Islamic financial instruments and strategies.
Under the new liberalization measures pertaining to Labuan Holding Companies, these entities are expected to effectively retain substantially all the regulatory and tax benefits they enjoy currently while at the same time having the opportunity to maintain a physical presence in the country’s capital city.
In order to ensure the effective operation of this new system a joint working group comprised of representatives from Labuan Offshore Financial Services Agency (LOFSA), the island’s regulatory agency, and the Companies Commission of Malaysia (Surhanjaya Syarikat Malaysia SSM) will address the tax and regulatory issues to govern LHCs that opt to take advantage of the physical presence option. Holding companies electing to pursue this route will make an irrevocable election to be taxed under the Malaysia Income Tax Act (MITA) of 1967 (pursuant to Section 3A of the Labuan Offshore Business Activity Tax Act of 1990), will conduct non-Malaysian Ringgit business only, and will comply with a handful of other requirements governing the conduct of business, filing of audited financial accounts and convening of Annual General Meetings in Malaysia.
Although they will be taxed under MITA, physical-presence LHCs will continue to enjoy zero taxation on offshore income and capital gains, as well as zero withholding tax on foreign payments of interest, royalties, technical fees and leasing. Additionally LHCs under MITA's auspices should be able to enjoy access to the 69 tax treaty arrangements that apply to Malaysian onshore companies, although final negotiations are still in process. 'The devil is always in the details' says Labuan IBFC’s Martin Crawford. 'We continue to work through the details and communicate them to our companies and their tax advisors, and expect that we will start to see good results and a groundswell of interest after the measures become legal on June 1'.
Of course, as Crawford adds, the tax advantages while important are by no means the sole consideration for companies considering the new Labuan alternative. 'With rents and other costs in Hong Kong and Singapore remaining sky high, with the many strategic advantages to locating in the heart of the world’s most dynamic economic region, and with the strong tailwinds of commitment to economic liberalization working to support a strong multiyear growth trajectory, Malaysia should indeed become the second corporate home of choice for many of the world’s leading as well as up-and-coming enterprises'.
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