Labuan’s New Laws Raise the Bar

Unlike the Ten Commandments, engraved in stone and God-given to Moses, most of Man’s laws are friable and ‘subject to change’ when the need arises. Fuelled by the changing financial landscape of the last five years or so, and coupled with the drive to maintain its integrity, Labuan International Business and Financial Centre (Labuan IBFC) recently reviewed the territory’s original set of nine laws which have been in operation since the jurisdiction was established 20 years ago.

On 11 February 2010, the new legislation was finally enacted, comprising four new Acts and four existing ones that have been radically amended. Below is a brief summary of the legislation:

The Revised Acts 

The amended Labuan Financial Services Authority Act 1996 renames the regulator as Labuan Financial Services Authority or Labuan FSA, and grants enhanced regulatory powers. These include obtaining and sharing information with other relevant foreign or domestic authorities in compliance with the central issue of the Organisation for Economic Cooperation and Development (OECD) regarding provision of tax information when properly requested.

The law governing business on the island was also amended as the Labuan Companies Act 1990 (LCA). Key changes to this Act include the permission for Labuan companies to deal freely with Malaysian residents; to own controlling interest in Malaysian companies; the introduction of protected cell companies for insurance or mutual fund activities; amalgamation of companies to form one new company; the introduction of no par value shares; removal of authorised share capital; and higher standards from directors of their statutory duties.

Taxation remains the core of the amended Labuan Business Activity Tax Act 1990 (LBATA), which now allows shipping operations as a Labuan business activity on condition that the operations are carried out in Labuan and outside of Malaysia. A new Malaysia International Ship Registry has been set up for this purpose. For investors who desire tax certainty and clarity in their business activities, LBATA provides for this under advance tax ruling. New entities have also been introduced, such as Labuan foundations, Labuan Limited Partnerships and Limited Liability Partnerships, Labuan protected cell companies as well as the Islamic versions of these entities. All of these entities will enjoy the liberal tax treatment provided in Labuan – 3 per cent on audited net profit or a flat rate of MYR20,000 for trading companies and nil tax for non-trading entities.

The Labuan Trusts Act 1996 (LTA) has been amended to expand the variety of trusts that can be created – from purpose or charitable trusts to the unique trusts that advance human rights and fundamental freedom. One type of trust that meets the contemporary needs of high net-worth individuals or families is the Labuan Special Trust (LST), which allows for a trust of company shares to be set up under which the trustees have no powers to intervene, the management of the company being left solely to the company’s directors. LST can be used for succession planning; commercial purposes; and matrimonial settlement. For Muslims, these trusts can be made compliant to Shariah principles.

The New Acts

Given the fact that Malaysia is the acknowledged leader in Islamic finance, Labuan is naturally heavily engaged in the sector. The jurisdiction is also a major player in the Malaysia International Islamic Financial Centre (MIFC) initiative that is promoting and developing Islamic finance. The new legislation, called Labuan Islamic Financial Services and Securities Act 2010 (LIFFSA), is groundbreaking in that it is an ‘omnibus’ Act that clarifies, streamlines and consolidates into one comprehensive Act all Islamic finance-related issues, and which by its breadth sets new standards in the area. A formal body called the Shariah Supervisory Council has been set up for investors seeking advice on product compliance with Shariah principles.

The new Labuan Foundations Act 2010 (LFA) is a civil law version of a trust, and indeed the two share many similar features. But unlike a trust, which does not need to be registered, foundations must do so with Labuan FSA. The provision for foundations should interest high net-worth individuals and families from civil law countries as well as Muslim families since a foundation can be structured to be Shariah compliant.

One of the most important new laws in Labuan is the Act that encompasses the jurisdiction’s financial services. Called the Labuan Financial Services and Securities Act 2010 (LFSSA), it replaces the previous individual Acts on banks, insurance, funds and trust companies, etc. Some highlights are the de-regulation of private funds and their re-definitions. In insurance, those engaged in the sector may now be involved in financial planning activities and there is no longer a necessity for a Labuan insurer to have a Labuan resident director. Under the provision for managed trust, the Act allows a trust company outside of Labuan to appoint a Labuan trust company as its agent to manage its business on the island.

The Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 repeals the former 1995 Limited Partnerships Act. The new Act incorporates similar provisions from the previous Act and has expanded it to cover Limited Liability Partnerships. Interestingly, the Act allows for an LP or a Labuan company to convert to an LLP and a foreign LLP to be registered in Labuan.

The new legislation is expected to enhance Labuan IBFC’s reputation as a safe, business-friendly and well-regulated jurisdiction, poised to achieve its aim of being the premier IBFC in Asia Pacific.