The New Amendments to the Labuan Companies Act, 1990

The island of Labuan was declared as an International Offshore Financial Centre (IOFC) on 1st October 1990 by the government of Malaysia. In January 2008, a holistic re-branding and re-positioning exercise was conducted to reflect and reposition Labuan as one of asia's most connected, convenient and cost efficient jurisdiction’s in compliment with it’s luxuriate international status. Eventually in the first quarter of 2010, a robust and comprehensive changes were made to Labuan’s legal framework with the highlights of four new laws with four others radically amended on 11 February 2010 to transform Labuan IBFC business scene. In the interim Labuan also ranks alongside other domiciles on the OECD ‘white list’ of locations that have signed exchange of tax information agreements with at least 12 of its treaty partners.

Among the radically amended laws is the Labuan Companies Act, 1990. Originally known as the Offshore Companies Act, 1990, the Act principally governed and provides for incoporation, registration and administration of a Labuan and foreign Labuan companies in Labuan. Through the rebranding exercises the Offshore Companies Act, 1990 has been liberalised and revamped holistically to incorporate major changes within the Act. Consequently, the Act has been renamed Labuan Companies Act, 1990 (LCA) and the word ‘Offshore’ has been either deleted from or replaced with the word ‘Labuan’ in the newly amended Act with effect from 11th January 2010.

The Labuan Companies Act, 1990 (LCA) is the main legislation governing Labuan Companies. It has been designed to enhance the ease of operating business in Labuan while complying with stringent international standards which are implemented by other jurisdictions. The tax regime is still the same which is either a flat rate of MYR20, 000 or three per cent from net audited account despite the amendment to the Act.

THE KEY AMENDMENTS TO THE LABUAN COMPANIES ACT, 1990

Some of the key amendments are set out below:

Labuan companies are permitted;

• to own and hold any debt obligations, securities or shares, including controlling stakes, in Malaysian domestic companies
• to carry on businesswith a residents; and
• to deal in Malaysian ringgit. This is however subject to certain limitations as set out in section 7(4) of Labuan Companies Act, 1990.

In addition, a Labuan Company that deals with residents shall notify Labuan FSA about the transaction with the residents. However, there is no requirement to do so if the dealing is with the residents involves licensed activity pursuant to Labuan Financial Services and Securities Act, 1990 and the Labuan Islamic Financial Services and Securities Act, 2010. Nonetheless, section 7(6) of the Labuan Companies Act, 1990 has laid several exceptions pertaining the notification to Labuan FSA if a Labuan company is dealing with residents.

• Apart from the above, key signifcant amendments made under the Labuan Companies Act, 1990, is the introduction of Protected Cell Company or also known as “PCC” . PCC are the new form of company introduced under the Act. In general, PCC is a limited company that can be separated into distinct cells and allows the assets and liabilities of individual cells to be separated from one another. The key features of PCC is segregation of asset and liabilities through a series of ring fencing rules. A PCC may establish one or more cells and the liabilities of each cell are kept separate. However, each Protected Cell Company is deemed a single entity.

Pursuant to the Act, a Labuan company may be incorporated as a PCC or may convert into a PCC for the purpose of conducting the following business activities:

• Labuan insurance business or Labuan captive insurance business on such terms as provided under the Labuan Financial Services and Securities Act (LFSSA) 2010 and Labuan general takaful business or Labuan captive takaful business on such terms as provided under the Labuan Islamic Financial Services and Securities Act (LIFSSA) 2010; or
• Conducting the business of a mutual fund under the Labuan Financial Services and Securities Act 2010 and the business of an Islamic mutual fund under the Labuan Islamic Financial Services and Securities Act 2010.
• Labuan Companies are now permitted to carry out shipping operations provided that the shipping activities are carried out in Labuan or outside Malaysia. Pursuant to section 2 of the Labuan Business Activity Tax Act (LBATA) 1990, shipping operations are defined as the transportation of passengers or cargo by sea or the letting out on a charter of ships on a voyage or time charter basis.
• Companies limited by guarantee has also been introduced under the amended new Act. Company limited by guarantee means a company formed on the principle of having the liability of its members limited by its memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of it being wound up.
• The requirement to have the par or nominal value of the shares has been removed. Under the amended Act, the shares in a Labuan Company shall have no par or nominal value. In general terms, shares that are issued with no par value, bears no relationship to their traded value or to the underlying assets, which they represent. No par value shares prevents the possibility of creating liability to shareholders in the unlikely event of the share price falling below the par value. In addition, this will also allow a Labuan company to gain greater flexibility in structuring and raise their capital.
• The need for authorized capital was also abolished. Prior to this, the previous Offshore Companies Act, 1990 required a specific amount of authorized capital for the incorporation of a Labuan Company.
• Flexibility for Labuan Holding companies and banks to co-locate in designated areas in Malaysia. However, an approval must be obtained from the Authority before the companies can proceed with the co-locating.
• In order to promote and to ensure that Labuan remains competitive as other IBFC jurisdictions, Labuan companies can now elect whether to be taxed under LBATA 1990 or make an irrevocable election to be taxed under the Malaysian Income Tax Act, 1967 (ITA). If the Labuan Company makes such an irrevocable election it will have access to the Double Tax Agreements entered by the Government of Malaysia with other countries.
• Section 47A of the Labuan Companies Act, 1990 permits issuance of Treasury Shares. Generally this section allows a Labuan company to hold its own shares that are purchased or otherwise acquired pursuant to section 48A of the Act as Treasury Shares with the conditions that such issuance are permitted under the company Articles and the number of shares purchased or acquired by the Labuan company, when aggregated with shares of the same class held by the Labuan company at the time of the purchase or acquisition, does not exceed fifteen percent of the shares of that class previously issued by the Labuan company.
• Reduction of capital does not require a court order if the directors make a solvency declaration and certain other conditions are met.
• Redeemable preference shares may be redeemed out of profits or, if the directors make a solvency declaration, out of the capital of the company.
• The amendments to the LCA 1990 also introduced an outline for amalgamations.
  There are three forms of amalgamations in Sections 118A, 118B and 118C.
  
  Section 118A allows two or more Labuan companies to amalgamate. This mode of amalgamation creates a new Labuan entity which must be registered with the Labuan Financial Services and Securities Authority (LFSA).
  
  Section 118C of the LCA provides for a short form amalgamation for amalgamations between a holding company and one or more of its wholly-owned subsidiaries or between two or more wholly-owned subsidiaries of the same corporation.

For this type of amalgamation, it is not necessary for a new Labuan company to be created. Where the amalgamation involves a holding company, that company must continue as the amalgamated company. For the wholly-owned subsidiaries of the same corporation, any of the subsidiaries can be the amalgamated company.

Section 118B of the LCA enables a Labuan company to amalgamate with a foreign Labuan company or a corporation provided that the Labuan Company continues as the amalgamated company.

An entity which holds a licence under the Labuan Financial Services and Securities Act 2010 or the Labuan Islamic Financial Services and Securities Act 2010 is not permitted to be involved in any of the three forms of amalgamations under the LCA.

• The new insertion of section 131A provide an alternative procedure for voluntary winding up of solvent Labuan Company. Pursuant to this section, where a Labuan company has ceased to operate and has discharged all its debts and liabilities, any officer or member of the Labuan company may, after giving notice to the effect that the Labuan company proposes to apply to the Authority for a declaration of dissolution of the Labuan company. Upon receiving such notice the Authority may dissolve the Labuan company unless written objection is made to the Authority within thirty days from the date the notice was posted. Nevertheless striking off procedure under section 151 in the new amended LCA, 1990 is much more expedient in nature.

Under the said section 151, every incorporation or establishment of a Labuan Company is required to pay such annual fees as maybe prescribed, on or before the expiration of a period of six months from the annual fee payment date, failure which, an additional amount of 50 per cent from the prescribed annual fee will be imposed.

In the event where a Labuan Company fails to pay the annual fee together with the additional amount imposed within one month from the date of the expiration of the period of six month, a written notice will be send to the company secretary specifying that the name of the Labuan Company to be struck off if payment is not receive within one month from the date of the notice or such extension period as allowed.

The Authority may strike the name of the Labuan company off the register once the period of one month from the date of the notice has lapsed.

The recent amendment to the LCA 1990 clearly shows that Labuan IBFC can attract many new potential investors and clients, and at the same time compete with other established jurisdictions such as Bahamas, Panama and Jersey. The evidence of these changes can be shown by the increasing number of new companies incorporated in Labuan IBFC. For the year 2011, in total there are 651 new companies were incorporated in Labuan IBFC. These represents an increase of 8.1 per cent from 2010, making the total number of companies operating in the Labuan IBFC to 8,655 companies.

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