What is offshore company?
There is a common misconception that the use of offshore company means evading taxes and hiding money from the government, which is definitely not the case.
In fact, to set up an offshore company or relocate your existing business overseas is a crucial step toward internationalizing yourself and your assets.
The term Offshore Company means a company incorporated in a country outside the country of the place of residence / incorporation of beneficial owners.
Again, this is typically pursued to realize various privacy, financial, legal or tax benefits for the owners.
Background of Labuan International Business and Financial Centre (Labuan IBFC):
Back to 16 April 1984, Labuan was declared a Federal Territory of Federal Government of Malaysia and officially named as Federal Territory of Labuan. This jurisdiction is based on Labuan island and six smaller islands which is located off the south-western coast of Sabah in East Malaysia.
In October 1990, Labuan was developed by Malaysian government into an low-tax offshore financial centre to provide foreign corporations and international investors for the development of offshore financial activities.
In January 2008, Labuan authorities has started a global rebranding exercise to rename its well-developed offshore financial centre to Labuan International Business and Financial Centre (Labuan IBFC), involving the renaming Labuan legislations, terms and nomenclatures to omit the word ‘offshore’, in order to reflect the growth of the jurisdiction’s international statue.
Currently, Labuan IBFC is a top-notch offshore financial in Southeast Asia as an excellent gateway to market of Asia Pacific Region, it provides global customers for a variety of offshore financial tools including banking and investment banking, insurance, captives, trust business, fund management, investment holding, and company management, especially Islamic banking and finance.
Federal Territory of Labuan has a population of approximate 87,000 inhabitants comprising mainly Malays and Chinese, with a sizeable population of foreigners.
Labuan Financial Services Authority
Formerly known as Labuan Offshore Financial Services Authority (LOFSA), Labuan Financial Services Authority (Labuan FSA) is an official regulatory agency established in Februrary 1996, it is in charge of regulating and supervising the financial industry, and planning the further development in the jurisdiction.
|Official Language:||Bahasa Malaysia, English|
|Legal System:||British Common Law (as Federal Government of Malaysia)|
|Currency:||Malaysian Ringgit (MR / Currency code: MYR)|
|Time Zone:||GMT +8|
Setup of offshore companies in Labuan IBFC:
- Type of Entity: Labuan Company
- Legislation: Labuan Companies Act 1990 (LCA)
- The requirement to obtain approval for dealings between Malaysia residents and Labuan Companies is removed (Notification to Labuan FSA after the transactions is required)
- Labuan Company can use any currency for transaction and share issuance except Malaysian Ringgit
- Every Labuan Company must employ the services of a Labuan trust company to act as its incorporation agent. This trust company offers the services and duty as follows:
- Provides the registered office and resident secretary
- Provides the secretarial duties of the Labuan company including lodgement of any documents required under the LCA
- Make available any of its trust officers for appointment as resident director and resident company secretary
Characteristics of Labuan Company:
- Incorporation of a new Labuan Company; OR
- Registration of foreign companies as a Labuan Company
- Allowed currencies: Any foreign currencies except Malaysian Ringgit
- Minimum issued share: One share (in any denomination in any foreign currencies except Malaysian Ringgit)
- Minimum capital: no requirement
- Minimum authorized share capital: no requirement
- Bearer shares : Not allowed
- No par value shares: Not required
- Different classes of shares: Allowed
- Corporate director: Allowed
- Residential director: Optional
- Minimum number of director: one (either individual or corporate entity)
- Nationality/place of incorporation: No restriction
- Directors’ meeting: optional, defined by a Labuan Company’s Articles of Association
- Corporate shareholder: Allowed
- Residential shareholder: Optional
- Minimum number of shareholder: one (either individual or corporate entity)
- Nationality/place of incorporation: No restriction
- Shareholder and director can be same entity
- Resident Company Secretary: Required, either corporate or individual (must be provided by the Labuan trust company)
- officers of the Labuan trust company; or
- a Labuan company wholly owned by the Labuan trust company
Registered Office Address:
- Local address as registered office: Required, the same to the address of the resident company secretary (provided by the Labuan trust company)
Accounts & Annual Return:
- Annual return: Required (no later than 30 days from the anniversary of the date of the incorporation of Labuan companies)
- Audited accounts: Not required if company pays a flat tax rate of RM20,000 *
- Requirements to file accounts: Not required if company pays a flat tax rate of MR20,000 *
- Privacy protection: No publicly accessible records.
- No person may divulge to others any information concerning the shareholding, management and any business, financial or other transactions of a Labuan company.
- Change in domicile: Allowed
- Amalgamation by merging two or more Labuan companies into one: Allowed
Remark * : Labuan Companies may opting to pay their profit tax at RM20,000 flat rate, however all licensed companies providing banking and insurance services, and trust companies are required to prepare annual audited account.
General Procedures of Incorporation and Registration of Labuan companies:
The application, the power and the duties of a Labuan company and its member are regulated by the Labuan Companies Act 1990 (LCA) and various legislation in Labuan IBFC.
- You must appoint a licensed Labuan trust company, which should conduct its own due diligence on the prospective client.
- Reserve a company name in English language, and the name will be reserved for a period of three months.
- Upon lodgement of complete documentation and payment of fees as well as clearance from the due diligence process conducted by Labuan FSA, a Labuan company can be approved for incorporation or registration within 24 hours.
Documents and payments:
- Memorandum and Articles of Association of the proposed company;
- statutory declaration of compliance by the trust company;
- consent to act as a director(s);
- individual forms filled up by each director; and
- relevant fees (including services fee of the appointed Labuan trust company and its affiliate)
Common abbreviation in company name:
|Corporation / Incorporate||Corp. / Inc.|
|Public Limited Company||P.L.C.|
|Societe Anonyme / Sociedad Anonima||S.A.|
Tax Regime in Labuan IBFC:
Labuan IBFC has been developing by Malaysian Federal Government as an offshore financial centre in bid to attractive international financial activities since 1990’s.
Labuan IBFC had been vigilant against international money laundering. The jurisdiction offers generous tax benefits to Labuan business structures (i.e. Labuan Companies) for international financial activities, it clearly is viewed as an attractive place for global tax planning.
As a “mid-shore” jurisdiction:
Labuan IBFC has its specialized legislative framework to regulate those Labuan-specific business entities. In other words, these Labuan entities are subject to 2 different tax systems – under the provision by Malaysian Income Tax Act 1967 (ITA) and Labuan Business Activity Tax Act 1990 (LBATA) – to deal with their domestic transactions and international transactions respectively.
Regarding the international transactions of Labuan entities, Labuan Business Activity Tax Act 1990 (LBATA) is the major piece of regulation.
“Labuan business activities”:
Under LBATA, Labuan business activities means activities carried on by a Labuan entity (ie. Labuan Company is kind of Labuan business entities) in a foreign currency with non-residents or with another Labuan entity.
For the Labuan Entities carried on Non-Labuan business activities may subject to Zero profit tax, if they do not carry out any activities as define under “trading activities”
By laws , trading activities include the following:
- Shipping operations
- Any other activity not being a Labuan non-trading activity.
On the other hand, non-trading activities mean activities relating to the holding of investments in securities, stocks, shares, loans, deposits or any other properties by a Labuan entity on its own behalf.
For the Labuan entities carry on Labuan business activities regarded as trading activities, they can make its election of tax system annually either to pay 3% of its audited net profit or flat payment of RM20,000.
Nevertheless, the Minister of Finance may designate any activity to be a Labuan business activity, which then may enable the carrying out of activities with residents or in the Malaysian currency.
Preceding year basis of assessment:
Tax under the LBATA is levied on the preceding year basis. For example: The year of assessment 2016 has its basis period ending in 2015. This is in contrast to the current year basis practiced in the mainstream tax system under the Income Tax Act 1967.
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.
Every Labuan Entity shall submit its tax return within 3 month in each of year of assessment, with an exception approval from Labuan Inland Revenue Board (Labuan IRB), then such submission could be submit later than prescribed date.
Why Malaysian “Income Tax Act” rather than LBATA?
To date, 11 countries have specifically excluded Labuan from treaty benefits in their double tax agreements with Malaysia. They are Japan, Netherlands, United Kingdom, Australia, Sweden, Luxembourg, Republic of Seychelles, Chile, Indonesia, South Africa and South Korea.
In order to gain acceess to Malaysian treaty benefits, the laws have been amended to allow a Labuan company to elect to be treated under the Income Tax Act 1967 rather than the Labuan Business Activities Tax Act 1990.
However, the election is irrevocable.
No indirect taxes
Labuan enjoys free-port status. Hence indirect taxes are not applicable here.
Stamp duty is exempted on all instruments executed by a Labuan entity in connection with its Labuan business activity.
Labuan entities are also not subject to exchange control restrictions.
Payments by Labuan entities
The following exemptions are available to recipients of income from Labuan entities:
- dividends received by an offshore company
- dividends received from an offshore company which are paid, credited or distributed out of income derived from an offshore business activity or, income exempt from tax
- distributions received from an offshore trust by the beneficiaries
- interest received from an offshore company by a resident person (other than a person licensed to carry on a business under the Banking and Financial Institutions Act 1989, Islamic Banking Act 1983, Insurance Act 1996 or Takaful Act 1984)
Others benefit or advantages of owning a Labuan company:
- To apply for Labuan’s financial service-related licenses such as Money Brokering License, Securities License, Fund Management License, Insurance and Leasing.
- To apply Working Permit, Dependent Passes under the Labuan Entities for owners and their dependents
|Internet Banking||Initial Deposit (USD)||Physical Presence is required?|
|Kuwait Finance House||Yes||5,000||No|
|Maybank International||No, only Telegraphic Transfer through fax or email||25,000||No, requires signature sighting by MBB-Officer in any branch|
|Public Bank||Yes||10,000||No, require signature sighting by the bank’s officer in any branch|
|Ambank||No, only Telegraphic Transfer through fax or email||10,000||No|