As the world lurches from one financial imbroglio to another in these turbulent times, a jurisdiction situated in the comparative calm of the Asia Pacific has been enjoying still, calm waters topped by a momentous but quiet occasion on 11 February 2010.

That was the day Labuan International Business and Financial Centre (Labuan IBFC) sailed into a new era, suitably fortified to meet the challenges and business needs of the future with the introduction of its new laws. Reviewing and re-drafting all the laws involved gathering valuable input from industry players and the skills of a clutch of international lawyers who helped draft the legislation.

The tropical isle of Labuan, which began as Malaysia’s international business and financial centre in 1990, is strategically located almost midway between China and India, a geographic advantage particularly in the context of today’s steady flow of investment from West to East.

Despite its respectable growth over the last two decades, Labuan IBFC recognised that the key driver to greater growth in a changing world is the revamp of its legislation.

The legislation comprises four new laws and the radical amendments of four existing ones governing all the business activities on the island. A veritable feast – too extensive for an article like this - the laws are presented here as a taster’s portion which, it is hoped, will have you asking for more.
From omnibus to foundations

Among the four new Acts introduced in Labuan are two pieces of "omnibus" legislation, so-called because they aggregate all the guidelines, directives and legislation covering individual business activities on the island.

The Labuan Financial Services and Securities Act 2010 (LFSSA) governs financial entities using the conventional financial system while the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA) is a mirror of the conventional Act but relates to activities deemed Islamic and Shariah-compliant.

The LFSSA provides for the regulation and administration of the financial services and securities industry including securities, mutual funds, market intermediaries, Labuan Trust companies, Labuan banks, Labuan insurance companies, company management, exchanges and self-regulatory organisations.

Among the key features of the Act is the enhanced scope of the regulator’s statutory objectives and functions which now includes the power to issue licenses, guidelines, directives and advisories. New entities such as Labuan Private Trust Company, Labuan Managed Trust Company, Self-Regulatory Organisation, Limited Liability Partnerships and Protected Cell Company have also been introduced under its ambit.

In the area of mutual funds, private and public funds have been re-defined with the significant change being that private funds have been deregulated. Private funds are defined as either those with a maximum of 50 investors with each investor’s first time investment being not less than MYR250,000, or any number of investors with each investor’s first time investment at a minimum of MYR500,000.

In the insurance sector, licensed life brokers can now act as full-fledged IFAs. There is also no longer a need for a Labuan insurer to have a Labuan resident director.

As a first mover in Islamic finance, Labuan had issued a stream of guidelines, directives and circulars over the years, amending and adapting conventional products for Shariah-compliant use . This maze of assorted rulings has been standardized and codified, resulting in the ground-breaking Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA).

Possibly the first comprehensive Islamic finance legislation in the world, LIFSSA’s central concern is Shariah-compliance. For instance, the jurisdiction’s Shariah Advisory Council has been elevated to be the Shariah Supervisory Council. This is not just a titular change but an important scaling up as the SSC now ascertains the proper Islamic law relating to any business regulated in Labuan IBFC and any of the Council’s rulings may be taken as a valid reference by a court of competent jurisdiction when making a decision.

The Act, which covers provisions from the licensing and regulation of Islamic finance activities to the role of the regulator (Labuan Financial Services Authority or Labuan FSA, responsible for ensuring the stability of both the conventional and Islamic systems in Labuan), also defines the range of Islamic financial services and products which broadly parallel conventional financial products.

New business products including takaful captives (the first in the world), and a wide range of Islamic-styled variations such as Protected Cell Companies; Private Trust Companies; Labuan and Labuan Foundations; Limited Partnerships and Limited Liability Partnerships are permitted.

The third new Act is the Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 which repeals and replaces the earlier law on Limited Partnerships. Under the new Act, three types of partnerships are allowed in Labuan IBFC, namely Limited Partnerships, Limited Liability Partnerships and recognised limited liability partnerships.

The LLP, as a partnership in which the partners have limited liability, allows all investors to actively participate in the management without being personally liable for any other partner’s liabilities that may arise from negligence or misconduct.

Although an LLP contains elements of both a partnership and a corporation, it is different from a typical joint stock company in which shareholders do not actively participate in the company’s management. The introduction of these partnerships, commonly used by professionals, will greatly enhance the jurisdiction’s appeal.

A Labuan Limited Partnership is suitable for fund management as it provides for a general partner and limited partners, the latter as passive limited investors in the partnership. The Act also provides for an LP or a Labuan Company to convert to an LLP, and for a foreign LLP to be registered in Labuan.

To cater for those involved in estate planning or wealth management, Labuan introduced its new Foundations Act 2010. Similar to common law Trusts, Foundations would probably be more familiar to individuals or families from Civil Law countries like Indonesia, Thailand, the Philippines and the Middle East. They may also be preferred over Trusts as a Founder can retain substantial control over the management of the Foundation’s assets.

The LFA addresses all the key issues such as the formalities, administration and judicial nature of Foundations including provision for the redomiciliation of a Foundation into and from Labuan. Other significant features are the preservation of confidentiality, and the unenforceability of foreign claims or judgements pertaining to divorce, succession rights or creditors’ claims. Furthermore, a Foundation can be in the Islamic form if it subscribes to Shariah principles and appoints a Shariah adviser.

Spring cleaning and modernising four Acts
It wasn’t a case of throwing the baby out with the bath water but more cleaning out the cobwebs accumulated over the years that led to the streamlining of the supervisory and regulatory functions of the Authority. Accordingly, the amendments to the Labuan Financial Services Authority Act 1996 (LFSAA) discarded some ambiguous provisions and added others to enhance effectiveness and efficiency.

Chief among the changes were the re-naming of the regulator to Labuan Financial Services Authority (or Labuan FSA, formerly known as Labuan Offshore Financial Services Authority or LOFSA) and the granting of its power to issue licenses for banks and other finance-related businesses.

Just as significant are the provisions for the regulator to gather information from Labuan institutions and to share them with other enforcement agencies when there is a prima facie case to do so. These powers go far in ensuring that the business practices in Labuan IBFC are in compliance with international standards as adopted by many jurisdictions. There are, however, sufficient provisions to ensure confidentiality and "no fishing" expeditions will be entertained.

The Labuan Companies Act 1990 (LCA) which regulates companies set up in the jurisdiction has been simplified and updated to modern standards. For example, no par value shares; no authorised capital; permitting the amalgamation of companies; permitting companies limited by guarantee; granting flexibility in the shareholding and capital structures; and the registration of Labuan companies in any language or character (so long as an English version is provided too) are some of the measures introduced.

Further liberalisation include certain restrictions being lifted such as those on shipping operations (confined to Labuan and outside of Malaysia); permission to deal with Malaysian residents; and owning controlling interest in Malaysian domestic companies. Moreover, Labuan investment holding companies can co-locate in Kuala Lumpur and Labuan banks permitted to co-locate anywhere in Malaysia. New corporate structures, especially Protected Cell Companies mainly for captive insurance and fund activities, are now allowed.

In amending the existing Labuan Trusts Act 1996 (LTA), the model has been to take the best from the best, drawing features and improving on these from other jurisdictions.

One of the most attractive new features is the Labuan Special Trust which allows the Trust to hold shares in a Labuan Holding Company, which in turn may own assets such as cash, real estate, art securities, businesses, insurance policies etc.

These shares, which are "on trust to retain", may be held indefinitely. As the management of the holding company is the responsibility of the directors only, there is a distinct separation between the custodian role of trustees and their fiduciary role of investing which is handled by the directors of the company. This provision meets the contemporary needs of high-net-worth Individuals or families for, by separating the roles, the founders of wealth (the older generation) can still keep the original legacy intact. This feature is one of the most sought after in Trust Law.

Other advantages under the Labuan Special Trust include: settlors having wide reserved powers that are reasonable but do not compromise the Trust; protection of a Trust against a foreign law claim; variety of Trust purposes including one unique to Labuan, “the advancement of human rights and fundamental freedom”; Trusts can now be "in perpetuity"; and there are clear guidelines relating to beneficiaries and the information they will receive. Residents can establish trusts for their non-Malaysian assets and foreigners may be a settlor or beneficiary for Malaysian assets.

As a natural follow-up to the other laws, the Labuan Business Activity Tax Act 1990 (LBATA) which covers the tax obligations of those entities defined as carrying on Labuan business activities, was amended to include new Labuan entities such as Foundations, Limited Liability Partnerships, Protected Cell Companies, companies undertaking shipping operations and their corresponding Islamic versions. Under LBATA, Labuan trading companies pay tax at the rate of 3% on audited net profit or a flat MYR20,000 as elected each year; while non-trading companies pay no tax on passive income.

Another provision under the Act is to enable advance tax rulings from the Inland Revenue Board (IRB) which will be a boon for potential investors who seek certainty and clarity in their tax obligations.

The Act also contains provision for the Malaysian Inland Revenue Board to obtain information from Labuan entities and to share this with the foreign competent tax authority requesting the information under the Double Taxation Agreement signed and concluded with Malaysia. However, Labuan has safeguards in place and limitations on the sharing of information.

For those seeking new opportunities as the tide flows from West to East, or for those concerned about wealth preservation, the time has come to consider Labuan IBFC with its new legislation complementing its connectivity, convenience and cost efficiency.

The article was first published in FSC Report 2011

Generic Popup