Labuan: Country and Foreign Investment Regime

On this Page:

- LABUAN GEOGRAPHY
- LABUAN POPULATION LANGUAGE AND CULTURE
- LABUAN GOVERNMENT
- LABUAN ECONOMY AND CURRENCY
- LABUAN ENTRY AND RESIDENCE
- LABUAN BUSINESS ENVIRONMENT

Labuan Geography

The island of Labuan lies off the north west coast of Borneo, 8km from the Malaysian state of Sabah and 123 km from Kota Kinabalu, the state capital.

Labuan has a central position in Southeast Asia, particularly in the ASEAN region, being 1,258 km from Manila, 3,037 km from Bangkok, 1,552 km from Kuala Lumpur, 1,368 km from Singapore and 1,500 km from Jakarta.

Covering an area of 92 sq. km, Labuan is roughly triangular in shape. Its fine and safe harbour has always made it popular with seafarers. It is from this that the island derives its name, Labuan, meaning "an anchorage" in Malay.

Most of the island is flat and undulating, the highest point being 85 m.

Labuan has no climatic disturbances to speak of. There are monsoons from April to June and September to December. Generally the island enjoys a healthy tropical climate. Its temperatures range from 24C to 34C.

The national carrier, Malaysia Airlines (MAS) operates daily direct flights to Labuan from Kuala Lumpur and Kota Kinabalu. Royal Brunei Airlines also operates direct flights to Labuan.

Back to top

Labuan Population, Language & Culture

When the island was ceded to Queen Victoria in 1845 there were no permanent inhabitants there. Rajah James Brooke proclaimed Governor of Sarawak in 1841 also became Labuan's first governor.

On 1 August 1848 Labuan was declared a free port and open to settlers. Brooke tried to persuade the Chinese and Brunei people from Brunei to come to Labuan but he was not successful. However Chinese merchants from Singapore started opening up shops in the settlement. Others started farming.

The population of Labuan in 1867 was about 4,000, the majority being Muruts, Dusuns and Kedayans. There were also Malays from the Straits Settlements, 600 Chinese, Indian stallkeepers and 40 Europeans.

Under the Labuan Order-in-Council dated 10th July 1946 Labuan ceased to be part of the Straits Settlements, and became part of the Colony of North Borneo. The island, meanwhile lost its privileges as a free port. Labuan in 1946 had a population of 9,253.

In the decade that Labuan was incorporated with North Borneo as a colony in 1946 she had to pay the same tariff conditions as the other ports. Under these conditions the island did not prosper. A decision to return Labuan to the status of a free port was made. And so on 1st Sept 1956 Labuan was reconstituted a free port by Ordinance.

On 31st August 1963 the state became self-governing and on 16th September of the same year was made a state within the Federation of Malaysia. North Borneo took the name of Sabah.

Today Labuan has a population of about 90,000 (according to a July 2009 estimate). The indigenous people that now inhabit Labuan are the Kedayans, Brunei and Kadazan. It is not known when the Kedayans first came to Labuan. The Kedayans are a Muslim people and are probably of Sumatran or Javanese origin.

The official language is Bahasa Malaysia. However, English is widely spoken and many documents and publications are available in English.

Back to top

Labuan Government

Labuan was ceded to the state of Sabah in 1963. Subsequently, its administration was handed to the Federal Government of Malaysia in 1984.

Malaysia consists of 13 states and the two federal territories of Kuala Lumpur and Labuan. Malaysia has a complex federal political system, with extensive local power still in the hands of nine hereditary sultans, who elect the head of state (entitled HM the Yang di-Pertuan Agong) every five years from among their number.

Legislative power in the hands of the bicameral parliament comprising the Dewan Rakyat (House of Representatives), with 192 members directly elected for a five year term, and the 70-strong Dewan Negara, or Senate, of whom 40 members are appointed by the Head of State and 30 members elected by the country's 13 regional assemblies.

Executive power is held by the Prime Minister, who is formally appointed by the head of state but in practice the leader of the largest party in the Dewan Rakyat. The Prime Minister governs with the assistance of an appointed ministerial cabinet.

Back to top

Labuan Economy & Currency

Recognizing Labuan's strategic location and proximity to major shipping routes and offshore oil and gas fields, the Federal Government launched a long-term development program to jump-start Labuan's stagnating economy and to encourage the influx of both domestic and foreign investments.

As Malaysia's only deepwater anchorage, Labuan is a free port, a Federal Territory, and an International Offshore Financial Centre (IOFC). The currency is the Malaysian Ringgit (RM).

Labuan's GDP was estimated at RM145 million in 1991 and RM196 million in 1995, giving a per capita GDP of RM2,650 and RM3,010 respectively. In 2000, GDP per head was estimated to be RM3,579. The mining sector, largely represented by oil and gas production and its related industries, is the biggest contributor to Labuan's economy, followed by the manufacturing sector, wholesale, retail, hotel and restaurants sector.

Although still not a major economic contributor, the finance sector is gaining significantly with its GDP contribution increasing from 5.7% in 1991 to nearly 10% in 2000. In the future, the manufacturing and mining sectors are expected to play a less significant role.

The Government hopes that Labuan will register an average GDP growth of 10.1 per cent per annum during the planning period to 2015. By the year 2015, Labuan's total GDP is projected to be RM1.335 million with a per capita GDP of RM9,315.

Malaysia's ambitions for Labuan to become a financial centre to challenge Singapore and Hong Kong remain unfulfilled, but the island has become a major conduit for FDI into the surrounding economies, especially Korea. It is thought that somewhere between one-third and one-half of the companies registered on the island are somehow linked to Korea. Many Korean companies themselves have invested back into Korea through Labuan.

Back to top

Labuan Entry & Residence

To facilitate offshore activities in Labuan, a liberal immigration policy has been adopted. Multiple entry visas are traditionally issued to expatriates who have been granted employment permits to work with offshore companies in Labuan.

Foreign nationals may not usually obtain residence permits in Malaysia. Malaysia issues the following temporary permits:

• Tourist passes for visitors to Malaysia; these may be obtained at the port of entry;
• Transit visas, which are valid for one month;
• Business passes for foreign nationals attending business meetings; these may be obtained at the port of entry;
• Student passes for students attending approved educational institutions.

The nationality of the passport holder is considered in determining whether to issue these permits.

Any person who wishes to enter Malaysia to take up employment with a Malaysian company or firm must apply for an employment pass from the Department of Immigration.

Employment passes are issued for a specified period, usually two to three years, and are renewable for an additional two to three years.

Employment passes are granted on a case-by-case basis, generally for positions that require special technical knowledge or expertise not available locally or for positions that cannot be filled by local Malaysian citizens.

To obtain employment passes, expatriates must have a valid passport from their home country, a contract from their employer, a cover letter and three passport-size photos.

The employer of an expatriate must submit an application to the Department of Immigration and await a decision, which may take one month. After the employer receives a letter of approval, it must submit the passport of the employee and pay for the employment pass and the levy. The levy is applicable only to expatriates earning less than a designated amount per month or to expatriates holding employment passes valid for less than two years.

Licensed manufacturing companies that wish to hire expatriates must present copies of their manufacturing licenses. Service companies with foreign equity of more than 30% must seek the approval of the Foreign Investment Committee before hiring expatriates. Companies engaged in construction and project management must register with the Construction Industry Development Board before hiring expatriates. Companies engaged in the retail, trade, wholesale and direct-sales sectors that have foreign equity of more than 30% must seek the approval of the Committee on Wholesale and Retail Trade before hiring expatriates.

It is illegal to work without a valid employment pass; therefore, a foreign national may not work in Malaysia until he or she has received a work permit and all other necessary documents.

To obtain an extension, expatriates must submit new applications for extension three months before the expiration of their passes.

Expatriates who have not completed their terms of contract but wish to take up employment with other companies must leave the country for six months before taking up new employment.

A foreign national may start a business in Malaysia by registering a company locally. For companies that sell to the domestic market or render services within the country, a local joint venture may be required.

Companies that export at least 80% of their manufactured goods may be entirely foreign-owned. It is common for foreign nationals to head these operations.

In 2003, the Malaysian government decided to make it easier for companies to hire skilled foreigners, allowing for automatic approvals to be granted for the recruitment of highly skilled workers where there is no available local expertise.

From June 2003, the government further relaxed rules on employing expatriates, granting that manufacturing companies with foreign paid-up capital of at least US$2m be automatically permitted ten expatriate positions, with those to include five key posts. Under the amended rules, expatriates could be employed for up to ten years for executive posts and five years for non-executive posts.

Manufacturing companies with foreign paid-up capital of US$200,000–2m, meanwhile, were permitted automatic approval for up to five expatriate posts, including at least one key post.

Back to top

Labuan Business Environment

Under the guidance of LOFSA (the Labuan Offshore Financial Services Authority) the Malaysian authorities have poured hundreds of millions of dollars into improvement of Labuan's physical infrastructure, which is now fully up to modern standards. Excellent office and light-industrial premises are available, and state-of-the-art telecommunications include an Internet Gateway which provides a e-commerce platform.

Professional support for offshore development is well developed in Labuan: most of the top accounting and consultancy practices have offices there, along with a good range of lawyers. Malaysian accounting standards approved by the local accounting bodies are adaptations of the international accounting standards approved by the International Accounting Standards Committee.

Compared with some other regional financial centres, Labuan is comparatively cheap. This is both in terms of cost of physical facilities such as rentals as well as the rate of professional fees charged by accountants, lawyers and other professional service providers.

In April 2008, LOFSA released its 2007 Annual Report, highlighting the development and progress of the Labuan International Business and Financial Centre (IBFC) and the financial performance of LOFSA.

According to LOFSA, a strategic milestone was achieved in 2007, with the repositioning and rebranding of Labuan IOFC as Labuan International Business and Financial Centre (IBFC).

It observed that: "The new brand name of Labuan IBFC marks its greater focus and its continuous progress towards a vibrant and progressive international business and financial centre."

"Labuan IBFC has shown its agility to build new strengths, leveraging on its comparative advantages, to meet the emerging and more sophisticated demand in the region."

The report revealed that the Labuan IBFC continued to record double-digit growth in the number of new offshore companies, which totalled 6,297 in 2007.

The offshore banking industry reported an expansion in the loan assets, complemented by an improvement in the asset quality.

The total assets of offshore banks increased by 27.8% from USD21.1bn in 2006, to USD 27bn in 2007, and the offshore leasing business continued as one of the main offshore financial activities, to become one of the highest growing financial industry in Labuan IBFC in 2007.

Total new lease financing increased by 18.7%, resulting in a cumulative financing of USD14.1bn. This was boosted by strong activities in the oil and gas sectors, as well as increased shipping activities in the region.

The report went on to reveal that the offshore insurance industry continued to expand, particularly in the reinsurance business sector, which grew by 40.3% to USD919.2mn in 2007, of which 62.0% were non- Malaysian premiums, signalling its growing role as a reinsurance centre.

For the year 2007, Islamic-based assets in the Labuan IBFC continued to grow, to USD1.2bn, representing an increase of 36.9% as compared to 2006. There was strong interest from investors from the Middle-East seeking to invest in the Asian region.

According to the Labuan IBFC Annual Report for 2008, released in May 2009, the Labuan IBFC maintained positive growth in 2008 across all key business sectors, despite the more challenging global environment, and new measures were recorded to improve the flexibility and business-friendliness of its tax and legal framework, becoming effective in 2009 and beyond.

The position of Malaysia as an International Islamic Financial Centre (MIFC) has further enhanced Labuan’s effort to promote Shariah compliant trusts and foundations, as these products complemented the Islamic financial products and services that were already available onshore.

The Labuan International Financial Exchange (LFX) also recorded four new listings, bringing the total number (as at 2007) to 31, with total market capitalisation of USD15.1bn.

Going forward, LOFSA identified several key strategic programmes to advance Labuan as an International Business and Financial Centre.

One such initiatives was to elevate Labuan IBFC‘s status to being the “gold standard for holding company jurisdiction”.

LOFSA also revealed that it was in the process of streamlining all aspects of the existing legal framework covering both conventional and Islamic businesses to create a more "facilitative, flexible and frictionless business environment".

Then the following month, LOFSA announced the establishment of Labuan IBFC Incorporated Sdn Bhd, (Labuan IBFC Inc).

The new entity, which is fully-owned by LOFSA, is responsible for promoting Labuan as an International Business and Financial Centre (IBFC).

The main function of the Labuan IBFC Inc is to drive market development, as well as to act as a facilitator for investors seeking to participate in Labuan IBFC. It will also undertake "targeted and focused interface with potential investors".

In February 2010, new laws which, it is hoped, will substantially improve Labuan’s competitive edge in international financial markets came into effect.

Back to top