Labuan: Law of Offshore

On this Page:

- LABUAN TABLE OF STATUTES
- LABUAN TRUST LAW
- LABUAN BANKING LAW
- LABUAN INSURANCE LAW

Labuan Table of Statutes

This is a non-exhaustive list of the main Malaysian statutes affecting Labuan, and its offshore and non-resident business. The statutes are listed in alphabetical order – click on the statute for a fuller description of the statute, the legal regime it forms part of, or in some cases the text of the law.

Anti-Money Laundering Act 2001
Anti-Money Laundering (Invocation of Part IV (No.2)) Order 2003
The Malaysian Companies Act 1965
Mutual Assistance in Criminal Matters Act 2002
The Offshore Companies Act 1990
The Labuan Trust Companies Act 1990
The Offshore Banking Act 1990
The Offshore Insurance Act 1990
The Labuan Offshore Business Activity Tax Act 1990
The Labuan Offshore Trusts Act 1996
The Labuan Offshore Limited Partnerships Act 1997
The Labuan Offshore Security Industry Act 1997
Labuan Offshore Security Industries (Amendment) Act 2003

In October, 2005, Bank Negara Malaysia Deputy Governor, Datuk Zamani Abdul Ghani, told the Labuan Offshore Industry Dinner 2005 that LOFSA would continue to monitor and enhance incentives given to the investment community in order to ensure that the Malaysian island's reputation as a well regulated and investor-friendly offshore jurisdiction advances.

"Though Labuan IOFC is now considered one of the most established financial centres in the Asia-Pacific region and one of the few integrated IOFCs with best international practices and standards supported by an independent legislative framework, our efforts to further increase its appeal will not stop," he said.

"Though Lofsa is the sole independent authority responsible for the administration of the offshore industry in Labuan, it will continue to have periodic discussions with other domestic regulatory agencies on how to further make Labuan IOFC more attractive," he added.

Zamani said that an International Advisory Panel (IAP) comprising experts from the private and public sector had been formed to present domestic and international perspectives and to advise Lofsa.

He added that the Offshore Companies Act 1990 was - at that time - in the final stage of being amended, while the Labuan Offshore Trusts Act 1996 was being reviewed to be in line with global changes in trusts business.

In April, 2006, LOFSA subscribed to World-Check, a leading provider of structured intelligence on high and heightened risk individuals and entities, to screen applications for licences. The move will allow LOFSA to conduct verification checks based on the World-Check database, which contains information on high or heightened risks, such as terrorists, fraudsters, money launderers, Politically Exposed Persons (PEPs), arms dealers and sanctioned entities, amongst many other categories.

World-Check also gathers information on its targets' networks and associates to ensure comprehensive coverage.

In May 2006, it was announced that Malaysia was planning to carry out a "holistic" review of the tax regime governing the Labuan international offshore financial centre.

“We’d like to see it (a new tax structure) come out as soon as possible because it would enhance LOFSA's’s competitiveness and attractiveness, in particular with other jurisdictions,” Tan Sri Dr Zeti Akhtar Aziz, chairman of the Labuan Offshore Financial Services Authority (LOFSA's) said at the time.

LOFSA then revealed plans to unveil a new strategy in the first half of 2007 to attract more international investors.

Speaking at the Labuan-IOFC Investment Route to Asia conference in Kuala Lumpar in December 2006, LOFSA's director-general said that the authority was looking at ways in which Labuan's tax structure could be improved, with a particular focus on the jurisdiction's double taxation avoidance treaty network.

He also indicated that LOFSA was trying to identify niche markets, such as Islamic finance, which Labuan could specialise in.

This end was advanced on March 2007, when the Dubai Financial Services Authority (DFSA) entered into a mutual recognition agreement to facilitate cross border distribution of Islamic investment products with the Securities Commission of Malaysia (SC).

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

A total of four new acts, together with radical amendments to a further four existing laws, will completely change the way in which Labuan carries on its financial services business. With the enactment of the new laws, the Labuan Offshore Financial Services Authority has been re-named the Labuan Financial Services Authority (Labuan FSA).

Dato Azizan Abdul Rahman, the Director-General of Labuan FSA said: “These far-reaching changes cover all financial activities in Labuan International Business and Financial Centre – from banking, insurance, leasing and company incorporation right through to the creation of Islamic financial products and services. Apart from that, the changes have taken into consideration all aspects so that we are ahead of accepted international standards and practices.”

In particular, an additional clause to the Labuan Offshore Business Activity Tax Act will enable the island to adopt the internationally-agreed Organization for Economic Cooperation and Development standard for the exchange of information for tax purposes in double taxation agreements (DTAs).

It provides power to the Director General of Inland Revenue to call for information from any person as he may require for the purpose of compliance with any DTAs entered into by the government of Malaysia. It allows the disclosure of any information on a DTA to any authorised agent of the government with whom Malaysia’s government has made such an agreement, and upon a request from a tax authority of any government of any country outside Malaysia.

Furthermore, any person may request for an advance ruling from the Director General of Inland Revenue on the application of any provision of the Tax Act to a particular type of arrangement. Subject to certain qualifications, a ruling issued under this proposed section is binding on the person who requested for such ruling and on the Director General of Inland Revenue.

The new laws allow for the creation of Labuan foundations, limited liability partnerships, protected cell companies (insurance and mutual funds), shipping operations, Labuan special trusts and financial planning activities. These complement the existing available range of products and services and aim to provide investors with a wider choice of financial products to maximise investment opportunities.

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Labuan Trust Law

Labuan trusts are regulated under the Labuan Offshore Trusts Act 1996 ("the Act"). The Act was gazetted and commenced operation on 31 October 1996. An offshore trust which is validly created in accordance with the Act, whether in Labuan or abroad, may be registered with the Labuan Offshore Financial Services Authority. A registered offshore trust is subject to the provisions of the Act.

An "offshore trust" is defined in the Act as a trust which complies with all the following criteria:

• It is settled by a person who is neither a citizen or permanent resident of Malaysia, at the time of the creation of the trust;
• It does not own any real estate in Malaysia;
• The beneficiaries are all persons who are neither citizens nor permanent residents of Malaysia;
• At least one of the trustees is a company registered under the Labuan Trust Companies Act 1990 to carry on business as a trust company.

Some of the key features of the Act are as follows:

• A Labuan offshore trust is recognised and enforceable in accordance with its terms by the Malaysian courts situated at Labuan. The Act provides for the establishment of charitable and purpose trusts as well as spendthrift or protective trusts.
• An offshore trust must be created by a will or other instrument in writing for it to be valid.
• The governing law of a Labuan offshore trust need not be Malaysian law.
  If an offshore trust is validly created, the courts will not vary it or set it aside, nor recognise the validity of any claim against the trust property, pursuant to the law or an order of a court of another jurisdiction in respect of:
  • the personal and proprietary consequences of marriage or the termination of marriage;
  • succession rights, whether testate or intestate; including the fixed shares of spouses or relatives;
  • any claims or court orders with regard to matters referred to in paragraph a. or b. in reference to the personal laws of the settlor or the beneficiaries; or
  • the claims of creditors in an insolvency (see, however, below).
    
• If it is proved beyond reasonable doubt that a Labuan offshore trust has been created or registered in Labuan or property disposed of to such a trust:
  • with the principal intent to defraud a creditor of the settlor; and
  • at the time such creation, registration or disposition took place, it had the effect of rendering the settlor insolvent or without property by which a creditor's claim, if successful, could have been satisfied; then
  • the creditor's claim may be satisfied out of the property which but for the creation, registration of the trust or disposition of property would have been available to satisfy the creditor's claim.
    
• The liability extends only to the interest which the settlor had in the property prior to the creation, registration or disposition and any accumulation to the property, if any, subsequent thereto. Moreover, it is important to note that the onus of proof (being "beyond reasonable doubt") is on the creditor.

An offshore trust created or registered in Labuan and a disposition of property to such a trust shall not be fraudulent as against a creditor of the settlor if:

• its creation or registration, or the disposition takes places after the expiration of two years from the date that the creditor's cause of action arose; or
• its creation or registration, or the disposition, takes place before the expiration of two years from the date the creditor's cause of action arose and that creditor failed to commence such action before the expiration of one year from the date of such creation, registration or disposition.

A settlor will not have imputed to him an intent to defraud a creditor solely by reason that the settlor has created or registered an offshore trust or has disposed of property to such trust within two years from the day that creditor's cause of action accrued.

An offshore trust shall, unless otherwise stated in the terms of the trust, continue to exist for a period not exceeding 100 years. A foreign trust may redomicile to Labuan and, if so, may be registered in Labuan. An offshore trust may migrate from Labuan.

The trustee of an offshore trust is under an obligation not to disclose to any person any document or information as to:

• his deliberations as to how he should exercise or has exercised his functions as trustee;
• the reasons for any decision made in the exercise of those functions;
• any material upon which such a decision was or might have been based.
  any part of the accounts of the trust; or
• any letter of wishes given by the settlor or beneficiary.

Moreover, the Act requires that every trustee and every other person shall at all times regard and deal with all documents and information relating to a trust as secret and confidential; and that no trustee nor other person shall at any time be required to produce to or before any court, tribunal, board, committee of inquiry or any other authority or to divulge to any such authority any matter or thing coming to his notice or being in his possession for any reason, where such matter or thing relates to a trust.

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Labuan Banking Law

The Offshore Banking Act 1990 provides a regulatory framework covering the operations of an offshore bank in Labuan.

The Act allows for the application of an offshore banking licence for the setting up of a branch or subsidiary. Among the documents required to accompany the application are constituent documents, audited balance sheet, statement on the details of the proposed establishment and particulars of directors and share-holders, and a guarantee and/or undertaking.

As confidentiality is the hallmark of an offshore financial centre, a major responsibility of an offshore bank is the maintenance of strict secrecy over the affairs of its customers.

Under the Offshore Banking Act 1990, an officer or director of an offshore bank is prohibited from giving, reproducing or disclosing any information or document relating to the affairs or account of its customers to any person, unless authorised in writing by the customer or his personal representative.

In its dealings with customers, an offshore bank is prohibited from accepting cash deposits and from opening an account for a customer whose identity is not known to it. The offshore banks are expected to observe a strong self-regulatory code of conduct which places much emphasis on "knowing your customer".

An applicant setting up a subsidiary has to provide capital funds of at least RM10 million or its equivalent in any other currency. For a branch, where solvency is the responsibility of the home monetary authority, there is no requirement to provide for minimum net working funds, so long as the head office maintains capital funds of not less than the equivalent of at least RM10 million.

Applicants for a banking license should meet the following minimum criteria:

• Must be a bank or financial institution;
• Must possess sound track record;
• Must be accorded a good credit rating by acceptable rating agencies;
• Must be supervised by a competent regulatory authority; and
• Must conform to generally accepted standards of international banking practices or BIS, as the case may be.

The applicant is required to submit an application in a prescribed Form L. The submission should include but not be restricted to the following:

• the nature of business of the applicant;
• the composition of Board of Directors and senior management;
• audited financial statements for the last two years;
• a three-year business plan. The business plan should provide detailed outline of the operations and strategy of the applicant with regard to its Labuan entity; and
• any other information which is relevant to the application.

The minimum requirements for issuance of licence are:

• Letter of awareness from competent regulatory authority which supervises the applicant;
• Letter of guarantee or undertaking or both from the parent company to be furnished to LOFSA; and
• Annual licence fee of RM80,000 (at the time of writing).

Upon issuance of the licence, the offshore bank is required to comply with the following:

• Statutory requirements under the OBA;
• Maintain a physical presence in Labuan;
• Comply with prudential and reporting requirements issued by LOFSA;
• Carry on business in any currency other than the Malaysian currency except as permitted by the relevant authorities; and
• Any other requirement issued by LOFSA from time to time.

Anti-Money Laundering Legislation:

The full text of the Anti-Money Laundering Act of 2001 can be found here.

During 2003, attention was given to the international initiative against money laundering, with the introduction of the Anti-Money Laundering (Invocation of Part IV (No.2)) Order 2003. The provision relates to the reporting obligations of institutions licensed or registered to carry on, among others, offshore banking, insurance and trust company business.

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Labuan Insurance Law

The Offshore Insurance Act 1990 (OIA) governs the licensing and regulation of offshore insurance and offshore insurance-related activities in the Labuan IOFC. The OIA provides for the establishment of a complete spectrum of insurance activities, namely:

The application submitted by the applicant for a licence to carry on offshore insurance business should contain the following information:

Comprehensive nformation on the paid-up capital and solvency requirements is available here. The requirements were as follows at the time of writing:

The applicant must submit a banker's certificate as evidence that the working funds are maintained in the account of the applicant with a bank in Labuan; and may apply for flexibility to pay up less than 100% of the working funds required, subject to the provision of adequate guarantee, acceptable to LOFSA for the difference in amount.

The applicant must establish its management in Labuan with at least one director resident in Labuan or has appointed or will appoint a licensed offshore underwriting manager in Labuan; may set up a marketing office in Kuala Lumpur to facilitate meetings and business dealing with clients. The number of staff at the marketing office should not exceed four, comprising of two officers at a junior level, a secretary and a driver; and the controller, director and chief executive officer must be a fit and proper person.

All licensees are required to pay to LOFSA annual licence fees on or before January 15 of each year. The levels at the time of writing were: