Offshore for Asia – Labuan Offshore Company Guide November 2008

The information contained in this guide is educational and intended for informational purposes only.

It does not constitute legal, accounting, professional or other advice or services, nor is it a substitute for such professional advice or services.

Although every attempt has been made to check the accuracy of this guide, Labuan IBFC Incorporated Sdn. Bhd.

accepts no responsibility whatsoever for any errors, mis-statements, inaccuracies or omission.

Foreword

‘Offshore for Asia-Labuan Offshore Company Guide’ is meant to be a complete and authoritive manual for people interested to learn more about Labuan offshore company structures as well as their benefi ts. As such, it will be a valuable source of reference for professionals including lawyers, accountants, advisors, company secretaries, and others such as decision makers. The scope is therefore on company issues with the Offshore Companies Act 1990 as the starting point.

This Labuan Offshore Company Guide is unique in that it is a distillation of practical knowledge derived from my years of involvement in offshore business in Labuan IBFC. Its value is that it contains some information which cannot be found by searching the internet.

The Guide highlights the main provisions in the Offshore Companies Act 1990 relating to company incorporation, administration and current compliance. The Guide also explains some of the more pertinent rules affecting a Labuan offshore company. Special features include the new annual fee structure for Labuan offshore companies and the provision allowing Labuan offshore companies to be taxed under the Malaysian Income Tax Act 1967. The laws and regulations mentioned are as at Nov. 2008-10-22

It is my hope that this Guide will help professionals to better understand Labuan offshore company structures so that they will be fully equipped to advise their clients on the opportunities and services that await them in Labuan IBFC.

The Guide in the present form is merely the fi rst stage . Given the changing global fi nancial scenario, I expect future editions may offer more coverage, updating and amendments. The Guide will also be accessible online from www.simplyoffshore.com, www.labuanibfc.my and www.offshore4asia.com

Ahmad Kamil Bin Mohd YusopLL B(Hons), CLPLaw & Commerce Trust Limited

Introduction to Labuan IBFC

Malaysia’s offshore fi nancial hub was established in 1990, operating under the name of Labuan International Offshore Financial Centre. It was re-named Labuan International Business and Financial Centre early in 2008 to refl ect its growth and to meet the changes in the global economic environment.

Labuan IBFC is strategically located with easy connections to many countries in the Asia Pacifi c region and shares the same time zone as well. Since its inception, the jurisdiction has developed by leaps and bounds when measured by its current achievements such as over 6,500 offshore companies; more than 300 licenced fi nancial institutions including banks; and a full range of service providers like 23 trust companies that have established themselves on the island.

Labuan IBFC is now embarking on an aggressive growth strategy to become the premier IBFC in the Asia Pacifi c region. It is focused on fi ve core areas viz. offshore holding companies; captive insurance; Shariah compliant Islamic Finance structures; public and private funds; and wealth management. Given the burgeoning interest around the world in Islamic fi nance, Labuan IBFC is well placed to enhance its lead in this sector. Labuan has another advantage as it has been involved from the start in the formation of the Malaysian International Islamic Finance Centre initiative launched in August 2006.

The jurisdiction, under the robust but progressive regulatory body called Labuan Offshore Financial Services Authority (LOFSA), offers trading companies the benefi ts of 3% tax on net audited results or a fl at rate of RM20,000; low operational costs; liberal exchange controls; and a host of other advantages There is also a fi nancial exchange called the Labuan Financial Exchange or LFX for listing and trading purposes.

This is an essential step-by-step guide for those intending to establish an offshore company in Labuan IBFC whether for themselves or on behalf of their clients.

Part I: Introduction

1. Offshore companies:defi nitions2. Offshore benefi ts

Part II: How to set up

3. Governing law in Labuan IBFC4. Formation of Labuan offshore company5. Types of companies6. Memorandum of Association7. Permitted purpose for incorporation8. Prohibition against dealing with Malaysian residents

Part III: Company matters

9. Lodgement of documents10. Share capital11. Share subscription12. Preference and redeemable shares13. Dealing with own shares14. Reduction of capital15. Members16. Registered offi ce of an offshore company17. Name, etc on letters and documents

Part IV: Company procedures

18. Offi cers19. Secretary20. Meetings 21. Notice of meeting22. Quorum23. Resolutions24. Special resolutions25. Keeping of minutes26. Annual returns27. Annual fee28. Register of members29. Ultra vires transactions30. Company seal

page 1 - 4

page 5 - 10

page 11 - 14

page 15 - 20

Part V: Accounts and audit

31. Accounts and audit32. Approved auditors & liquidators33. Dividends34. Arrangements & reconstructions35. Take over & mergers36. Winding up, strike off, etc.37. Redomiciliation

Part VI: Taxation

38. Taxation of company30. Application for tax resident status40. Personal taxes41. Double taxation relief42. Anti-money laundering law43. Secrecy 44. Exchange control

Part VII: Expatriate employment, incentives and guidelines

45. Expatriate employment in Labuan IBFC46. Offshore bank accounts47. Licensable or regulated business in Labuan IBFC48. Exemptions and incentives49. Summary of features and benefi ts50. Business and Regulatory Guidelines51. Frequently asked questions.

page 21 - 26

page 27 - 34

page 35 - 48

PART I: INTRODUCTION

1. Defi nition of offshore companies

The terms “offshore business” and “offshore company” have no precise legal, tax or general business meaning. The term “offshore” usually refers to the physical location of the person using the word. For example, if A lives in India, any place outside of India is “offshore” to him.

In the context of ‘offshore business’ and ‘offshore company’ the words refer to matters relating to the structuring of international business, family wealth management, asset protection and tax planning. Specifi cally, the term “offshore companies” traditionally refers to companies incorporated in offshore jurisdictions. Such jurisdictions usually offer all or any combinations of the following;

i) separate but more favourable corporate legislation to non-residents, ii) favourable tax treatment for business activities with non-residents; iii) confi dentiality treatment for offshore companies; iv) government support and encouragement; v) “ring fencing” or the prohibition of business dealings between domestic companies and offshore entities; vi) liberal exchange control policy; vii) availability of tax minimization vehicles; viii) strong or majority reliance on fi nancial services

A few examples of such jurisdictions are Labuan, Mauritius, Brunei, British Virgin Islands, Bermuda, Jersey and the Isle of Man.

In addition to “offshore companies” incorporated in these jurisdictions, there are also entities popularly known as “International Business Companies” or “IBC”; “International Trading Companies” or “ITC”; “Exempt Companies”; “Limited Liability Companies” or “LLC”, etc. Regardless of their descriptions, these companies usually share all or some of the above benefi ts. However it should be noted that the traditional defi nition of offshore companies is no longer applicable. For example, companies incorporated in the American states like Delaware, Nevada, Wyoming, etc. where none of the above features seem to be offered.

Types of offshore companies

Typically, the following types of companies are used for tax planning and international business:

1) International Business Companies or IBCs1

These are zero tax offshore companies incorporated in jurisdictions often described as tax haven islands such as the British Virgin Islands, Belize, Bermuda, Bahamas, Nauru and the Seychelles.

1 Other synonyms are “Business Company” or “BC” ; “International Trading Company” or “ITC”; “Global Business Company” or “GBC” or “Exempt Company”.

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2) Offshore companies

This traditionally refers to companies incorporated in jurisdictions which offer both offshore companies and onshore companies but the offshore companies may benefi t from favourable tax and corporate regimes. For example, Labuan has two types of companies, namely local “Sdn Bhd” company and “Labuan offshore company”. The “Labuan offshore companies” enjoy specifi c tax, regulatory and confi dentiality advantages over the “Sdn Bhd” companies. Fiscally, the Labuan offshore company may be categorized as either offshore company carrying on an offshore business activity which is an offshore trading activity or an offshore company carrying on offshore business activity which is an offshore non-trading activity. The former, either alone or in conjunction with a Malaysian domestic company is used as a tax planning vehicle to access Malaysia’s numerous Double Taxation Treaties. The latter is a zero tax company which may be used more or less in the same manner as the Business Company in BVI or the Brunei IBC.

Mauritius has two types of companies that are used for offshore business and international tax planning. The Mauritius Global Business Company II pays zero tax and is effectively a tax haven company, similar in many respects to a BVI Business Company, while the Mauritius Global Business Company I is tax resident and typically utilised for double tax treaty and international tax planning advantages.

3) Limited Liability Company (LLC) and the Limited Liability Partnership (LLP).

LLCs and LLPs are hybrid companies which are used for offshore business, international business and tax planning because they have the advantage of limited liability but the fl ow-through characteristics of a partnership for tax purposes. By this, we mean that profi ts are divided among the members, in proportion to their respective holdings, and are taxed in their respective hands. In most cases, if all the members or partners of LLCs and LLPs are non tax resident in the domicile of the LLCs or LLPs and no business is conducted in that country, neither the LLCs or LLPs nor members or partners will be taxed in the company’s country of establishment. Such companies are said to be “fi scally transparent” and examples include the LLCs in the U.S. states of Delaware or Nevada, LLCs in the Isle of Man and LLPs in the United Kingdom.

4) Onshore company 2

Hong Kong, although not typically regarded as a tax haven, has a favourable tax regime which effectively means that correctly structured, managed and administered Hong Kong companies can be utilised to conduct offshore business and international business without paying tax in Hong Kong, provided that any profi ts arising are not derived in Hong Kong. This type of tax regulation is known as “territorial taxation”.

2 Companies incorporated onshore in countries which have tax regimes that are by statute tax advantageous for specifi c international purposes. Examples are Singapore, Hong Kong, Luxembourg, Denmark and the Netherlands.

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While almost all countries offer tax regulations of one kind or another to encourage inward investment, successful implementation of such companies is dependent on a wide variety of issues. Such issues are anti-avoidance provisions, double tax avoidance, controlled foreign company, management and control tests, transfer pricing, thin capitalisation, participation exemptions, capital gains tax and a myriad of other ever-changing tax regulation.

The above issues are often complicated, requiring cross-border tax planning knowledge and experience. Expert implementation is certainly required to create structures domiciled in high tax, onshore countries as diverse as the UK, Portugal, Singapore, Greece, Belgium, Austria, Spain, Switzerland, Luxembourg and the Netherlands.

2. Offshore advantages in general

Regardless of the above, the benefi ts of using offshore companies as a conduit for international business, asset protection, wealth management and tax planning are numerous. It is impossible to list all of them but some of the most common are discussed below. Unless otherwise stated, the term “offshore companies” refers to all or any one of the four categories of offshore companies previously mentioned.Reduced Tax: Most offshore companies enjoy zero or low corporate tax. Undoubtedly this is one of the most sought after benefi ts. Provided that the tax law of the country of origin is carefully considered, the use of offshore companies can offer legitimate and signifi cant tax advantages.3

Confi dentiality:4 Most offshore companies are shielded by some form of confi dentiality provision. For example, provided the business conducted is a legitimate one, it would be extremely diffi cult for a third party to inquire into the identity of the owner and the affairs or management of an offshore company unless the owner gives consent or disclosure is obtained through a court order. This confi dentiality feature not only shields the owner from unwanted publicity but also from preying eyes.

Conduit for mobile and borderless business: Many offshore companies are being used as conduits to conduct borderless and highly mobile business. Examples of such businesses are fi nancial advisory, consultancy, internet business5 or investment in the world exchanges.

Cost saving: Due to this high mobility and the expansion of virtual activities, often no real or signifi cant physical presence is required. No local licensing and staff are required. This means signifi cant cost advantage in using offshore companies.6

Asset protection: A correctly structured offshore company, either alone or with an offshore trust may be used to enhance protection of assets. An offshore company normally has an in-built confi dentiality feature which makes tracing of ownership daunting if not impossible. Any asset owned by an offshore company which in turn is owned by a trust gives extra asset protection features. The benefi cial owner ceases to be connected to, or with, his assets and achieves anonymity in relation to his assets.

3 An onshore trading company must be aware of transfer pricing rules when structuring its international trading business in offshore centres.4 Most offshore centres in the world have in place legislation prohibiting money laundering. 5 Some offshore banks do not accept opening a company account for internet business as this type of business poses greater money laundering risk.6 The proliferation of service offi ces and virtual offi ces facilitates the operation of offshore businesses.

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Liberal exchange control policy: Most offshore centres adopt very liberal exchange control policies which allow free remittance of profi ts and capital.

Access to tax treaties: Double tax treaty benefi ts may be enjoyed by using companies in jurisdictions that have signed numerous DTAs with other countries. The major benefi t is that DTAs allow tax relief that can signifi cantly reduce withholding tax rates. Examples of such jurisdictions are Mauritius, Labuan, Cyprus and the Netherlands Antilles.

Banking privacy: Some jurisdictions, notably Switzerland, offer very signifi cant banking privacy benefi ts. Other major banking centres like Singapore and Hong Kong are equally well known and popular.

The search for political stability: There are many investors in the world who live in countries with less than desirable levels of political and economic stability. High net worth persons from politically unstable countries have often used offshore structures and centres as their fi nancial refuge, transferring funds to an offshore location where the funds can be deposited with an offshore bank and invested with greater security. By using an offshore company as a vehicle, they can avoid death or estate duties .

Real estate holding: An offshore company is frequently interposed to own property to avoid inheritance tax and capital gains tax.

Various commercial uses: The principal commercial uses of offshore companies are numerous, some of which are:

i. international trading ii. investment holdings iii. inter company fi nancing iv. professional services or consultancy v. patent, royalty and copyright holding vi. ship management and yacht ownership vii. personal and corporate tax planning viii. banking, fi nance and treasury management companies ix. debt securities issuing companies x. international headquarters and administrative companies xi. brokerage and leasing companies xii. insurance, life insurance and reinsurance companies xiii. international shipping and air transport companies xiv. international joint venture companies for property management xv. mutual fund companies xvi. trust companies xvii. internet marketing companies

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PART I I : HOW TO SET UP

3. Governing law in Labuan IBFC

The Offshore Companies Act 1990 (OCA 1990) is the legislation that governs all Labuan offshore companies. Prior to October 1990 when the Act was enforced, the body responsible for regulating Labuan offshore companies was the then Registrar of Companies. The Offshore Companies Act 1990 has been amended a few times since it was passed. Among the major amendments was the appointment of Labuan Offshore Financial Authority7 (LOFSA) as the Registrar8 in 1996 in place of the then Registrar of Companies, now the Companies Commission of Malaysia.

No less important was the removal of the rule that prohibited Malaysian residents from owning shares in Labuan offshore companies. Further, to enhance the delivery system in Labuan IBFC, electronic lodgement called the EDSP 9 was introduced which allowed all lodgements to the Registrar by trust companies to be done electronically.10

The domestic counterpart of the OCA 1990 - the Companies Act 1965- does not apply11 to Labuan offshore companies except in winding up (See Part VIII and Part X of Companies Act 1965 and The Companies (Winding-Up) Rules 1972).12 Instead, LOFSA exercises sole regulatory function on all Labuan offshore companies.

In mid 2008, following the re-branding exercise, Labuan Offshore Financial Centre was renamed Labuan International Business & Financial Centre or LIBFC. The role to market the jurisdiction was handed over to a newly incorporated company, Labuan IBFC Incorporated Sdn Bhd. Labuan IBFC Incorporated Sdn Bhd is the offi cial agency sanctioned by the Government of Malaysia to market Labuan IBFC as a premier International Business & Financial Centre in Asia Pacifi c. Labuan IBFC Incorporated Sdn Bhd is a subsidiary of Bank Negara of Malaysia, the Central Bank.13

7 Subs. Act A998.8 Section 2 OCA 1990, “Registrar means the Labuan Offshore Financial Services Authority established under the Labuan Offshore Financial Services Authority Act 1990.9 Electronic Documents Submission & Payment10 Section 9A OCA11 Section 5 OCA 1990 12 Sections 131(1) and 131(2) OCA 199013 A “Sdn Bhd” designates a domestic company rather than a Labuan offshore company, in which case the regulator is not LOFSA but the Companies Commission of Malaysia. This choice is deliberate and in accordance with corporate governance principles.

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4. How to form a Labuan offshore company

The fi rst step in forming a Labuan offshore company is to get approval from LOFSA of the required name by using the services of a trust company.14 The application should indicate why the name is selected and the nature of business to be conducted by the applicant company.

Names are not allowed where, in the opinion of the Registrar, it is undesirable or is a proper name, or includes a name of a kind that the Registrar is not willing to accept for registration.15 The name shall have any of the following description: 16

a) The word “Corporation” or the word “Incorporated” or the abbreviation “Corp.” or “Inc.”; b) The word “Limited” or the abbreviation “Ltd.”; c) The words “Public Limited Company” or the abbreviation “PLC.”; d) The words “Society Anonyme” or “Sociedad Anonima” or the abbreviation “S.A.”; e) The words “Aktiengesellschaft” or the abbreviation “A.G.”; f) The words “Naamloze Vennootschap” or the abbreviation “N.V.”; g) the words “Perseroan Terbatas” or the abbreviation “P.T.”; h) In romanised characters, any word or words in the national language of any country which connote a joint stock company limited by shares, or any abbreviation thereof.

Similar procedures and rules apply when a company seeks to change the name of an existing company.

Names in Chinese characters are not registerable. So is a name that ends with LLP as “LLP” refers to Limited Liability Partnership, and similarly as “LLC” refers to “Limited Liability Company”, this is also not registerable. The reason is that the term “LLC” in its popular use refers to a hybrid company which in essence is more a partnership rather than a true company limited by shares.

A Labuan offshore company may include the word “Berhad” or the abbreviation “Bhd.” as part of its name provided it has the word “(L)” as part of its name.17

A trust company or any other person may, by subscribing its or his name to a memorandum and complying with the requirements in the registration, form an offshore company.18 Every offshore company must be a company limited by shares.19

Application to incorporate can only be handled by a Labuan trust company who must then submit the Memorandum and Articles of associations with the following details: i) names of directors and shareholders; ii) registered address, company secretary and trust company: iii) size and denomination of share capital; iv) the nature of business of the company;

14 The term trust company or Labuan trust company refers to a trust company registered under Section 4 of The Labuan Trust Companies Act 1990.15 Section 21(1) OCA 199016 Section 21(2) OCA 199017 Section 21(2B) OCA 199018 Section 14(1) OCA 199019 Section 14(3) OCA 1990

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v) address of directors, shareholders and secretary; vi) percentage of shareholding; and vii) declaration that the requirements of the OCA 1990 in respect to all matters precedent and incidental to the registration have been complied with.

All submissions are made online through the EDSP. No hard copy is required to be fi led. Payment for fi ling fees is made by auto deduction by LOFSA from the trust company’s HSBCnet account. No cheque or cash payment is made to LOFSA.

Due diligence requirement:

Trust companies are “reporting institutions”20 under the Anti-Money Laundering & Anti-Terrorism Financing Act 2001 or AML/ATF Act. Trust companies therefore are required to know the true identity of the benefi cial owners of Labuan offshore companies. This means knowing exactly who they are providing services to and not just knowing their client’s agent or reps.

In the case of individual directors and shareholders, true identity can be established by obtaining copies of passports or identity cards which have been verifi ed by lawyers, accountants, notary public, bankers or company secretaries. In the case of corporate directors and shareholders, the certifi cates of incorporation must be verifi ed too.

Trust companies are also required to have their own ‘Know Your Customer’ policy or KYC. Such a policy will require them to look at the nature of the client’s business to determine if the business is genuine. The policy may similarly require production of proof of address and a professional or banker’s reference regarding the client and his business. The KYC policy is often an on-going process requiring trust companies to be vigilant not only at the engagement stage but also through the duration of the provision of services to their clients.

Trust companies are required to report suspicious activities to the Financial Intelligence Unit which is under the purview of Bank Negara Malaysia.

5. Types of companies

Unlike its domestic counterpart, 21 the OCA 1990 makes no express distinction between private and public companies. However, the OCA 1990 contains provisions governing invitation to the public.22 Generally, an entity is a public company if it:

a) issues an invitation to the public to deposit money or lend money to it; b) issues an invitation or distributes application forms to the public to subscribe for shares or debentures with it, and c) the invitation is not addressed to a restricted circle of persons and the number of persons exceeds twenty.

Companies that do not fall under the above are deemed private companies.

20 Section 3 Anti-Money Laundering Act 200121 Section 15 CA 196522 Part VI, from Sections 28 to 42 of OCA 1990

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Whether an offshore company is private or public, a more signifi cant classifi cation is made based on taxation applicable to the offshore company. For tax purposes, a Labuan offshore company can be classifi ed either as: a) company carrying on offshore business activity which is an offshore trading activity, or, b) company carrying on offshore business activity which is an offshore non-trading activity.There is however a tendency to describe the former as “trading company” and the latter as “non-trading company.”(Detailed discussion on this classifi cation is found below.)

A foreign company means a company, society, association or body incorporated outside of Malaysia.23 Foreign companies may apply to the Registrar for registration as “foreign offshore company”. Registration must be made through a trust company by submitting a copy of its certifi cate of incorporation, charter, statute or memorandum, list of directors and offi cers, a memorandum appointing the trust company as its agent and a statutory declaration made by an offi cer of the trust company.24

6. Memorandum of Association

The Memorandum of Association must be submitted to LOFSA at the time an offshore company is formed. Unlike in the domestic practice, there is no “Standard Table” to be used. All trust companies use their own standard Memorandum of Association. The Memorandum of Association must be dated, printed and divided into numbered paragraphs and contain the following;25

i) the name of the offshore company; ii) the objects of the offshore company; iii) the amount of the share capital with which it is proposed to be registered and the division thereof into shares of fi xed amount; iv) full name and address of each subscriber; and v) a declaration by the subscriber to the memorandum of association stating his desire to form an offshore company and agreeing to take the number of shares allocated to him.

The Memorandum and Articles may be amended by a special resolution of the members of the offshore company.

7. Permitted purpose of incorporation

An offshore company may carry on any business which may be lawfully conducted in Malaysia in, from or through Labuan.26 An offshore company may not carry on licensable business unless licensed accordingly. An offshore company must carry on business in, from or through Labuan.27 This provision must be adhered to as it is the compliance of this provision that will ensure the Labuan offshore company enjoys the taxation benefi ts under the Labuan Offshore Business Activity Tax Act 1990 or LOBATA 1990.28

23 Section 2(1) OCA 199024 Section 121(2) OCA 199025 Section 18(1) OCA 199025 Section 7(1) OCA 1990.27 Section 7(2) OCA 1990.28 Section 2 of the Labuan Offshore Business Activity Tax Act 1990 states that “offshore business activity” means an offshore trading or an offshore non trading activity carried on in or from Labuan…”

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There have been instances where the Inland Revenue of Malaysia determined that a Labuan offshore company that did not conduct its business in, from or through Labuan was subject to tax under the Income Tax Act 1967 or ITA 1967. In the absence of any Court case deciding the meaning of “carrying on business in, from or through Labuan”, care should be taken by clients or investors establishing and structuring a Labuan offshore company especially the location and the manner in which an offshore company’s business is carried out.

8. Prohibition against dealing with Malaysian residents

Unless permitted by LOFSA, a Labuan offshore company is prohibited from carrying on business activities with a resident of Malaysia.29 Resident means a natural person, a citizen or permanent resident of Malaysia or any other person who has established a place of business and is operating in Malaysia.30

A Labuan offshore company that is not to be treated as carrying on business with a resident of Malaysia by reason only that-

a) it maintains a bank account with a bank in Malaysia; b) it hires professionals to do work for it; c) it prepares books and accounts in Malaysia, holds meetings in Malaysia, holds lease of property, holds shares in one or other offshore companies; and d) a resident of Malaysia holds shares in it.

An exemption was recently given by LOFSA in the form of a blanket approval allowing a Labuan offshore company to deal with a resident as follows:

i) carrying on business with a resident, ii) invest in a domestic company, and iii) wholly own a domestic company to conduct offshore business.

The blanket approval is subject to the conditions that i) the Labuan offshore company sends notice (in a prescribed form) to LOFSA not later than 10 days from the date of transaction that took place with the resident, and ii) the transaction undertaken by the Labuan offshore company and the resident (where applicable) has obtained the necessary approval from the relevant domestic regulatory authorities like BNM, SEC, FIC, etc.* The notice should at least specify a) details of the transaction/investment, b) the rationale and advantage of the transaction using a Labuan offshore company including tax benefi ts, etc, and c) total amount and source of funding in the transaction or investment.

Further and pursuant to a clarifi cation31 by LOFSA, the following transactions between a Labuan offshore company with a related Malaysian domestic company or individual or vice versa do not require approval from LOFSA under Section 7(3) (a) OCA 1990;32

29 Section 7(3) (a) OCA 199030 Section 2(1) OCA 199031 This clarifi cation is pursuant to a letter from LOFSA dated 27September 200732 Section 7(3) (a) OCA 1990 states that “No offshore company shall carry on business with a resident of Malaysia except as permitted by the Offshore Banking Act 1990 or by the Registrar.”* It is submitted that approval too must be obtained from the Inland Revenue Board whether or not such dealing will be considered by the Inland Revenue Board as “offshore trading activity” or otherwise

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a) advances or payment made to each other for whatever purpose; b) loan without interest or fees, i.e. loan that does not involve any interest or fee irrespective of the purpose of the loan given; c) loan carrying interest or fee, i.e. loan that involves any interest or fee irrespective of the purpose of the loan given.

The total amount of the loan payment or advance shall not exceed RM100 million in aggregate in a year.

Two companies are related companies if one is the holding of the other, or is a subsidiary of the other or is a subsidiary of the holding company.33 In the absence of any guidelines as to the circumstances in which an individual is related to a Labuan offshore company, it is submitted that at least the director and the shareholder of the Labuan company are individuals related to the Labuan offshore company. It could further be extended to cases where an individual is a director or shareholder of the Labuan offshore company’s parent or subsidiary.

A Labuan offshore company is also prohibited from doing or engaging in any of the following:

a) carrying on banking, insurance, reinsurance or trust company businesses unless licensed to do so; 34 b) carrying on business in Malaysian Ringgit except for paying its administrative35 and statutory36 expenses;37

c) carrying on shipping operation in Malaysia; or d) carrying on any business of a trust company.

33 Section 4 OCA 199034 Section 7(3)(b) OCA 199035 Administrative expenses should include payment of salary, rental, rates, offi ce upkeep and similar expenses.36 Some examples of statutory expenses are taxes, government fees and licence fees.37 Section 7(3) (c) OCA 1990.

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PART I I I : COMPANY MATTERS

9. Lodgement of documents

All documents required to be lodged with the Registrar must be lodged or fi led through a trust company.38 Similarly, every application for any extract or copy of any certifi cate or any documents lodged with the Registrar must be made through a trust company. However a member may apply for a certifi cate, document or extract if they are for his own personal use. In practice, this is rare if allowed at all.

As a measure to enhance LOFSA’s delivery process, the OCA 1990 was amended to enable the Registrar to provide electronic lodgement or fi ling of documents, called the EDSP.39

All trust companies are required to be subscribers of the EDSP. The EDSP is open only to trust companies. A document is deemed to have satisfi ed the requirement for lodgement or fi ling of document if it is transmitted to the Registrar through the EDSP.

A copy or extract of any document electronically fi led or lodged through the EDSP and duly certifi ed by the Registrar as a true copy or extract from that document shall be admissible as evidence in any proceedings with equal validity as the original document.40

The original copies of the documents fi led or lodged electronically through the EDSP shall be kept at the offi ce of the trust company at all times.

10. Share capital

Shares of an offshore company may be in any currency except the Ringgit. The United States Dollar is the most common currency denomination. Capital duty payable is based on the size of authorised capital. There are only three capital fee bands namely:

a) RM1,000 b) RM2,000 and c) RM5,000

An offshore company with authorised capital not exceeding the equivalent of RM50,000 in foreign currency pays RM1,000 as capital fee. An offshore company with authorised capital of RM50,000 or more but less than RM1,000,000 pays capital fee of RM2,000 and an offshore company with authorised capital exceeding the equivalent of RM1,000,000 in foreign currency pays RM5,000. It must be noted that capital fee is a one-time fee.

There is no restriction on the nationality of shareholders and the minimum of one shareholder is required. Bearer share is not permitted so each shareholder must be registered. Register of shareholder is not a public record and the use of nominee shareholder is very common.

38 Section 9(1) OCA 199039 Section 9A(1) OCA 199040 Section 9B

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The issuance of shares is normally dealt with in the Articles and is usually authorised by the directors. The most common type of share is ordinary shares although the use of others like preference shares or founder shares can be employed.

Shares in an offshore company may be paid in full in cash or in kind, partly paid or unpaid. Any signifi cant shares purported to be fully paid issuance must be backed by a statutory declaration verifying the availability of the proof of assets backing the issuance. Such proof may be bank deposit proof, assignment of assets or a statement by an accountant or auditor of the availability of the assets. Without such proof no trust company will want to issue shares of high amount or value.

11. Subscribing for shares

Initial shares may either be subscribed for by the ultimate shareholders or by a trust company. A minimum of one share needs to be subscribed and all shares subscribed must be registered shares. There is no difference between initial subscriber 41 and member as all subscribers are taken as members and details entered in the members’ register. Where an offshore company makes any allotment of shares, the offshore company must lodge a return of allotment with the Registrar within one month of the date of the allotment.42

An offshore company may, by altering its articles, do any of the following:

i) increase its capital by creating new shares; ii) consolidate and divide its shares, whether or not issued, into shares of larger amount; iii) subdivide its shares; iv) convert fully paid shares v) cancel un-issued shares

12. Preference and redeemable shares

An offshore company is not allowed to issue preference shares or convert ordinary shares to preference shares, unless its articles set out the rights of the holders. Such rights should cover right to repayment of capital, right to participation in surplus assets and profi ts, right to receive dividends, right to vote and others.43

An offshore company is allowed to issue redeemable preference shares if the redemption rights and terms are spelt out in the articles. No redemption shall have the effect of reducing the amount of authorised capital of the offshore company. Further, shares shall not be redeemed except out of profi ts and fully paid for.44

41 In most IBC jurisdictions, initial subscribers are the registered agents who are not recognised as members when subscribing shares. No shares need to be issued to subscribers, thus allowing the registered agent to issue shares fi rst to registered owners.42 Section 43(1) OCA 199043 Section 54(1) OCA 199044 Section 55 OCA 1990

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13. Dealing with own shares

An offshore company may provide fi nancial assistance,45 directly or indirectly for the purpose of purchasing its own shares or the shares of any of its subsidiaries or its holding company, if:

a) the lending of money is part of the ordinary business of the offshore company, or; b) the fi nancial assistance is given to its employees or employees of its subsidiaries or holding company, or; c) there is no reasonable ground to believe that the company is not or would not have been insolvent after such assistance, or; d) there is no reasonable ground to believe that the realisable value of the company’s assets will be less than its aggregate liabilities after giving the assistance

An offshore company may also purchase its own shares for the purpose of:

a) eliminating fractional shares; b) paying dissenting shareholders; c) retiring redeemable preference shares.

The above purchases or assistance, whether direct or indirect, shall be made only using the unreserved and unrestricted surplus available.

14. Reduction of capital

An offshore company may, if so authorised by its articles, by special resolution and confi rmed by an order of the court, reduce its capital in any of the following ways:46

a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up; b) cancel any paid up capital which is lost or unrepresented by available assets; or c) pay off any paid up share capital which is in excess of the needs of the company

15. Members

The minimum member is one and can be either a corporation or a natural person. There is no nationality requirement so anyone may be a member. Members of an offshore company shall be liable to the company only to the extent of the amount of shares unpaid on their shares but their liability as members is limited only to the amount unpaid on the shares held by them.47 Initial subscriber or subscribers to the Memorandum of Association are considered as members and thus shares must be issued to them.48

45 Section 48 OCA 199046 Section 53(1) OCA 199047 Section 18(2) OCA 199048 Section 18(1) (e) “ that the subscriber or subscribers to the Memorandum are desirous of being formed into an offshore company in pursuance to the Memorandum and respectively agree to take the number of shares in the capital of the company set out opposite their respective names.”

13

This is so even if the subscriber is a trust company or its offi cer. The better practice is for a subscriber not to be considered a member and for that subscriber to be an authorised offi cer of a trust company.49 This will reduce the amount of administrative work involved in issuing shares and cancelling them later.

An offshore company must keep a register of members50 containing details of each member’s names, nationalities, addresses, date becoming a member, date ceasing to be a member, date of allotment, number of shares allotted and share certifi cate number. The register of members is a prima facie evidence of all matters recorded therein. The register must at all times be kept at the registered offi ce and be made available for inspection by any member free of charge.

16. Registered offi ce of an offshore company

Every offshore company is required to have a registered address and its registered address must be the principal address of a trust company in Labuan.51 Notifi cation must be made to the Registrar of the location of its registered address within one month after incorporation.52

Do remember that the registered address is provided merely to enable the Registrar or a third party to send notices or service of process but the registered address is not given as the main business address. The following must be kept at the registered address:

i) the register of shareholders containing the names and addresses of the shareholders, the number of shares held, the amount paid on each share, the date when a shareholder was fi rst entered on the share register and the date when the shares were registered in his name; ii) a register of directors and secretaries which must contain certain prescribed details such as names, addresses, occupations and dates of taking up and ceasing to hold offi ce.

The offshore company’s name must be displayed at the registered offi ce. If a change of registered address has taken place, a notice must be lodged with the Registrar withinone month of the change.53

17. Name, etc on letters and documents

An offshore company must paint, affi x, and keep painted and affi xed its name in romanised letters in a conspicuous position outside its offi ce or its place of business.54 Under the OCA 1990, the name of the company must appear in legible characters on all business letters, statements of account, invoices, order forms, notices, other offi cial publications, negotiable instruments and letters of credit.

49 Most offshore jurisdictions with business company types like BVI, Brunei, Mauritius, Cayman, Bahamas, etc adopt this practice. In Mauritius and BVI the word “subscriber” or “subscribe” is not used.50 Section 105 OCA 199051 Section 85(1) OCA 199052 Section 85(2) OCA 199053 Section 85(3) OCA 199054 Section 86(1) OCA 1990

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PART IV: COMPANY PROCEDURES

18. Offi cers

Resident director

Every offshore company must have at least one director who may be a resident director.55 Only an offi cer of a trust company or a domestic company wholly owned by the trust company shall be appointed as a resident director of an offshore company.56 A director can be either a corporation or a natural person. Prior to his appointment as a director, a person must give his consent in writing to act as a director.

A resident director shall not be subject to retirement but he may be replaced by another offi cer of the trust company. A resident director is entitled to vote without disclosing his interest as a director in other offshore companies. A resident director is bound by the secrecy provision that prohibits him from disclosing any information he obtains by virtue of his offi ce unless he believes that fraud is or is likely to be practised by the offshore company.

A person is disqualifi ed from being a director of an offshore company if he has, either in Labuan or elsewhere:

a) been convicted of an offence in connection with the promotion, formation or management of a corporation; b) been convicted of any act involving fraud or dishonesty; or c) adjudged bankrupt and is still undischarged.

The fi rst director is normally appointed by the members and where there is casual vacancy, a directorship may be fi lled by a person appointed by the continuing director.

Directors’ duties

Every director of an offshore company must at all times act honestly and use reasonable diligence in the discharge of his duties. He must not make improper use of any information acquired by him through his offi ce and gain advantage, directly or indirectly. A director who is in any way directly or indirectly an interested party in a contract with the company, must declare the nature of his interest. Likewise, where there is a confl ict arising between his duties in the company and his personal interest.

19. Secretary

It is mandatory for an offshore company to appoint one or more secretaries, at least one of whom must be a resident secretary. Only an offi cer of a trust company or a domestic company wholly owned by a trust company may be appointed as resident secretary.

55 Section 87(1) OCA 199056 Section 87(2) OCA 1990

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Such an offi cer must fi rst be a trust offi cer approved by LOFSA. A qualifi ed trust offi cer must have any one of the following qualifi cations:57

i) an advocate and solicitor or a person who possesses a degree in law; ii) a member of the Malaysian Institute of Accountants established under the Accountants Act 1967 or of any other association of accountants approved by the Registrar; iii) an associate or fellow of any association of bankers, insurers or company secretaries or similar body recognised by the Registrar; iv) a person who has served for an uninterrupted period of not less than ten years in any public service or statutory body or in both, or a person who holds a position of trust, equivalent to the aforesaid; or v) any person recognised by the Registrar as a person comparable to any person earlier mentioned.

A secretary of an offshore company shall be appointed by the directors of the company. It is common for a company to have more than one secretary and it is also common to have a corporation act as secretary.

A resident secretary has onerous duties under the OCA 1990. He must be responsible for the compliance by the offshore company with the requirements of the OCA 1990. This includes lodging of documents, maintenance of the company’s records at the registered offi ce and dealing with communications served to the company at its registered offi ce.

A resident secretary shall not be responsible for any penalty provided under the OCA 1990 unless it is for anything done or omitted to be done by him in carrying out his duties. He is also not liable for any damage caused or suffered by any person unless such damage arises by reason of his wilful conduct, default or neglect.

Every offshore company must keep a register of its directors and secretaries which must contain details such as names, identifi cation, residential address or registered address in the case of corporate directors and corporate secretaries.

The register must at all times be kept at the registered offi ce and be made available for inspection by any director, member or auditor of the company, free of charge.

20. Meetings

Annual General Meeting of members

Unlike its domestic counterpart, there is no provision in the OCA 1990 that the fi rst members’ meeting must be held within 18 months from the date of incorporation and subsequently within 15 months. A meeting of members may be convened in such manner, time and place within or outside Labuan as the directors consider necessary or desirable. Therefore it is possible that an offshore company not even hold a members’ meeting in any particular year. A meeting of members may also be convened on a request of ten or more members or members holding not less than one-tenth of the total paid up capital of the company. A meeting may be conducted by members either by attending in person, by participating by telephone or other electronic means.

57 Regulation 2(d) of the Labuan Trust Companies Regulation 1990

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21. Notice of meeting

Unless the articles require a longer notice period, the directors of an offshore company must give not less than seven days’ notice of meetings of members. A meeting held in contravention of the notice requirement is generally still valid if members holding ninety percent majority have waived notice of the meeting.

22. Quorum

Unless otherwise provided in the articles, where an offshore company has more than one member and two or more members are present at a meeting of members, the members present shall be a quorum at the meeting. At the meeting a chairman can be elected by the members present. Every member shall have one vote and it is common to specify in the articles that a chairman shall have a casting vote. Unless otherwise provided in the articles, all shareholders vote as one class and each share has one vote. Action agreed to be taken by members in a meeting may also be agreed by a resolution of all consenting members in writing, or by telex, telegram, telefax, cable or other written electronic communication without the need for any notice.

23. Resolutions

Every company has two groups namely the members and the board of directors. The decisions of the members and the board of directors are refl ected in the resolutions they respectively pass. Resolutions of members and resolutions of directors may be passed during a meeting or passed by way of resolution in writing.

24. Special resolution

A special resolution is one which has been passed by a majority of not less than three-fourths of the members at a meeting of members, of which not less than twenty-one days’ notice specifying the intention to propose the resolution as a special resolution has been duly given.58

A resolution may be proposed and passed as a special resolution even if less than twenty-one days’ notice is given if members who collectively hold not less than seventy-fi ve per cent of the total vote of members agree to it.

Where a resolution requires a special notice, such a resolution shall not be effective unless notice of the intention to move it has been given to the offshore company not less than twenty-eight days before the meeting, and the company shall give its members notice of any such resolution at the same time and in the same manner as it gives notice of the meeting. If that is not practicable, it shall give them notice in any manner allowed by the articles not less than fourteen days before meeting, but if, after notice of the intention to move such resolution has been given to the company, a meeting is called for a date twenty-eight days or less after the notice has been given, the notice, although not given to the company within the same time required by this section, shall be deemed properly given.59

58 Section 101 OCA 199059 Section 102 OCA 1990

17

The following resolution shall, within fourteen days after the passing be lodged with the Registrar: 60

a) special resolution; b) resolution which has been agreed to by all the members of an offshore company, being a resolution which, if not agreed to, would not have been effective unless it has been passed as a special resolution; c) resolution which has been agreed to by all members of the same class of shareholders, being resolution which, if not agreed to, would not have been effective unless passed by some particular majority; and d) all resolutions which effectively bind all members of any class of shareholders whether agreed to by all members of that class or not.

A copy of every resolution passed as above shall be embodied in or annexed to every copy of the articles issued after passing the resolution. 61

25. Keeping of minutes

Every offshore company must ensure that all minutes of meetings of members and minutes of meetings of directors are kept in a book kept for that purpose.62 Such a book must be kept at the registered offi ce of the offshore company but its copy may be kept elsewhere.

26. Annual returns

An offshore company must make an annual return in a prescribed form and contain certain prescribed particulars. The return must be kept up to a date not earlier than fourteen days from the date of lodgement and lodged with the Registrar once in a calendar year, not later than thirty days prior to the anniversary of the date of its incorporation.63

If an auditor is appointed, the annual return lodged with the Registrar must be accompanied by a certifi cate each from the auditor 64 and a director.65 The certifi cate by the auditor must state that:

a) proper accounts for the fi nancial year have been kept, that a balance sheet and profi t and loss account have been prepared and audited; and b) the director giving the certifi cate has been furnished with a copy of those accounts.

Copies of the accounts to which this certifi cate relate to must be kept by the auditors for seven years.

The certifi cate of the director shall state that he has considered the audited accounts and he must certify with or without qualifi cation that:

a) those accounts show the offshore company was solvent on the date it was made up; b) he is unaware of circumstances which render those accounts untrue; and c) no circumstances have occurred since the date on which those accounts were made up would render the company insolvent.

60 Section 103(1) OCA 199061 Section 103(2) OCA 199062 Section 104(1) OCA 199063 Sections 109(1), 109(2) & 109(3) OCA 199064 Section 109(4) OCA 199065 Section 109(5) OCA 1990

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27. Annual fee

Annual fee of an offshore company is payable not later than one month from the anniversary of its incorporation. In practice, a trust company normally asks for this payment three to four months before it is due.

With effect from 1st July 2008, LOFSA’s annual fee charged for new Labuan offshore companies incorporated on or after that date has been reduced from RM2600 to RM1500.

For all existing Labuan offshore companies incorporated on or before 30th June 2008, LOFSA’s annual fees payable are as follows:

1) if the due date (last day to pay annual fee) falls on or before 31st July 2009, LOFSA’s annual fee payable is RM2600 and thereafter RM1500 only. (see example 1)

2) if the due date (last day to pay annual fee) falls on or after 1st August 2009, LOFSA’s annual fee payable is RM1500 only. (see example 2)

Example 1) if a company is incorporated on 5th April 2008, its anniversary is on 5th April 2009. Its annual fee shall be paid not later than 30 days from its anniversary which means by 4th May 2009. This company still pays RM2600 in 2009 but will pay RM1500 in the following years.

Example 2) if a company is incorporated on 5th July 2008, its anniversary is on 5th July 2009. Its annual fee shall be paid not later than 30 days from its anniversary which means by 4th August 2009. This company therefore only pays RM1500 in 2009 and thereafter.

Failure to pay the annual fee within the prescribed period will render an offshore company liable to a penalty. If non-payment persists for more than a year, strike off proceeding may be taken against the offshore company.

28. Register of members

Every offshore company must keep a register of its members which must contain the following:

a) name, nationality, address and any relevant information of each member, and a statement of the shares held by each member, distinguishing each share by its number or by the certifi cate number identifying the member’s holding and of the amount paid or agreed to be considered as paid on the shares of each member; b) the date at which the name of each person was entered in the register as member; c) the date at which any person ceased to be a member during the previous seven years and therefore ceased to be a member; and d) the date of every allotment of shares to members and the number of shares that comprised each allotment.

19

The register shall be prima facie evidence of any matters inserted therein as required or authorised by the OCA 1990.

The register must be kept at the registered address of the company and shall be made available for inspection by members at no charge.

29. Ultra vires transaction

A transaction purported to be done by an offshore company, is not invalid by reason only of the fact that the company was without capacity or power to undertake the transaction. Such lack of capacity or power may only be relied upon under the following circumstances: a) any proceeding against the offshore company by any of its members, debenture holders or trustee of debenture holders to restrain transfer of property to or by the company, b) any proceedings by the company or any member of the company against the present or former offi cers of the company; or c) any petition by the Minister of Finance to wind it up.

30. Common seal

There is no express provision for a common seal to be adopted. The closest to this provision is a requirement to display the name which shall be legible and in romanised letters on thecompany’s seal.66 If this is to be construed as a requirement to have a seal, it is at best indirect. In practice the articles of an offshore company usually provide that the seal can only be affi xed by authority of the board, signed by a director and countersigned by another director or the company secretary. An offshore company may also have a share seal and share certifi cates under such seal shall be deemed to be sealed with the common seal of the company.67 In practice, the use of share seal is uncommon, perhaps limited to an offshore company that issues a large number of shares.

66 Section 86(2) (a) OCA 199067 Section OCA 1990

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PART V: ACCOUNTS AND AUDIT

31. Accounts and Audit

An offshore company must keep proper accounts and other records which can suffi ciently explain the fi nancial position and the transactions undertaken by the company.68 This would mean keeping accounts up to trial balance at the least. Appropriate entries are to be made in the accounts and other records of the company within sixty days of the completion of the transactions to which they relate.69 The records must be kept at the registered offi ce or elsewhere if so directed by the directors. The records must be made available for inspection and kept in such a manner as to enable them to be conveniently and properly audited. An auditor must give written undertaking of non-disclosure before inspecting the records. Failure to keep proper accounting records is an offence under the OCA 1990.

Accounts to be presented before meeting

The directors of an offshore company must lay forth the accounts, audited or otherwise, before the company at a meeting of members not more than nine months after the date the accounts are made up.70 A copy of every account to be presented must be sent to all members not less than seven days before the date of the meeting. A copy of the accounts so presented must be lodged with the Registrar within one month after presentation.

Appointment of auditor

Within ninety days after its incorporation, the directors of an offshore company must appoint a person or persons to be the auditor or auditors of the company.71 Within thirty days ofsuch appointment, a notice together with a written consent from the auditor should be lodged with the Registrar.

An offshore company is not required to appoint an auditor 72 under the following circumstances:

a) it is not a licensed company;73

b) the company does not issue an invitation to the public to subscribe its debenture; c) the company does not issue an invitation to the public to deposit or lend money to it and; d) the members of the company resolve at a meeting of members that the company need not make an appointment in respect of a particular fi nancial year.

68 Section 110 (1) OCA 199069 Section 110(2) OCA 199070 Section 111(1) OCA 199071 Section 113(1) OCA 199072 Section 113A OCA 199073 Section 113A (a) only makes mention of a company licensed under the Offshore Banking Act 1990 and Offshore Insurance Act 1990. However in practice, all licensed companies are required to have their accounts audited.

21

However, it is worth repeating that an offshore company electing to pay tax at the 3% rate will need to have its accounts audited. The accounts must be submitted to the Inland Revenue Board of Malaysia, Labuan Offshore Unit, because the 3% rate is calculated based on the chargeable profi ts74 of an offshore company carrying on an offshore trading activity. The chargeable profi t of an offshore company shall be the net profi ts as refl ected in the audited accounts in respect of a particular year of assessment.75

The same applies to an offshore company that elects to be taxed under the ITA 1967. Such election requires the offshore company to have its accounts audited and to submit the audited accounts to the Inland Revenue Board.

However, an offshore company which carries on an offshore business activity which is an offshore non-trading activity is not required to have its accounts audited. The bulk of the offshore companies in Labuan may come under this category and thus do not need their accounts audited.

Taxation, accounts and audits summary

74 Section 4(1) LOBATA 199075 Section 4(2) LOBATA 199076 The term “offshore trading activity” includes banking, insurance, trading, management, licensing or any other activity which is not an offshore non-trading activity.77 Extension of time to fi le and pay is allowed but must be made before 30th April every year.78 Yes if the accounts are presented at a meeting of members. No if the accounts are not presented yet.79 The term “offshore non-trading activity” refers to activity relating to the holding of investments in securities, stock, shares, loans,deposits and immovable properties by an offshore company on its own behalf.

22

Filing of a/cwith LOFSA?

Filing of a/cwith IRB?

Must a/cbe audited?

Are a/c required to be prepared?

When taxpayable?Tax rateTaxing Statute

YES if electing to pay 3%; NO if paying RM20k

YES if electing to pay 3%;NO if paying RM20k

NO/YES 78

NO/YES

YES

YES

YES

YES YES

YES if electing to pay 3%. NO if paying RM20k

NO NO

On or before 31st May every year77

On or before 31st May every year

N/A

LOBATA 1990

LOBATA 1990

LOBATA 1990

LOC as Trading Company76

LOC as non-trading Company79

3% or RM20k

3% or RM20k

NIL

LOC which is licensed

YES NO/YES YES YESAdvance taxpayablemonthly

ITA 1967 26% ondomestic income; 0%on foreign -sourced income.(25% fromYA2008/2009)

LOC electing to be taxed under ITA 1967

32. Approved auditors & liquidators

The Registrar may approve any person to be an approved auditor.80 No person shall perform the duties of auditor of an offshore company unless he is an approved auditor.81 Application for approval is made to LOFSA using prescribed forms. Currently, the annual fee for an approved auditor is RM200.00. There is no requirement that the auditor must have a presence in Labuan. An approved auditor must give his consent in writing prior to his appointment as an approved auditor for an offshore company. No person shall knowingly accept the appointment as an auditor of an offshore company or prepare on behalf of an offshore company any audit report unless he is an approved auditor.82

The Registrar may approve any person to be an approved liquidator.83 No person shall perform the duties of liquidator of an offshore company unless he is an approved liquidator.84 An approved liquidator must give his consent in writing prior to his appointment as an approved liquidator for an offshore company.85 Application for approval is made to LOFSA using prescribed forms. Currently the annual fee for an approved liquidator is RM200.00. There is no requirement that the liquidator must have a presence in Labuan.

33. Dividends

Other than a provision stating that dividends must be paid out of the profi ts of an offshore company,86 there are no other provisions governing it. Therefore it is common that the company’s articles will stipulate the ways in which dividends may be declared, usually expressed as a percentage of the amount paid up on the shares or nominal amount of the shares.

34. Arrangement & reconstructions

Arrangement and constructions are covered in detail in Part VII of the OCA 1990. ‘Arrangement’ means:87

a) a reorganisation or reconstruction of an offshore company; b) a merger or consolidation of one or more offshore companies with one other or more offshore companies, provided the surviving or the consolidated company remains an offshore company; c) a separation of two or more businesses carried on by an offshore company; d) or the combination of any of those specifi ed in a) to c) above.

80 Section 10(1) OCA 199081 Section 10(2) OCA 199082 Section 11(1) (a) OCA 199083 Section 12(1) OCA 199084 Section 12(4) (a) OCA 199085 Section 12(4) (c) OCA 199086 Section 140 OCA 199087 Section 118(1) OCA 1990

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A plan of arrangement requires approval by resolution of the directors of the offshore company or companies. Upon approval, the offshore company must make an application to the Court for approval of the proposed arrangement.

The Court may make an interim or fi nal order and may set out conditions for the approval. The Court may:

a) determine what notice, if any, is to be given to any person; b) determine whether approval should be obtained and the manner in which such approval is to be obtained; c) determine whether any holders of securities in the company may dissent the proposed arrangement; d) conduct hearing and permit any interested persons to hear; and e) approve or reject the plan as proposed or approve with amendments.

If a plan has been approved, the directors must confi rm the arrangement if they wish to go ahead with the arrangement. The directors of the offshore company shall upon confi rming the arrangement give notice to persons whom the Court has directed and submit the plan of arrangement to those persons for approval.

After the plan of arrangement has been approved by those persons, the articles of arrangement are required to be executed and must contain the plan, the order of the Court approving the plan, and the manner in which the plan of arrangement was approved.

The articles of arrangement must be lodged with the Registrar, after which the Registrar shall issue a certifi cate as evidence of the registration of the arrangement. The arrangement takes effect from the date the article is registered or on any subsequent date not more than thirty days from the date the articles are registered with the Registrar.

35. Takeovers & mergers

The Minister has the power to formulate regulations for the supervision and control of takeover and merger transactions. To date no such regulations have been issued.

36. Winding up, strike off, etc

An offshore company may be wound up voluntarily or by court order.88 A voluntary winding up may be either by way of members’ voluntarily winding up or creditors’ voluntarily winding up. Winding up by court order is initiated by a presentation of a petition by a person entitled to do so.89 The actual winding up process must be conducted by a liquidator approved by the Registrar. Winding up procedures90 in Companies Act 1965 are adopted in full.91 This process takes at least three months or longer.

88 Section 211 Companies Act 1965.89 For example the company itself, trustee or liquidator.90 Part VIII and Part X of the Companies Act 196591 Section 131 OCA 1990

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Strike off due to non-payment of annual fee.

An offshore company is required to pay an annual fee to the Registrar by the annual feepayment date.92 If the company fails to pay the annual fee on or before the expiration of six months from the annual fee payment date, 93 the company is liable to pay up to fi fty percent of the annual fee amount.94 If, on the expiration of one month after the six months period the offshore company still does not pay the annual fee together with the penalty amount, the Registrar may send a notice to the company secretary stating that the offshore company will be struck off should payment not be received within one month of the notice.95

Strike off does not absolve the company from liability, if any. A struck off company merely has its name removed from the Register but in law remains liable for all claims, debts, liabilities and obligations and the liability of its directors and members remain.96 Offshore companies whose names have been struck off shall remain liable for all fees, licence fees and penalties under the OCA and such fees, licence fees and penalties shall have priority over all other claims against the assets of the offshore company.97

The Registrar may refuse to take any action required of him for which a fee is prescribed until all fees have been paid.98 Where the name of an offshore company has been struck off, the offshore company and its directors, members, liquidators and receivers shall not:

a) commence any legal proceedings, carry on business or deal with the assets of the company except to continue proceeding that commenced prior to the strike off; b) defend any legal proceedings and generally make any claims under the name of the offshore company except to defend proceedings that were commenced against the company prior to the date of strike off, and c) act in any way with respect to the affairs of the offshore company.

A company that has been struck off may apply to be registered afresh.99 There is no time limit to apply for re-registration but all fees and penalties outstanding must be settled fi rst.

An offshore company that does not wish to continue business may apply to have its name struck off from the register by making an application in writing to LOFSA. The application shall be made through a trust company and all outstanding fees and penalties must be paid prior to submitting the application.

92 Section 151 OCA 199093 Annual fee payment date is the date which is not later than one month from the anniversary of incorporation.94 RM750.0095 Section 151(3) OCA 199096 Section 151(5) OCA 199097 Section 151A OCA 199098 Section 151B OCA 199099 Section 151C (2) (a) OCA 1990

25

Summary

37. Redomiciliation

An offshore company may, upon obtaining approval from the Registrar and within two months from the date the approval was given, apply for an instrument transferring the offshore company to another country as if it has been incorporated under the laws of that country. On the date of the instrument of transfer, the offshore company shall be become a company under the laws of that country and be domiciled there.100 Companies registered in other offshore jurisdictions can similarly be re-domiciled in Labuan.

100 Section 133(1) OCA 1990

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Types Method

By approved liquidator pursuant to winding up procedure in CA 1965

Application made by trust co after paying all outstanding fees to LOFSA

Suitability

Active company with assets and liabilities

Dormant co.Application to de-register/strike off

Winding up

Effect

Co. officially “dead”

Benefits

Winding up is a clean process

Co. still exists even after strike off

Co. may be re-instated

Company’s name being struck off by LOFSA due to non-payment of annual fee

N/AStrike off due to non-payment of annual fee

Not clean but co. may be re-instated by paying back-dated fees and penalties

PART VI: TAXATION

38. Taxation of an offshore company

Taxation of a Labuan offshore company is governed by the Labuan Offshore Business Activity Tax Act 1990 or LOBATA 1990. An offshore company carrying on an offshore business activity shall be charged to tax in accordance with the provision of LOBATA 1990 for each year of assessment.101 “Offshore business activity “means an “offshore trading” or an “offshore non-trading” activity carried on in or from Labuan in the currency other than Ringgit by an offshore company with non-residents or with another offshore company but does not include shipping operation.102

The term “offshore non-trading activity” refers to activity such as the holding of investments in securities, stock, shares, loans, deposits and immovable properties by an offshore company on its own behalf.103 The term “offshore trading activity” includes banking, insurance, trading, management, licensing or any other activity which is not an offshore non-trading activity.104

With effect from the year of assessment 1996, petroleum operations are now regarded as offshore business activities. The change is aimed at attracting oil exploration companies to use Labuan as a base for their regional oil exploration and other activities. Further, offshore companies that have been approved to invest in domestic Malaysian companies are allowed to hold the investments in Malaysian Ringgit. Such holding does not amount to dealing with Malaysian residents.

With effect from the year of assessment 1999, the defi nition of “offshore business activity” has been extended to cover income from transactions with Malaysian residents through money broking and offshore leasing activities. Further, other activities that involve the carrying on of activities with Malaysian residents or in Malaysian currency would now be subject to approval by the Minister of Finance.

Permitted investments in domestic companies in Malaysian currency are now included in the defi nition of “offshore business activity”. So too charter of ships on a “bare boat” basis will now qualify as an “offshore business activity”.

101 Section 3 LOBATA 1990102 Section 2 LOBATA 1990103 Section 2 LOBATA 1990104 Section 2 LOBATA 1990

27

If an offshore company carries on an offshore trading activity, tax at the rate of 3% is imposed upon its chargeable profi ts105 for the year of assessment.106 Alternatively, this offshore company can elect to be assessed at a fi xed rate of RM20,000 for a year of assessment.107 When making an election, the offshore company will have to fi le statutory declaration in the prescribed form.

Where the fl at rate of RM20,000 is chosen there is no need to fi le audited accounts. However the company should still maintain adequate fi nancial records. An offshore company carrying on offshore business activities that does not have an accounting period for a year of assessment will have to pay RM20,000 and fi le a statutory declaration within three months from the commencement of the year of assessment.108

An offshore company carrying on offshore non-trading activity pays no tax.109 Such an offshore company is still required to fi le a statutory declaration in the prescribed form.110

An offshore company carrying on an offshore trading activity must fi le a statutory declaration and return of profi t within three months from the commencement of a year of assessment. However, the IRB has allowed extension and the fi ling is now made on or before 31st of May every year. Further extensions may be applied for on or before 30th April every year.

Election to pay RM20,000 can be made within 3 months from commencement of year of assessment. When exercising an election, the offshore company must fi le a statutory declaration in the prescribed form. Where an offshore company carries on both an offshore trading activity and an offshore non-trading activity, it will be deemed to be carrying on an offshore trading activity. Thus the offshore company is liable to pay tax at the rate of 3% of its audited net profi t or elect to pay RM20,000.

Any income derived by an offshore company from an activity which is not an offshore business activity will continue to be subject to the Income Tax Act 1967.

Tax rebate is granted to an offshore company for any zakat which is paid in the basis period for that year of assessment.111 The responsibility of tax compliance done by or on behalf of an offshore company lies jointly and severally with the manager, principal offi cer and resident director of an offshore company.112

105 Chargeable profi ts are based on the audited net profi ts as declared in the return of profi ts fi led by the offshore company.106 Section 4 LOBATA 1990107 Section 7 LOBATA 1990108 Section 8(1) LOBATA 1990109 Section 9 LOBATA 1990110 Section 10 LOBATA 1990111 Section 8A LOBATA 1990112 Section 16 LOBATA 1990

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Election to be taxed under the Income Tax Act

With effect from the year of assessment 2008, a Labuan offshore company may now elect to be taxed under the ITA 1967. The election must be irrevocable. Tax is to be paid under the ITA 1967 at the prevailing tax rate and the Labuan offshore company will be governed by all the provisions therein. At least in theory, this should enable the Labuan offshore company to access and benefi t from all the Double Tax Treaties that Malaysia has signed with its 60 plus treaty partners. Since all the income of the Labuan offshore company is foreign sourced, this income when remitted to Labuan/Malaysia will be exempted from Malaysian Income Tax. Not only is the income of the Labuan offshore company tax exempt, dividends from the Labuan offshore company received by the shareholders of the Labuan offshore company are also exempted from tax.

Election procedureThe election must be made and furnished to the Director General of Inland Revenue [DGIR] within three (3) months after the start of the basis period for a year of assessment. For an offshore company where its basis period ends on a day in the Year of Assessment 2008, the election may be made and furnished before 1st August 2008. The election shall be effective for that basis period for a year of assessment (for which the election was made) and subsequent basis periods.The LOBATA imposes tax on a preceding year basis. The ITA 1967 on the other hand imposes tax on a current year basis. Therefore, the accounting period for which the election is made may refer to a different year of assessment under those Acts.An offshore company may make an irrevocable election in the prescribed Form 8 and submit the form to the following:

Inland Revenue Board of Malaysia Labuan BranchUnit E.004 & E.0051st Floor, Podium LevelKompleks Ujana KewanganJalan Merdeka87000 Wilayah Persekutuan Labuan

Compliance requirementUpon election, an offshore company is required to comply with the provisions under the ITA 1967 in the year of assessment in which the election was made and for the subsequent years of assessment. Amongst others, an offshore company is required to: i. fi le an estimate of tax payable, if any, by completing Form CP204 and furnish it to the DGIR not later than 30 days before the beginning of the basis period for that year of assessment; ii. make payments by installment on a monthly basis, commencing from the 2nd month of the basis period for the year of assessment of which an estimate has been furnished; iii. pay their fi nal tax liability by the 7th month from the date following the close of the company’s accounting period; iv. keep documents for ascertaining chargeable income and tax payable; and v. subject to tax audit.

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39. Application for tax resident status

Whilst it is possible for a Labuan offshore company to apply for tax resident status from the Inland Revenue Board, the grant is not as of right but dealt with on a case by case basis. The status is given for one year of assessment only. Thereafter, a new application is required if tax resident status is required in subsequent years of assessment. The Inland Revenue Board has issued a list as to the documents or information required for the application. These are as follows:

a) Memorandum & Articles of Association, b) Minutes of directors’ meeting indicating where meetings are held and what decisions in relation to “management & control” were taken, and c) Photocopies of the director’s travel documents showing his entry into and exit from Malaysia.

Other than the above, it is also considered vital for the application that the particular Labuan company has fi led tax returns, paid all taxes due and have kept its accounting and fi nancial records in good order. The Inland Revenue Board reserves the right to request further information or documents.

40. Personal taxes

Individuals employed by a Labuan Company are liable to personal income tax as prescribed by the ITA 1976. However the following incentives apply;

a) expatriate or non-citizen employed in Labuan in a managerial capacity enjoys 50% abatement on his employment income. Such abatement is available for each year of assessment from 1998 to 2010. b) 50% of the gross income of a non-resident manager working for a Labuan trust company is exempted from tax from the year of assessment 1998 to the year of assessment 2010, c) 50% of the housing and regional allowances for residents working in offshore companies in Labuan will be exempted from tax for the year of assessment 1998 to the year of assessment 2010, and, d) income from fees received by any non-citizen in his capacity as a director of an offshore company for the year of assessment 2002 to the year of assessment 2010 wil be exempted from income tax.

41. Double taxation relief

Labuan is part of Malaysia and thus, may offer the benefi ts of Malaysia’s numerous double tax treaties. Whilst some treaty partners from high tax countries had declined to recognise Labuan offshore companies as being entitled to benefi t under Malaysia’s tax treaties with them, there are many others that recognise these companies. Asian countries on the whole have accepted Labuan offshore companies as being entitled to the benefi ts of Malaysia’s double tax treaties with them, largely because they are themselves eager for inward investment. As recently as mid 2008, the new measure introduced that allowed Labuan offshore companies to elect to be taxed under the ITA 1967 should arguably enable more recognition of Labuan offshore companies by Malaysia’s treaty partners.

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42. Anti-money laundering law

In 2001, one of the most signifi cant developments in Labuan was the passing of the Anti-Money Laundering & Anti-Terrorism Financing Act 2001113 or AML/ATF Act, a piece of legislation which made it a crime to launder money and fi nance terrorism. The AML/ATF Act came into effect on 1st October 2001.

The provisions of the AML/ATF Act cover the following: 1. any person natural or artifi cial, 2. any serious offence, foreign serious offence or unlawful activity whether committed before or after its commencement, and 3. any property whether situated in or outside of Malaysia.

In addition there are provisions governing the establishment and powers of competent authority, reporting, report keeping, customer identifi cation and training by “reporting institutions”, investigation, freezing, seizure and forfeiture of assets by enforcement agencies.

What amounts to money laundering acts?

Under the AML/ATF Act money laundering acts can be broken down into the following:

The act of any person who - a) engages directly or indirectly in a transaction that involves proceeds of an unlawful activity;

b) acquires, receives, possesses, disguises, transfers, converts, exchanges, carries, disposes, uses, removes from or brings into Malaysia proceeds of any unlawful activity; or

c) conceals, disguises or impedes the establishment of the true nature, origin, location, movement, disposition, title of, rights with respect to, or ownership of, proceeds of unlawful activities; where ––

as may be inferred from an objective factual circumstance, the person knows or has reason to believe that the property are proceeds from any unlawful activity; or in respect of the conduct of a natural person, the person without reasonable excuse fails to take reasonable steps to ascertain whether or not the property are proceeds from any unlawful activity.

Unlawful activity is defi ned as “any activity which is related, directly or indirectly to any serious offence or any foreign serious offence. Foreign serious offence means an offence certifi ed to be an offence against a foreign state and that offence if committed in Malaysia would have been a serious offence.”

113 When fi rst passed, the Act was called Anti-Money Laundering Act 2001. Inclusion of anti-terrorism fi nancing came in 2003.

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Money laundering offences

Any person who engages in, or attempts to engage in or abets the commission of money laundering shall be guilty of an offence.114 The punishment for money laundering offences under AML/ATF Act is very severe. Conviction carries a fi ne not exceeding fi ve million in Malaysian Ringgit or to imprisonment not exceeding fi ve years. There are many other lesser degrees of offences like opening an account using a fi ctitious name or failure to keep records within the prescribed time limit.

Terrorism fi nancing offences are;

a) providing or collecting property for terrorist acts,115

b) providing services for terrorist purposes,116 c) arranging for retention or control of terrorist property,117 and d) dealing with terrorist property 118

AML/ATF Act imposes strict obligations on reporting institutions119 in Labuan in combating money laundering and terrorism fi nancing. In particular reporting institutions in Labuan are imposed with the following obligations:

1. Record keeping , 2. Reporting, 3. Identifi cation procedures, 4. Retention of records, and 5. compliance programme

Record-keeping

There is an obligation on the part of the reporting institution to keep records of any transaction involving either Malaysian or other currency where the transaction exceeds a certain amount to be prescribed by the Competent Authority.120 Among the particulars to be recorded are identity and address of customer, identity of accounts, types of transaction, date, time and amount.

114 Section 4 AML/ATF Act115 Section 130N of the Penal Code116 Section 130O of the Penal Code117 Section 130P of the Penal Code118 Section 130Q of the Penal Code119 For the purpose of Labuan “reporting institution” the term means any person who carries on “offshore fi nancial services”. This defi nition is wide enough to cover all companies in Labuan whether licensed or otherwise. But it is submitted that “reporting institution” should be confi ned to licensed companies like trust companies, banks, insurers, fund managers, etc. 120 The Financial Intelligent Unit (FUI) of the Bank Negara

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Reporting obligation

A reporting institution must promptly report to the Competent Authority any transaction exceeding an amount specifi ed AND where the identity of the person involved, the transaction itself or any other circumstances concerning the transaction give rise to suspicion that the transaction involves proceeds of unlawful activity. Under the Act, reporting is to be made to the Competent Authority.

Identifi cation procedure

Reporting institutions are prohibited from opening fi ctitious accounts. Not only are they required to obtain and record information about the true identity of the customers, they are also required to verify, by reliable means, the identity of the customer. This can be verifi ed through the identity card, passport, birth certifi cate or any other offi cial or private documents.

Compliance programme

A reporting institution is required to develop and implement internal programmes that can detect and forestall money laundering and terrorism fi nancing. These programmes must also be implemented in its branches or subsidiaries outside Malaysia. The programmes must include:

1) Procedure to ensure high standard of integrity of its employees, 2) On going employee training such as “know your customer” programme, 3) Independent audit function to check compliance with programme

Effect of the implementation of the Act on Labuan institutions

Though LOFSA is committed to combating money laundering and terrorism fi nancing, the attraction of Labuan as an offshore centre would still be the top priority. While the provisions of the AML/ATF Act are far-reaching, the attractiveness of Labuan to genuine investors should not be compromised. For example, while the AML/ATF Act overrides all secrecy provisions in the prevailing legislation, the overriding is only in so far as there is suspicion that a transaction involves proceeds from a criminal activity. This is justifi ed as reporting of suspicious transaction is one of the fundamental requirements of the AML/ATF Act.

43. Secrecy provisions

Except in the case of criminal proceedings, all proceedings relating to an offshore company shall be heard in camera121 and no details shall be published by any person without leave of the Court.122

In a proceeding for winding up of an offshore company, the Court may order that the records, books and registers of the company and the entries in the Registrar’s register be open to the public for inspection. Such order may be made if the Court is satisfi ed that the company or its offi cer has failed to comply with any provision of the OCA 1990. Such a disclosure order can also be made by the Court if an offshore company or any of its offi cers is convicted by the Court of an offence under the OCA 1990.

121 Proceeding held in camera means proceeding held in a closed door session, normally by a judge in a private offi ce and not in open court.122 Section 149(1) OCA 1990

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No person shall, in Labuan or elsewhere, divulge, attempt or threaten to divulge and induce or attempt to induce another person to divulge any information concerning or touching upon the following in relation to an offshore company, for which he shall be guilty of an offence:

a) the shareholding in or benefi cial ownership of any shares in such company; b) the management of such company; and c) any of the business, fi nancial or other affairs or transactions of the company.

44. Exchange control

Labuan offshore companies enjoy dual residencies namely, as a resident for tax purpose and a non-resident for the Malaysian Exchange Control purpose. This is very unique and the non-resident status enables a Labuan company to open foreign currency accounts with any banks and may remit and receive foreign currencies liberally. As soon as an offshore company is registered, a request is sent by the Registrar to Bank Negara Malaysia for a declaration of non-resident status. Normally this declaration is obtained within 2-3 weeks after incorporation. This declaration states that a particular offshore company is a non-resident for foreign exchange administration purpose subject to the conditions that the company:

a) complies with the provisions stipulated in the Exchange Control Notice ECM 15 pertaining to Labuan International Business and Financial Centre, and b) shall not undertake any transaction with the residents of, or deal in the currency of Israel without the permission of the Controller of Foreign Exchange.

Pursuant to the declaration, the Controller gives permission to an offshore company to:

a) open one or more external accounts in Malaysia solely for the purpose of defraying its administrative and statutory expenses including granting of loan to staff; subject to the requirement that the External Account is to be funded by receipt from resident arising from the sale of foreign currencies or proceeds of credit facilities in RM as permitted in ECM6; b) open one or more foreign currency accounts in and outside of Malaysia; c) buy, borrow, lend or sell foreign currency from an authorised dealer, a Tier-1 merchant bank, a licensed offshore bank or any non-resident.

An offshore company is not permitted to;

a) accept deposits in Ringgit from any resident or non-resident; b) extend or raise any credit facility in Ringgit on behalf of resident or non-resident, other than extension of Ringgit credit facilities to their staff; c) open any Ringgit account except for defraying administrative and statutory expenses; and d) obtain credit facilities in Ringgit from any resident other than permitted in ECM 6.

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PART VII: EXPATRIATE EMPLOYMENT, INCENTIVES AND GUIDELINES

45. Expatriate Employment in Labuan IBFC Expatriate employment in Malaysia falls under the following categories:

Key post: This is for high level managerial post in foreign-owned private companies and fi rms operating in Malaysia. These posts are essential for foreign owned companies to safeguard their business interests in Malaysia. The expatriates employed under this category are generally responsible for determining the companies’ policies, goals and objectives. Examples of posts under this category are Executive Chairman, Chief Executive Offi cer, Managing Director, General Manager, Technical Director, Production Manager, Project Manager, Country Manager or Factory Manager.

Executive posts: This is an intermediate level, managerial and professional posts. The posts require academic qualifi cations, practical experience, skills and expertise related to the respective jobs. The expatriates are responsible for implementing the company’s policies and supervision of staff. Examples of posts under this category are Marketing Manager, Logistics Manager, Quality Control Manager, Professionals such as Chief Engineer, Engineer Manager, Lecturer, Doctor, Architect, etc.

Non-executive posts: These are posts for the performance of technical jobs that require specifi c technical or practical skills. Examples of posts under this category are Welder, Mould Maker, Tool & Die Maker, Manufacturing System Designer, Food/Nutrient Technologist, Fashion Designer, and Specialist in Furniture Design, Heat Setting Technician, Sewing Specialist, and Craftsmen.

To employ an expatriate under any one of the above categories the following processes apply:

1) application for approval of position from six authorised agencies such as:

a) MIDA or Malaysian Industrial Development Authority, b) MDec or Multimedia Development Corporation, c) PSD or Public Service Department, d) CBM or Central Bank of Malaysia, e) SC or Securities Commission, and f) EC or Expatriate Committee.

2) application for approval of work permits from the Immigration Department of Malaysia.

The bulk of the applications for approval goes to the EC or Expatriate Committee. Application for work permit can be submitted to any Immigration Offi ce in Malaysia. As stated earlier, the above posts are in respect of expatriate employment in foreign-owned private companies and fi rms operating in Malaysia. In most cases the entities involved in providing employment are the local Sdn Bhd companies, local fi rms, public institutions, government bodies, operation headquarters and representative offi ces. Invariably the entities under which the expatriates are employed have business dealings with Malaysian residents.

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Labuan IBFC Expatriate Posts:

Expatriate employment under Labuan IBFC however is different and unique in that:

1) application for approval of position is not made to any of the six authorised agencies, but to the Labuan Offshore Financial Services Authority, 2) the employment is strictly under a Labuan offshore company established under the Offshore Companies Act 1990, 3) the Labuan offshore company is prohibited from dealing with Malaysian residents, 4) the application for approval of work permit can only be made to the Department of Immigration’s Offi ce in Labuan, and 5) once the work permit is approved, the expatriate must come personally to the Immigration Department’s Offi ce in Labuan.

If a person is a director or offi cer or shareholder or employee of a Labuan company he can apply for his work permit himself and dependent passes for his dependents. Normally work permits and dependent passes are given for 2 years although it is possible to apply for longer periods to a maximum of 5 years. It is very important that the applicant’s passport and his dependents’ passports have at least two and a half years’ validity at the time the application is made.

Applying for work permit & dependent passes

The fi rst step an applicant needs to do is to establish an offshore company in Labuan.He may be the director of the Labuan offshore company and at the same time, employed by the Labuan offshore company. Once his Labuan offshore company has been incorporated, application for approval of his position can be made to LOFSA. This application can only be made for a Labuan offshore company that conducts “offshore business activities” which include consulting, trading, management, etc, done with foreign parties. He is not permitted to use the Labuan offshore company to conduct business with residents of Malaysia.

If his application is approved, LOFSA will issue a letter to the Immigration Department in Labuan recommending that a 2-year work permit and dependent passes be issued to him and his dependents. Once a recommendation has been made by LOFSA, the rest is a formality.

On the Immigration Department in Labuan’s approval, the applicant and his dependents must travel to Labuan to have their passports endorsed with the work permit and dependent passes. In most cases, this can be done in one day. There are many fl ights to Labuan daily and the travel time is only two and a half hours from Kuala Lumpur.

The duration to obtain a work permit is fairly short. It takes two to three days to incorporate a Labuan offshore company. LOFSA normally takes a week to approve a position and thereafter, the Immigration Department will approve a work permit or dependent pass within fourteen days. Take note that the above time frames assume that the applicant has provided the trust company with full payment and complete documentation.

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Major benefi ts of a Labuan IBFC work permit

1) For carrying on offshore business activity, a Labuan offshore company is subjected to only 3% tax on its chargeable net profi t or RM20,000 which ever is elected for. If using a local Sdn Bhd company, the tax rate is 26%. 2) tax for an offshore company is payable on the preceding year basis, i.e. payable next year whereas a local Sdn Bhd pays tax in advance, 3) A work permit for a minimum of two years and maximum of fi ve years may be obtained, 4) It is not required to have residence in Labuan, 5) An expatriate enjoys 50% tax abatement from the salary received, 6) Director’s fee are exempted from tax 7) The Labuan offshore company may buy property in Malaysia which can either be residential or business use for its employees, directors, etc 8) Identity Card can be applied for immediately after the work permit is issued, 9) There is no need for local partners or local directors. 10) Only one director and one shareholder is required and they can be the same person and of any nationality, 11) The minimum paid up required, in most cases, is US$1.00 only, 12) RM account can be opened to pay for expenses.

Major prohibitions

> No business dealings with Malaysian residents, for example selling goods and services to Malaysian residents. > Not allowed to trade in the local currency Ringgit. But Ringgit account can be opened to pay expenses like salary, rentals and the like.

What is required for the work permit and dependent pass?

Work permit

i. clear copy of passport of the applicant (only pages which have been stamped); ii. four copies of passport sized photographs; iii. curriculum vitae; iv. academic qualifi cations v. company profi le vi. contract of employment stating at least designation, monthly salary of no less than RM3000.00 and acceptance of the employment; vii. letter from the Labuan offshore company on its letterhead addressed to the Immigration Department to apply for the permit and /or passes; and viii. if available, income tax number of the applicant.

Dependent pass i. clear copy of the passport of spouse and/or children; ii. four copies of passport sized photographs of spouse and/or children; iii. marriage certifi cate and/or birth certifi cate of children; and iv. a letter from the work permit applicant requesting dependent pass.

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Fees payable to Immigration:

i) main applicant pays RM300.00 for one year plus RM50 processing fee. ii) dependent pays RM90.00 for one year plus RM50 processing fee iii) journey performed fee, if required is RM500.00

Verifi cation of supporting documents

Supporting documents which are in foreign languages other than English have to be translated and authenticated by the applicant’s own embassy. Educational certifi cate may be certifi ed by an offi cer from an embassy, offi cer from a trust company, notary public and lawyer. Marriage certifi cate MUST be certifi ed by the Embassy only. If an applicant requires an entry visa, he needs to state a Malaysian Embassy where he will apply for the visa. Nationals from some countries may have to leave Malaysia and get their visa from the nearest Malaysian Embassy. However this can be avoided by paying “journey performed” fee of RM500.00. 46. Offshore bank accounts

A Labuan offshore company is granted the status of a Malaysian non-resident for Malaysia Exchange Control purpose.123 Thus it can open foreign currency accounts with any banks, in Malaysia or abroad. Generally a Labuan offshore company can open bank accounts with the following;

1) offshore banks in Labuan (foreign currency accounts only) 2) branch of a domestic bank in Labuan (foreign currency accounts and Ringgit account) 3) branch of a domestic bank in Kuala Lumpur or other cities in Malaysia (foreign currency accounts and Ringgit account) 4) any banks anywhere in the world (foreign currency accounts only)

It is common for Labuan offshore companies to open accounts with a branch of a domestic company in Labuan. Among the reasons are:

i. low initial deposit of around US$5,000 as opposed to at least US$25,000 for offshore banks, ii. account with Internet access, iii. Ringgit account can be opened where Ringgit can be used to meet expenses; iv. corporate credit cards can be obtained, and v. unlike offshore banks, a branch of a domestic bank has retail outlets which is more convenient.

It is also quite common for Labuan companies to open bank accounts with offshore banks in Labuan. However, whilst there are more than fi fty offshore banks in Labuan, not all facilitate the opening of bank accounts. Often the minimum initial deposit is high and the lack of internet banking is a limiting factor. In addition the offshore banks are not by nature retail banks so opening bank accounts is not its main activity.

123 This status is granted to an offshore company by Bank Negara Malaysia a few weeks after its incorporation and after it has submitted prescribed documents to Bank Negara Malaysia

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While a Labuan offshore company may open a bank account with any bank anywhere in the world, this is not a common occurrence. Most likely, this is based on the strength of a client’s existing relationship with a bank overseas.

It is not very common for an offshore company to operate a bank account with a branch of a domestic bank in, say, Kuala Lumpur. This has nothing to do with law or policy but rather the lack of understanding on the part of the local banks regarding structure and the compliance aspect of an offshore company. Many local bankers may hesitate which can delay or sometimes frustrate an applicant. The number of Labuan offshore companies that have opened bank accounts with domestic banks in Kuala Lumpur or other cities in Malaysia is not signifi cant and if they do open an account, it is largely due to the strength of a client’s existing relationship.

The requirements when opening a bank account vary from one bank to another, but generally banks will require the following information and documents from applicants:

a. what currency the bank account is to be in b. the name of the authorised signatories and the mode of signing, c. passport copies verifi ed by a bank offi cer, d. residential address and proof of residence which is normally in the form of recent bank or credit card statement or utility bill, e. curriculum vitae or resume of all directors, signatories, shareholders and benefi cial owners f. countries from which the remittances are expected; g. countries in which funds are transferred to; h. the offshore company’s profi le which can shed light on the company, the nature of its business, sources of funds, expected sales level, evidence of business and purpose of account should be provided to the bank. These include company/product brochure, budget, fi nancial statements, catalogue, invoice, print-out of website, etc. to nature of business stating company profi le or write-up of the company business; i. anticipated annual gross sales; j. list of counter-parties

The following are the most common corporate documents to be submitted by an offshore company; a) certifi ed true copies of Form 7 Certifi cate of Incorporation b) certifi ed true copies of Form 14 Return of Allotment of shares c) certifi ed true copies of Form 20 Notice on Situation of Registered Offi ce d) certifi ed true copies of Form 22 Particular of Directors and Offi cers e) certifi ed true copies of Memorandum & Articles of Association f) Letter of Information from LOFSA or Letter of Good Standing

Note that opening an offshore bank account is rather cumbersome now. However whichever bank is chosen, the trust company should be able to guide the applicant and make known exactly what information and documents are required.

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47. Licensed or regulated business in Labuan IBFC

The following are the types of businesses that require licences and/or regulated in Labuan IBFC:

Under the Offshore Banking Act 1990; i. Offshore banking business ii. Offshore investment banking iii. Islamic banking business iv. Building credit business v. Credit token business vi. Development fi nance business vii. Leasing business viii. Factoring business ix. Money broking

Under the Offshore Company Act a) Company management business

Under the Offshore Insurance Act a) Captive insurance b) Life, general and composite insurance c) offshore reinsurance d) insurance manager e) underwriting manager f) insurance broker

Under the Labuan Offshore Securities Industry Act a) Fund management b) Mutual fund c) Trustee for mutual fund d) Administrator of mutual fund e) Custodian of mutual fund

Under Labuan Trust Companies Act a) Trust company

48. Exemptions & Incentives

Other incentives for Labuan.To promote Labuan as an international fi nancial centre, the Malaysian Government has granted incentives in the form of tax and stamp duty exemptions or fee reduction for individuals and companies carrying out business activities in Labuan.

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Stamp duty exemptionAll instruments which are executed by an offshore company in connection with an offshore business activity shall be exempted from stamp duty previously chargeable under the Stamp Act 1949.

65% abatement for professional services Income

With effect from the year of assessment 1997, 65% tax abatement is granted on income derived from the provision of professional services in Labuan to an offshore company. This abatement is granted for each year of assessment up to year of assessment 2010. “Professional services” mean legal, accounting, fi nancial or secretarial services including the services provided by a trust company.

50% tax abatement for foreign managers50% tax abatement on income earned by non-citizens employed in managerial capacity in Labuan has been extended to the year of assessment 2010. In addition, 50% of the gross income of a non-resident manager working for a Labuan trust company is exempted from tax from the year of assessment 1998 to the year of assessment 2010.

Tax exemption for non-residents

With effect from the year of assessment 1998 to the year of assessment 2010, Malaysian residents working in the public sector and offshore companies in Labuan enjoy 50% exemption on housing and regional allowance.Further, a non-resident is exempted from tax in respect of income from the use of any moveable property by an offshore company licensed under the Offshore Banking Act 1990 or approved by LOFSA to carry out leasing business in Labuan.

Tax exemption for expatriate directors

With effect from the year of assessment 2002 to the year of assessment 2010, any income from fees received by a non-citizen individual in his capacity as a director of an offshore company will be exempted from income tax.

Tax-exempt receipts

The following receipts are exempt from income tax; i. dividends received by an offshore company; ii. 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; iii. distributions received from an offshore trust by the benefi ciaries;

Service tax

Service tax does not apply to Labuan.124 Therefore service providers like trust companies, lawyers and accountants do not have to collect and account for service tax.

124 Section 1(1), 1(1A) Service Tax Act 1975

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49. Summary of Labuan offshore company main features & benefi ts

LABUAN CORPORATE DATA SHEET-SUMMARY

Type of company Offshore Trading or Offshore Non-trading Common or civil law jurisdictions Common Shelf company availability No Time to incorporate 2-3 days approximately Min. annual duty or franchise fee App. US$450 (RM1500.00) Annual return fi lling fee Nil Taxation 3% or app. US$6000 (RM20,000) for trading co. & zero tax for non-trading co. LOC can now elect to be taxed under ITA 1967 and pay local rate of 26% in order to access all of Malaysia’s DTAs. Disclosure of benefi cial ownership No Bearer shares No Standard minimum paid up capital US$1 Standard authorised share capital Approximately US$14,000 125

Permitted currency of capital Any currency except local currency RM Minimum number of shareholders One Minimum numbers of directors One Corporate directors Yes Local directors No Company secretary Yes Company seal Yes Public record of directors No Public record of shareholders No Location of directors meeting Anywhere Location of shareholders meeting Anywhere Telephone board meeting Yes Double taxation treaty access Yes Requirement to fi le accounts Trading co paying 3% Yes/Non-trading No Requirement to prepare accounts Yes Requirement to fi le annual returns Yes Change in domicile Yes Local registered address Yes

125 Company with authorised capital of RM50,000 and below pays a one time RM1,000 capital fee to LOFSA, Company with authorised capital of above RM50,000 but below RM1million pays a one time RM2,000 capital fee to LOFSA, and Company with authorised capital above RM1million pays a one time RM5,000 capital fee to LOFSA.

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LABUAN IBFC-COST AND BENEFIT ANALYSIS

Star Rating

Corporate registration Very effi cient. Name search takes 1-2 hours only effi ciency and name reservation within one day. Company can be incorporated in 1 to 2 days

Availability of name Names are easily available.

Confi dentiality Excellent. Unauthorised disclosure of client’s information is subject to penalty.

Political stability Excellent. Since independence in 1957 Malaysia has enjoyed continued political stability

Maintenance cost Higher by comparison to IBC jurisdictions like BVI, Brunei, Seychelles or Bahamas.

Legal system Based on English legal system. Islamic laws apply to Muslims only in matters involving marriage, custody and inheritance.

Regulator LOFSA is under the Central Bank and is an excellent regulator. LOFSA is also a member of various international regulatory bodies.

Location Located off the coast of Sabah in East Malaysia (which is on the island of Borneo). Connections to Peninsular Malaysia by twice daily fl ights ex Kuala Lumpur.

Exchange control Very liberal

Rate of tax Very favourable, being 3% or RM20,000 whichever is elected. A Labuan offshore company is now allowed to elect to be taxed under the ITA 1967 and pay higher domestic tax rate

Double tax treaty access Malaysia has signed 68 DTAs with its business partners and Labuan being part of Malaysia enjoys access to most of them. Among the few countries that have excluded Labuan from the country’s DTA network are Japan, the UK and Switzerland.

Local banking services Good. Although there are more than 50 offshore banks in Labuan, not all of them take deposits. Initial deposit ranges from US$5,000 to US$500,000. Availability of internet banking is limited.

Time zone Same time zone with major Asian capitals

Reputation Labuan is part of Malaysia which is a major trading nation

50. Business and Regulatory GuidelinesSince its inception in 1990, LOFSA has issued numerous business and regulatory guidelines covering matters pertaining to business activities and conduct of offshore business activities. Notably the most important are guidelines on offshore banking, offshore investment banking, company management, fund management, leasing, insurance, trust companies, and Islamic fi nancial business. All these guidelines can be downloaded from LOFSA’s website www.lofsa.gov.my

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51. Frequently asked questions.

Are names easily available?

Yes. To date there are more than 6500 companies registered in Labuan so there is no problem with choice of names. In addition LOFSA as the Registrar is not subjected to the Government’s gazette restricting the use of certain names. For example, under the domestic registry, the name “Puteri” is gazetted for restricted use, and subject to Ministerial approval. This is not the case in Labuan where the name “Puteri” may be used.

Is a Labuan offshore company considered as non-resident for Malaysia Exchange Control?

Yes. A Labuan offshore company enjoys dual residency status, being a resident of Malaysia for tax purpose and non-resident of Malaysia for Malaysia Exchange Control purpose. On a weekly basis, LOFSA submits to Bank Negara Malaysia the list of newly incorporated offshore companies together with relevant forms. Upon approval BNM will issue a declaration of non-resident status for each company to LOFSA who will then forward the declaration letters to the respective trust companies. This declaration is normally obtained within 2-3 weeks after incorporation.

Can an offshore company elect to be taxed under the Income Tax Act 1967?

Yes, a Labuan offshore company may now elect to be taxed under the Income Tax Act 1967. Such election however is irrevocable and allows the offshore company to enjoy the benefi ts of Malaysia’s double taxation treaties with 68 countries.

Can a company search be done on a Labuan offshore company?

Yes, but company search is basic. The search may be performed by anyone if written authorisation for the search is given by the director of a Labuan offshore company.

Does the recent BNM guarantee on deposits cover deposits with offshore banks in Labuan?

Yes, Bank Negara Malaysia has issued a guarantee for all bank deposits held with banks in Malaysia. The guarantee covers all Ringgit and foreign currency deposits with domestic and locally incorporated foreign banking institutions. Offshore banks incorporated in Labuan are thus covered by the guarantee.

Is the use of bearer shares allowed in Labuan?

No.

What is Letter of Good Standing?

A letter issued by LOFSA confi rming among others, that a company is in good legal standing in that it is duly incorporated, still on the register, is not in the process of merger, consolidation or reconstruction, is not in the process of winding up, re-domiciliation or ceasing business and no proceeding is being brought to strike it off from the register. This letter is normally requested by a bank when an account is to be opened for an offshore company.

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What is Letter of Information?

A letter of information is one issued by LOFSA confi rming, among others, the details of the directors, shareholders, offi cers and nature of business of a Labuan offshore company. The letter also confi rms that the company continues to exist and there is no legal administration process with regards to winding-up or dissolution of the company which has been brought to LOFSA’s attention. This letter is normally used when opening bank accounts. The alternative to this letter is the letter of good standing although the letter of good standing is worded in a more general way.

What is certifi cate of incumbency?

A certifi cate of incumbency is normally issued by a company secretary or a registered agent and not the Registrar. The certifi cate normally gives details of shareholders, directors, offi cers, etc. This certifi cate is rarely used for the opening of bank accounts but to confi rm basic company details to business counter-parties.

What is a bare trust?

This is the most basic form of trust which is commonly used in company management business where shares in an offshore company are held by a trust company in its capacity as nominee or ‘bare trustee’ for the actual benefi cial owner.

What is certifi cate of indemnity?

This basic document is commonly used in company management where a benefi cial owner indemnifi es a nominee director from all risks, damages or liability incurred by the nominee arising from the exercise of his function as nominee director for and on behalf of the benefi cial owner.

Is the use of nominee shareholder allowed?

Yes and this is very common. This works as an added layer of confi dentiality to a benefi cial owner where his name will not appear in the shareholder’s register save for the bare trust.

Is the use of nominee director allowed?

Yes and this is very common. This works as an added layer of confi dentiality to a benefi cial owner whose name will not appear in the director’s register save for the certifi cate of indemnity.

What is an apostille?

This is a method of certifying a document for use in another country pursuant to the 1961 Hague Convention on Legalisation of Foreign Documents. With this certifi cation by apostille, a document is entitled to recognition in the country of intended use, and does not require certifi cation or legalization by the embassy or consulate of the foreign country where the document is to be used. This avoids the use of expensive and lengthy back-to-back legalisation but only available in a country which is a signatory to or has ratifi ed the Convention.

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Can apostille be obtained in Labuan?

No, apostille can only be obtained in a country which is a signatory to or has ratifi ed the Hague Convention on Legalisation of Foreign Documents. Malaysia is neither a signatory nor has it ratifi ed the Convention.

How are the documents of a Labuan company legalised?

The most common is back-to-back legalisation. For example if a certifi cate of incorporation needs to be legalised and used say, in the UK, a copy of the certifi cate must be certifi ed as a true copy by a Notary Public. Then the copy is sent to the Malaysian Consular Offi ce in Putrajaya where a Consular Offi cer confi rms that the signature appearing on the copy is that of the Notary Public. The copy is next brought to the British High Commission in Kuala Lumpur where an offi cer confi rms the signature of the Malaysian Consular Offi cer.

What are the common documents and information required for banking purpose?

The most common documents are 1) Form 7-Certifi cate of Incorporation, 2) Form 14-Allotment of Shares, 3) Form 20-Notice of Situation of Registered Offi ce, 4) Form 22-Particulars of Directors & Offi cers, 5) Memorandum & Articles of Associations, 6) Letter of Information or Letter of Good Standing, 7) bank reference, 8) business profi le, 9) resume of directors, 10) and sometimes qualifi ed intermediary certifi cate or letter of introduction from the trust company.

Which courts adjudicate legal matters involving Labuan offshore companies?

Here, ‘Court’ means a High Court or a judge thereof. The court adjudicating legal matters involving Labuan offshore companies is the High Court of Sabah & Sarawak, sitting in Labuan.

Who is the company registrar in Labuan?

The Registrar of Companies is LOFSA

What is the procedure to wind up a Labuan offshore company?

An offshore company may be wound up voluntarily or by the court. The actual wind up process must be conducted by a liquidator approved by the Registrar. The OCA 1990 does not provide for winding up procedures but winding up procedures in the Companies Act 1965 are adopted in full. This process takes at least six months or longer.

How long does it take to reserve a name?

One day or less.

How long does it take to register a Labuan offshore company?

One to two days.

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Can a tax resident certifi cate be obtained in Labuan?

Yes, by making an application to the Inland Revenue Board, Labuan branch, and by submitting among others, Memorandum & Articles of Association, minutes of directors’ meeting indicating where meetings are held and what decisions in relation to “management & control” were taken, and photocopies of the director’s travel documents showing his entry into and exit from Malaysia.

What is proof of residence and when is it normally required?

Proof of residence tells where a person normally lives and this can be in the form of a bank statement, credit card statement and utility bills. Proof of residence is commonly required by a trust company before entering into a business relation with a client and by a bank before an account can be opened.

What is re-domiciliation?

Re-domiciliation is the transfer of one company from another as if the transferred company has been incorporated in the other country.

Can a Labuan company re-domicile?

Yes, by obtaining approval from the Registrar and thereafter apply for an instrument transferring the offshore company to another country.

Is there a standard table for M&A?

No. Most trust companies use their own standard M&A versions although variations may be made.

Is stamp duty payable?

Stamp duty is exempted. All instruments which are executed by an offshore company in connection with an offshore business activity shall be exempted from stamp duty which would otherwise be chargeable under the Stamp Act 1949.

Can a Labuan offshore company deal with a resident?

Generally no but an exemption was recently given allowing a Labuan offshore company to deal with a resident provided i) the LOC sends notice (in a prescribed form) to LOFSA not later than 10 days from the date of transaction with the non-resident took place, and ii) the transaction undertaken by the LOC and the resident (where applicable) has obtained necessary approval from relevant domestic regulatory authorities like BNM, SEC, FIC, etc. The notice should at least specify a) details of the transaction/investment, b) the rationale and advantage of the transaction using an LOC including tax benefi ts, etc, and c) total amount and source of funding in the transaction or investment.

Can a Labuan offshore company open a Ringgit bank account?

Yes, it is permitted pursuant to the non-declaration status granted by BNM and ECM 15 where such account is solely for the purpose of defraying administrative expenses.

Can a Labuan offshore company open a bank account with a domestic bank?

Yes, both Ringgit account and foreign currency accounts.

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What is the maximum authorised capital fee payable?

There are three bands of authorised capital fees in Labuan. 1) RM1,000 for an offshore company with authorised capital not exceeding the equivalent of RM50,000 in foreign currency; RM2,000 for an offshore company with authorised capital exceeding the equivalent of RM50,000 but less than the equivalent of RM1million in foreign currency and RM5,000 for an offshore company with authorised capital exceeding the equivalent of RM1million.

Is a Labuan company required to hold its fi rst AGM within 18 months?

There is no equivalent provision in the OCA 1990 so there is no need to hold the fi rst AGM within 18 months and thereafter within 15 months.

Can a secretary other than a resident secretary be appointed?

Provided the fi rst secretary is a resident secretary (who is an offi cer of a trust company) any number of additional company secretaries may be appointed.

Can strike off be applied?

A Labuan offshore company may apply for strike off voluntarily or get its name struck off from the register due to non-payment of the annual fee. It is possible to re-instate a company after being struck off and there is no time limit for re-instatement.

When is audit not required?

When an offshore company is carrying on offshore business activity which is a non-trading activity. This usually applies to passive businesses like investment holdings.

When is audit required?

When an offshore company chooses to pay 3% tax or is licensed.

What is an offshore non-trading company?

This is a misnomer and an over simplifi cation which is often used when describing an “offshore company carrying on an offshore business activity which is an offshore non-trading activity.” Offshore non-trading activity means an activity relating to the holding of investments in securities, stock, shares, loans, deposits and immovable properties by an offshore company on its own behalf.

What is an offshore trading company?This is a misnomer and an over simplifi cation which is often used when describing an “offshore company carrying on an offshore business activity which is an offshore trading activity.” Offshore trading activity includes banking, insurance, trading, management, licensing or any other activity which is not an offshore non-trading activity.

When must a Labuan offshore company fi le its tax return?

LOBATA provides that an offshore company must fi le its return of profi t within a period of three months from the commencement of a year of assessment. Year of assessment means calendar year. Therefore the deadline to fi le is 31st May every year. However from 31st of March 2006, the Inland Revenue had agreed to grant all Labuan offshore companies a standard extension to fi le tax returns up to 31st May every year.

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