Article on New Labuan Laws

8/2/2019 Article on New Labuan Laws

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NEW LABUAN LAWS

New laws have been passed for the Labuan International Business and Financial Centre(Labuan IBFC), an international financial centre established by Malaysia in the island ofLabuan since 1990.

In December 2009, the Parliament of Malaysia passed a set of new legislation forLabuan IBFC. This represents the ongoing effort by Malaysia to ensure that the LabuanIBFC laws remain competitive and relevant, especially in light of the increasing worldscrutiny on international or offshore financial centres.

The new laws have been gazetted by the Minister of Finance and have come into effecton 11 February 2010.

The new legislation comprise the following Acts -

Offshore Companies (Amendment) Act 2010 (Act A1367);

Labuan Offshore Trusts (Amendment) Act 2010 (Act A1368); Labuan Offshore Financial Services Authority (Amendment) Act 2010 (Act

A1365); Labuan Offshore Business Activity Tax (Amendment) Act 2010 (Act A1366);

Labuan Financial Services and Securities Act 2010 (Act 704);

Labuan Islamic Financial Services and Securities Act 2010 (Act 705);

Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 (Act707); and

Labuan Foundations Act 2010 (Act 706).

The Labuan Trust Companies Act 1990, Offshore Banking Act 1990, Offshore InsuranceAct 1990, Labuan Offshore Securities Industry Act 1998 and Labuan Offshore Limited

Partnerships Act 1997 are repealed.

A general amendment across the new laws is to drop the use of the word offshore,including in the name of the remaining Acts. Hence, the names of the existing Acts willbe changed to the Labuan Companies Act 1990, Labuan Trusts Act 1996, LabuanBusiness Activity Tax Act 1990 and Labuan Financial Services Authority Act 1996.Similarly, in the new Acts, terms are defined (or redefined) without the word offshore. Inline with these changes, the Labuan Offshore Financial Services Authority (LOFSA) isnow known as the Labuan Financial Services Authority (Labuan FSA).

This paper sets out a summary of the key changes in the new legislation in two Parts.Part I discusses the overall key general amendments and Part II provides a shortsummary of amendments to the specific Acts.

Part I General Amendments

1. New types of Legal Entities

There are new types of legal entities that may be established in Labuan.


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Under the old laws, the legal entities that may be established in Labuan are offshorecompanies, offshore trusts (including unit trusts), offshore partnerships and offshorelimited partnerships. Foreign companies may register as a foreign offshore company.Whilst over the years these entities have served the businesses being conducted atLabuan IBFC well, it was generally felt that in order to be competitive with otherinternational financial centres, there was a need to statutorily provide for new types of

legal entities that have gained popularity in many jurisdictions in the world. They are asfollows.

Labuan protected cell company

This is a Labuan company established under normal company rules with the ability tosegregate its assets and liabilities into different cells, separated from the general assetsof the protected cell company. This structure allows for increased protection to investorsas the assets of each cell is protected from the liabilities of the other cells. Where aliability arises which is attributable to a particular cell of a Labuan protected cellcompany, only the cell assets attributable to that cell shall be used to satisfy the liability.

Labuan protected cell companies are only permitted to carry on the business of mutualfunds (conventional or Islamic) or Labuan insurance (including captive insurance)business (conventional or takaful).

Labuan protected cell companies may be incorporated under the amended LabuanCompanies Act 1990 or converted from existing Labuan companies or foreign Labuancompanies with the approval of the Labuan FSA. The Labuan protected cell company isa separate legal entity and can have an unlimited number of cells. It shall have 2categories of assets, the cell assets (comprising the assets held within the protectedcells) and the general assets (assets other than the cell assets). Cellular and non-cellular assets must be kept separate. Cell dividends may be declared and distributed inrelation to each cell. Separate registers shall be kept with respect to the shareholders of

each cell. Separate committees may be appointed to manage the business of particularcells.

The provisions on Labuan protected cell companies are found in a new Part VIIIB of the(renamed and amended) Labuan Companies Act 1990.

Labuan limited liability partnership (LLP)

The LLP model hardly needs any introduction as it is already available as a more flexiblestructure for doing business in many countries including the United Kingdom, Australia,Canada, Japan, Jersey and Singapore. It is also being considered by the CompaniesCommission of Malaysia and is the subject of a consultative paper issued by them.

Since 1997, Labuan has the limited partnership (LP) which is a structure that haselements of both a partnership and a company the general partner bears unlimitedliability whereas each limited partner, who does not participate in the management of thebusiness, bears liability limited to the amount of their contribution (or as the partnershipagreement may specify).

To a certain extent, the LLP in Labuan is similar to the LP in that it is also intended tohave elements of both a partnership and a company. However, unlike the LP, it has a


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legal personality separate from its partners and can hold assets in its own name, cansue and be sued in its own name and has perpetual succession. Every partner of an LLPis liable only to the extent of its respective contributions to the LLP and each partnerenjoys limited liability, similar to shareholders of a company. Unlike a company wherethe management lies with the directors, all partners in a Labuan LLP may be involved inthe management of the business directly. The relationship amongst the partners is

provided for in the partnership agreement. The LLP shall have a designated partner whoshall be answerable to the Labuan FSA for the doing of all acts and things as arerequired to be done by the LLP.

Like its counterparts in other countries, the Labuan LLP is much less regulated than theLabuan company. There is no requirement to file annual returns and it is only required tofile an annual solvency declaration once in each calendar year confirming that it issolvent.

A Labuan LLP may be registered under the new Labuan Limited Partnerships andLimited Liability Partnerships Act 2010 or converted from a Labuan LP or a Labuancompany, subject to certain conditions being met.

The provisions on Labuan LPs previously set out in the repealed Labuan OffshoreLimited Partnerships Act 1997 are now found in Part II of the Labuan LimitedPartnerships and Limited Liability Partnerships Act 2010, whilst the provisions onLabuan LLPs are found in Part III of this new Act. Under the new Labuan IslamicFinancial Services and Securities Act 2010 (LIFSSA), Part X provides for the formationof the Labuan Islamic LP and the Labuan Islamic LLP, being such partnerships whoseestablishment is undertaken expressly with a view that their respective aims andoperations shall be in compliance with Shariah principles.

Labuan foundation

A foundation is the civil law alternative to a common law trust. It is created by a founderwho transfers assets to the foundation, to be administered by a council (supported byofficers), for the benefit of and eventual distribution to, beneficiaries. It was usedhistorically by wealthy European families for the transfer of their assets to beneficiaries.The concept of foundations has since, in both civil law and common law countries,evolved into an effective asset protection and wealth management vehicle, generallyregarded as a more flexible structure to the common law trust.

Under the Labuan Foundations Act 2010, a Labuan foundation is formed when a founderregisters a charter by which the founder undertakes to provide assets for the benefit ofthe beneficiaries. The foundation assets will be managed by a council consisting ofindividuals or body corporates, in accordance with the terms in the charter and a set of

rules or articles providing more detailed terms on how the foundation is to be managed.

The Labuan foundation is a separate legal entity and the assets provided by the founderto it are held in the foundations own name and cease to be assets of the founder. Theproperty of the Labuan foundation shall be exclusively managed in accordance with thecharter for the attainment of the purposes of the foundation.

Unlike a trust, a foundation is administered according to contractual terms rather thanfiduciary principles. A foundation is managed at two levels the higher level being the


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council which is responsible for ensuring that the foundation complies with the terms ofthe charter and applicable law as well as the general supervision of the management ofthe Labuan foundation by its officers, and the lower level being the officer or officers whoshall administer the foundation to achieve the purposes or objects of the foundation.

Under the new LIFSSA, Part IX provides for the formation of the Labuan Islamic

foundation, being a foundation whose establishment is undertaken expressly with a viewthat its aims and operations shall be in compliance with Shariah principles.

Labuan Special Trust

The Labuan Special Trust is a trust designed to enable owners of a Labuan company ora Labuan LLP to establish a trust to specifically hold shares or partnership interests inthe Labuan company or Labuan LLP. The trustee holds these shares (designatedshares) while management of the Labuan company continues to be carried out by thedirectors (or limited partners, in the case of the LLP) without any power of intervention bythe trustee. It is modeled after the Virgin Islands Special Trusts Act 2003 (VISTA)enacted in the British Virgin Islands.

Under the provisions of the amended Labuan Trusts Act 1996, the designated trustshares must be shares of a Labuan company and the trustee must be a Labuan trustcompany. The trustees primary duty is to retain the shares and this duty takesprecedence over the duty to preserve or enhance the value of the trust fund. The trusteeis not accountable for losses arising from holding the shares, in particular losses arisingfrom factors such as absence or inadequacy of financial return or decrease in value ofshares. However, the trustee may intervene in specific circumstances. If an interestedperson (the beneficiary, enforcer or protector) has complaints about the conduct of thecompanys affairs on a permitted ground (permitted grounds are specified in the trustinstrument), he may call upon the trustee to intervene (an intervention call). The trusteemay then take appropriate action. The trustee has no fiduciary responsibility in respect of

the assets and affairs of the company except when he intervenes based on anintervention call. Voting or other powers in respect of the trust shares will not beexercised by the trustee so as to interfere in the management of the company. Theconduct of the companys business, including decisions regarding payment of dividends,is left to the directors of the company. The new provisions also enable the settlor of aLabuan Special Trust to prescribe special rules on how the trustee should exercise hisvoting powers in relation to the appointment, removal and remuneration of directors.

Essentially, the Labuan Special Trust, unlike other trusts, allows the management of thetrust to remain in the directors of the company and not the trustee and it is a form ofretention of powers of the settlor.

The provisions on the Labuan Special Trust are found in a new Part IVA of the (renamedand amended) Labuan Trusts Act 1996.

2. Removal of Malaysian Restrictions

The old restriction on Labuan companies to hold shares, debt obligations and othersecurities in Malaysian companies is removed through the deletion of section 147 of theOffshore Companies Act 1990. There is no notification or other requirement for suchholding. Malaysian residents are also permitted to enter into transactions with Labuan


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entities with only a requirement, in limited circumstances, to notify the Labuan FSAwithin ten working days of such transaction.

Malaysian residents are also now permitted to register LPs and LLPs in Labuan, as wellas establish Labuan trusts and foundations, and the Islamic equivalent entities under thenew LIFSSA. Malaysian residents are also permitted to be the beneficiaries of such

trusts and foundations.

3. Disclosure of information of Labuan entities

In line with the requirements of the Organization for Economic Co-operation andDevelopment (OECD) on the exchange and disclosure of tax information amongstcontracting countries, the Labuan laws now permit the disclosure of such informationrelating to any Labuan entity to countries which Malaysia has a double taxation treatywith (which as of 19 January 2011, totals up to 69 countries). In the latest progressreport issued by the OECD on 18 February 2010, Malaysia is classified in Category 1under the list of countries which has substantially implemented the internationally agreedtax standards (commonly known as the white list). This puts Malaysia in the same

category as other major financial centres like Australia, Japan, United States,Switzerland and Singapore.

Part II Specific Amendments

1. Amended and Renamed Labuan Companies Act 1990

Under the amended Labuan Companies Act 1990, the changes are generally to keep upwith modern legal developments in other countries and accommodate the conduct ofbusiness in Labuan which pace has overtaken existing law.

The provisions on public offers of shares and debentures of offshore companies formerly

found in Division 1 of Part IV are deleted entirely and replaced by new provisions onoffers of securities in Part II of the new Labuan Financial Services and Securities Act2010 (LFSSA) and Part III of the new LIFSSA.

These changes include the abolishment of the concepts of par value and authorizedshare capital with respect to Labuan companies, permitting companies limited byguarantee and the introduction of protected cell companies as discussed in Part I above.There is greater ease in carrying out share buyback and capital reduction exercisesthrough the satisfaction of a solvency test. New provisions for the statutoryamalgamation of Labuan companies and foreign corporations are introduced. There isalso now a simplified method of voluntary winding up procedure for solvent companies.

In line with the greater ease and flexibility permitted in the amended Act, new provisionsrelating to directors duties are included which, among other things, expressly providethat directors shall act in good faith in the best interest of the company and shallexercise reasonable care, skill and diligence with the knowledge, skill and experiencewhich may reasonably be expected of a director having the same responsibilities. Thereare also provisions clarifying the requirements as well as matters that a director may relyon, for a director to satisfactorily make a business judgment in matters concerning thecompany.


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2. Amended and Renamed Labuan Trusts Act 1996

Under the amended Labuan Trusts Act 1996, the key changes include the ability of thesettlor of Labuan trusts to reserve certain powers including the power to revoke oramend the terms of the trust, the power to apply income or capital of the trust property,the power to give binding directions to the trustee relating to the trust property and the

power to appoint or remove any trustee, enforcer or beneficiary.

Greater prominence and statutory protection is given to the purpose trust, which wasformerly recognized only under the old section 4(3), and it is expressly provided that thepurpose trust shall not be rendered void merely by uncertainty in its objects or mode ofexecution. The appointment of an enforcer for a purpose trust is now made mandatory.New provisions on the powers, obligations and rights of enforcers are introduced. Thepowers and duties of trustees are clarified through new provisions on, for example,obtaining and considering proper advice prior to exercising a power of investment.

A Labuan trust shall continue to exist for an unlimited period i.e. in perpetuity unlessotherwise stated in the terms of the trust.

3. Amended and Renamed Labuan Business Activity Tax Act 1990

Taxation in Labuan remains unchanged at 3% for a year of assessment upon thechargeable profits of a Labuan entity carrying on Labuan trading business activity(previously defined as offshore trading business activity) or RM20,000 as it may elect.There remains to be no tax chargeable for a year of assessment of a Labuan entitycarrying on Labuan non-trading business activity (previously defined as offshore non-trading business activity). Pursuant to the amendments to the Labuan OffshoreBusiness Activity Tax Act 1990 (under Chapter V of the Finance Act 2007 (Act 683), aLabuan entity continues to be able to elect to pay tax for a year of assessment under theIncome Tax Act 1967 in respect of its Labuan business activity (previously defined as

offshore business activity) if it chooses to, instead of under this Act.

The amendments in this Act are mainly consequential amendments to the amendedLabuan Companies Act 1990 and ensuring that all new types of Labuan entities underthe amended Acts and new Acts are captured (and therefore can enjoy) the taxtreatment under this Act. The list of Labuan entities are found in a new Schedule to theAct.

4. Amended and Renamed Labuan Financial Services Authority Act 1996

Under the amended Labuan Financial Services Authority Act 1996, as aforementioned,the LOFSA has been renamed as the Labuan FSA. The key changes in this Act deal

with the increased supervisory and enforcement powers of the Labuan FSA, as well asits right to disclose information that it obtains from or on the Labuan entity, in light ofincreasing world scrutiny on offshore financial centres and the increased importance andemphasis placed by international organizations like the OECD and the InternationalMonetary Fund on the ability of the governing authority to disclose information in order tocombat money-laundering and terrorism financing activities.

The Labuan FSA is, under the amended section 28B, permitted to disclose informationthat it obtains from or on the Labuan entity in certain circumstances, including (a) to the


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(Malaysian or foreign) home supervisory authority of the Labuan entity if such homesupervisory has the necessary provision in its constituent documents or correspondinglaws to safeguard such information from unlawful disclosure, and (b) to the domestic lawenforcement agency (meaning an agency that is responsible in Malaysia for theenforcement of laws relating to the prevention, detection and investigation of anycriminal offence) when the Labuan FSA has reasonable suspicion that a criminal offence

is about to be committed or is being committed or has been committed provided that thedomestic law enforcement agency has executed a secrecy undertaking on theinformation provided. Other events allowing the Labuan FSA to disclose informationinclude pursuant to a court order, and in giving effect to any legal arrangement ormemorandum of understanding or agreement with any foreign government or homesupervisory authority entered into by (i) the Government of Malaysia (for example doubletaxation treaties), (ii) the Labuan FSA with the approval of the Minister or (iii) anyrelevant domestic law enforcement agency with the approval of the relevant minister.

New powers include the Labuan FSAs power of entry, search and seizure for thepurpose of investigating any offence and the power to examine and search persons. TheLabuan FSA may also assist other authorities in Malaysia by supplying to other

authorities any information that it has with respect to Labuan entities and allow ininvestigation or prosecution.

5. Consolidation of the securities and financial services law under the newLabuan Financial Services and Securities Act 2010 and the Labuan IslamicFinancial Services and Securities Act 2010

The repealed acts that previously provided for the licensing of financial activities, theLabuan Trust Companies Act 1990, Offshore Banking Act 1990, Offshore Insurance Act1990 and Labuan Offshore Securities Industry Act 1998 (Repealed Acts) and theprovisions on the offer of shares and debentures previously found in Division 1 and 2 ofPart IV of the Offshore Companies Act 1990, as well as the licensing of company

management activities in Part VIIIA of the Offshore Companies Act 1990, areconsolidated into the new LFSSA and, for purely Islamic activities and offers, the newLIFSSA.

Under the new Part II of the LFSSA, the Labuan FSAs approval is required for an offerof securities in Labuan unless it is an excluded offer. The excluded offers include privateoffers (where offers are made to a restricted circle of 50 or less persons, which is anincreased number from the previous 20 persons limit), sophisticated offers and mutualfund offers. These provisions are mirrored in Part III of the LIFSSA.

While the substantive provisions on the licensing of activities previously set out in theRepealed Acts generally remain, a key change is that all applications for banking and

investment banking licences no longer need the approval of Bank Negara Malaysia(Central Bank of Malaysia) and will now be approved by the Labuan FSA. Another keychange is that, in addition to the fund management activities, the activities of securitiesdealing and investment advice are now also licensable activities in Labuan. Under theLIFSSA, it is also now possible to obtain banking, securities or insurance licences forpurely Islamic banking, Islamic securities and takaful activities only.

In addition, the new legislation has introduced the licence for a private trust company.This is a company carrying on trust company business for a single family trust or a group


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of related trusts and does not have to be licensed as a Labuan trust company. Thisprivate trust company cannot offer trust services to the general public but is incorporatedfor the purpose of acting as trustee of a single trust, or a group of related trusts.

6. Shariah law framework

The LIFSSA is a new Act that aims to provide a consolidated and comprehensiveregulatory framework for Shariah compliant businesses in the Labuan IBFC.

The LIFSSA provides for a Shariah Supervisory Council which shall be appointed by theLabuan FSA to be the authority in ascertaining Islamic law and advising on any Shariahissue for any business regulated or supervised by the Labuan FSA. The LIFSSA alsocontains provisions on the offer of Sukuk, the licensing of Islamic banking and takafulmatters, securities dealing and investment advice, the establishment of Islamic privateand public funds, the registration of Islamic trusts, Islamic foundations and Islamic LPand LLP as well as the recognition of an Islamic self-regulatory authority in the form of aShariah adviser or Shariah advisory board.We will be happy to advise you in greater detail on the new laws and the impact oropportunities it may present to your business. Kindly contact Chua Wei Min, director ofZI Labuan Trust Company Limited for further details.

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