Feature: Labuan IBFC – the gateway to Asia-Pacific

Labuan International Business and Financial Centre (Labuan IBFC) is seeing its comprehensive midshore solution reap results as new businesses soared 12.5% last year. Pedro Gonçalves explains the background to this success.

With 1059 new companies mostly from Japan, China and South Korea, Labuan IBFC is also making the most of its location, strategically located in the heart of Asia.

Anchored by a simple and attractive tax system, it offers a wide variety of business and investment structures to boast and promote cross border transactions and wealth management.

“Wealth management, in particular, offers a unique value proposition given that it is the only international financial centre in Asia to offer private foundations and special purpose trusts” – Muhammad bin Ibrahim, the former governor of the Central Bank of Malaysia
In a press release statement, Labuan Financial Services Authority said Labuan IBFC’s trust and corporate service providers increased by 11.5% year-on year amounting to 58 trust companies including granting six new licences in 2018.

It added that Labuan’s insurance sector also saw a growth of 19.1% to $1.7bn in insurance premiums written, of which 64.7% were foreign insurance businesses.

Being located off the coast of East Malaysia – also know as Borneo coast – on an island named Labuan, in the heart of Asia Pacific, has allowed it to become a connectivity hub for Asian businesses to continue tapping into opportunities in the region.

Its location shares the same time zone as many large Asian cities and financial hubs such as Singapore, Hong Kong, Beijing and Shanghai.

“The overarching growth last year underscored Labuan IBFC’s growing prominence as a regional financial hub, facilitating intra-Asian trade, investments and asset intermediation,” the report said.

Labuan FSA director general Danial Mah Abdullah said the centre continued to be an attractive destination among non-resident businesses fuelled by its robust business policies and the expansion and deepening of Labuan IBFC’s intermediation role.

“Yes, we are confident of recording another double-digit growth [in new company incorporation] this year, if not at a normal rate at eight to 10% growth recorded in the past 10 years.

“Labuan IBFC remains a preferred jurisdiction for investors seeking business expansion in the region, in tandem with the growing pace and potential of Asia’s economies,” he said during a meeting with the press.

Labuan banking sector’s total assets increased by 8.4% to $55bn, while total loans rose by 19.1% to $33. 2bn.The report said loans granted to non-residents accounted for 59.7%, with most from the Asia Pacific region.

Islamic banking business continued to grow in financing and customer deposits, with total assets grew 2.4% to $3.2bn, and total financing up by 8.4% from $2.7bn.

CATERING TO THE UNIQUE NEEDS IN ISLAMIC WEALTH MANAGEMENT

With the mission of striking the perfect balance between client confidentiality and compliance with international best standards and practices, Labuan IBFC not only provides Islamic banking services but was the first financial centre to meet the unique needs in Islamic wealth management.

It has available a complete suite of Islamic wealth management structures and solutions that includes a Shariah Supervisory Council that adds an extra layer of comfort to businesses and investors that seek Shariah-compliant financial services.

“Wealth management, in particular, offers a unique value proposition given that it is the only international financial centre in Asia to offer private foundations and special purpose trusts, including Islamic foundations or waqf,” Muhammad bin Ibrahim, the former governor of the Central Bank of Malaysia (Bank Negara Malaysia), said about Labuan IBFC.

The private client waqf foundations have attracted interest from investors in Asia Pacific, such as Singapore, as well as Jordan and Saudi Arabia.

Labuan IBFC is the first jurisdiction in the world to introduce the ability to utilise the concept of waqf in wealth preservation and management using contemporary and internationally recognised foundation laws. The financial centre is also looking at the new frontier that Islamic fintech presents.

REPOSITIONING LABUAN IBFC

Established in 1990, since 2008 the jurisdiction has undergone a rebranding and has moved beyond banking, capital markets, leasing and insurance to also include protected cell companies, partnerships, trusts, foundations and an international shipping registry.

 It has even become the financial hub of choice for players in niche financial services such as aircraft and oil and gas leasing services, reinsurance and captive insurance.

The game changing rebranding also included repositioning it from an offshore to a midshore centre to give a distinct value proposition that distinguishes Labuan IBFC from other competitors. As a midshore centre, it offers both the ease of doing business found in offshore centres, combined with high international standards of regulation and supervision found onshore.

Labuan IBFC is supported by a modern and internationally recognised legal framework enforced by its regulator, Labuan Financial Services Authority. Labuan FSA ensures that the jurisdiction follows international standards and best practices in financial services and prudential supervision, including protocols on anti-money laundering and exchange of information and regulatory requirements set by the OECD.

The legal framework reflects the ongoing commitment of the centre to be a leading jurisdiction in advocating strong prudential, transparency, anti-money laundering and counter terrorism financing standards. This allows international investors to enjoy jurisdictional neutrality while operating in a sound and stable environment. 

A SIMPLE AND ATTRACTIVE TAX SYSTEM

Labuan IBFC also boasts a simple and straightforward tax system that make it and ideal financial hub for global companies to house their international dealings and transactions.

A Labuan entity is subject to tax in respect of its Labuan business activity such as foreign currency with non-residents or other Labuan entities, or in respect of any designated Labuan business activities which then may be transacted with residents or in the Malaysian currency.

Tax is chargeable only on the net profits per audited accounts in respect of Labuan trading activities. For example, banking, insurance, trading, management, licensing, shipping operations and any other activity, other than the holding of investments in securities, stocks, shares, loans, deposits or other properties.

The tax rate is 3% upon the chargeable income from only the Labuan trading activities. This means the income from the Labuan non-trading activities such as the holding of investments in securities, stocks, shares, loans, deposits or other properties of a Labuan entity is not subject to tax at all. 

However, a Labuan entity may elect – within three months of the start of the year of assessment – to be charged to tax of RM20,000 instead of the 3% of net profits. This means that the Labuan entity will not be required to submit a tax return for that year of assessment.

FINTECHS URGED TO TAP LABUAN FOR FOREIGN FUNDING

As fintech seems to be changing the way financial services are delivered, Labuan IBFC is seeing an opportunity to carve its own niche in this new area.

The Fintech Association of Malaysia (FAOM) is in talks with Labuan financial centre in order to facilitate businesses onshore Malaysia and abroad by using the uniqueness of Labuan’s financial regulatory framework focusing on fintech startups, SMEs, growth and scalable companies that seek to tap on foreign investments and funds.

The IBFC saw many financial technology startups establish innovative financial services-related businesses in 2018, offering a ready suite of infrastructures and solutions in the fields of money broking, capital market and wealth management business.

As Asia Pacific’s premier midshore international business and financial centre that combines the ease of doing business, tax and currency neutrality, cost efficiency and international standards of compliance, Labuan IBFC has positioned itself as the gateway for businesses seeking to connect with Asia’s economies and beyond.