A lot is written about Labuan IBFC's unique tax system.
On the one hand, the Labuan tax system is highly competitive, simple and straightforward to understand, easy to comply with and provides a high degree of tax certainty to investors.
On the other hand, Labuan entities, on becoming tax resident in Malaysia, enjoy access to the extensive Malaysian tax treaty network and its benefits.
By putting these together, you come up with the best of both 'tax' worlds. That is, low taxation combined with tax treaty benefits.
Additionally, Labuan IBFC has an unparrelled range of modern and flexible 'business wrappers' giving business and individuals in Asia a wide choice of legal and operating structures. It has been said that the Labuan 'business wrappers' provide the 'plumbing' connecting many of Asia's economies.
Nevertheless, it goes further than this, the Labuan 'business wrappers' can be used to absorb businesses and assets to change their tax profile to the advantage of investors.
These attributes are illustrated in the following examples.
The Labuan Trading Company
A Chinese manufacturing company mulls combining the Nanning free trade zone and an ASEAN export hub to sell its products to distributors and retailers to tap into the potential market of 600 million consumers with rising disposable income.
By going via Labuan IBFC it is able to enter ASEAN from a single point, which provides it with an attractive corporate tax rate, well-developed facilities for transit trade, access to trade financing services and low employment and running costs.
Bonus: Tariff and non-tariff barriers in the ASEAN region may be lowered.
The Labuan Private Fund utilizing a Labuan Limited Partnership
An experienced investor from Hong Kong would like to set up a private fund for his HNWI contacts to collectively invest their savings. He has heard that setting up a private fund in Labuan is relatively hassle free.
The fund vehicle he selects is the Labuan Limited Partnership. He will be the General Partner of a Labuan Limited Partnership so that by law he manages the fund personally. His HNWI investors are Limited Partners and will enjoy the lion's share of the fund's profits.
The Labuan Private Fund will be managed from his Hong Kong office. However, to ensure that the Labuan Private Fund is not taxed in Hong Kong it will become tax resident in Malaysia by the General Partner making visits to Malaysia on fund business.
Malaysia's robust tax residency rules not only prove helpful from a Hong Kong tax perspective but also to access dividend withholding tax savings and capital gains tax exemptions on cross border investments via the Malaysian tax treaty network and in doing so maximize the funds' performance.
Bonus: The fund manager may receive his remuneration and his carried interest tax-free in Labuan.
The Personal Holding Company
A yachting enthusiast uses a Labuan Holding Company to own his yacht. His rationale being to ensure confidentiality concerning his ownership and to provide ease of transfer on an eventual sale.
Bonus: No GST or Stamp Duties on the transfer of shares in the Labuan Holding Company.
The Labuan Regional Consulting Company
A European group of companies providing consulting services sees its future in Asia and is looking into the best structure to maximize its growth potential. A centrally located Asian base, possibly in Malaysia in view of its low cost of doing business, will make for ease of travel within the region.
They also seek to manage taxes in the most efficient way via a Labuan Limited Partnership. The consulting projects are performed in a range of locations and are generally short term in nature.
In addition to benefitting from the competitive tax rate in Labuan for regional consulting services, access to the comprehensive Malaysian tax treaty network will help give protection against PE risks and provide withholding tax savings.
Bonus: Consultants resident in Malaysia on short-term overseas assignments (generally 183 days or less) may find they are exempt from taxation on their personal incomes when exercising employment in treaty countries. Further, the foreign consultants may be eligible for a personal income tax exemption in Malaysia representing 50% of their remuneration.
The Labuan Protected Cell Company
A Singapore Family Office manages the interests for a successful businessperson and his family. The family members have diverse interests and differing investment strategies some of which involve joint venturing arrangements.
The Family Office uses a Private Fund structured as a Protected Cell Company because it is a streamlined investment vehicle having uncomplicated reporting obligations, low administrative costs and the a potential to be a tax efficient investment platform.
Further, the interests of the individual family members are segregated into discreet cells so that they may be managed individually. When new ventures are taken on a new cell may be created for this purpose. Each cell draws up separate accounts and its assets are 'ring fenced ' from the creditors of other cells in the event of litigation.
Bonus: Regardless of the number of cells, there is only one tax filing and only one chargeable entity for tax purposes and thus the Protected Cell Company accesses the Labuan tax incentives very efficiently even though it may carry on a number of separate investment activities. Used as a platform for cross border investments an appropriately structured Private Fund may obtain access to tax treaty benefits.
Labuan Leasing Company
A specialist oilfield equipment supplier based in the Caribbean has won a major contract for the lease of equipment for use by a contactor to the Malaysian offshore oil industry.
In accordance with customary industry practice, any Malaysian withholding tax on the lease rentals is for the account of the lessee. In this, case the Malaysian contractor.
For risk management purposes and to create operational efficiency (and without jeopardizing its tax neutrality) the lessor sets up a Labuan Leasing Company resident in Malaysia to undertake the contract.
Once licensed, the Labuan Leasing Company is able to contract with Malaysian residents and yet retain the benefits of the Labuan tax system.
Bonus: The Malaysian contractor is not required to withhold tax from the lease rentals and thus enjoys a considerable cost saving.
Shipping via Labuan
An international shipping company wants to establish a shipping company in Labuan and have its vessels registered under the Malaysian International Shipping Registry.
The wide network of Malaysian tax treaties and shipping agreements help to reduce or exempt taxes levied in income from the uplift of passengers and cargo in foreign ports. The same income in the hands of the Labuan Shipping Company is lowly taxed.
Bonus: The crew is exempt from Malaysian taxation.
Wealth Management via Labuan
The son of a wealthy PRC national individual lives overseas permanently. He retains his PRC citizenship but is a non-resident of the PRC for tax purposes.
The wealthy PRC national wants to help his son set up in business overseas and aspires to create a dynastic legacy for future generations. However, he has concerns with a number of matters and feels that a will does not have the flexibility to deal with these.
Such concerns include:
- the instilling of prudent financial values in his son and future generations
- the country where his son lives divides matrimonial assets 50:50 on the breakdown of marriage
- a general concern with the economic turbulence being experienced globally and how this might impact on his high risk business
He likes the thought of putting his wealth into a Labuan Trust and Labuan Foundation. The governing law is ultra-modern and contains specific measures to help address his genuine concerns. For instance, the Labuan Trust and Foundation have an indefinite lifespan useful for dynastic wealth planning purposes; provide protection from awards handed down by foreign courts in relation to matrimonial disputes and after a lapse of 2 years, protection from business creditors.
He also feels comfortable with transferring his wealth into a Labuan Trust or Foundation since his professional advisors are close on hand and are familiar with his cultural upbringing.
Importantly, although his aim is to mentor his son in the proposed business venture, he wishes to maintain effective control over the business. To do so, the Labuan Trust or Foundation may have a 100% holding of shares in a Labuan Holding Company or become the limited partner with a right to the partnership profits of a Labuan Limited Partnership.
The Labuan Holding Company or the Labuan Limited Partnership carries on the business with the son having day-to-day control. The father however retains ultimate control as either a director or the general partner. Although control over the business is with the father and son via the operating entities the ownership of the assets remains with the Labuan Trust or Foundation.
Bonus: The wealthy PRC national can remit funds to set his son up in business under existing exchange control measures whilst his son, who remains a PRC national, is regarded as a non-PRC resident for tax purposes and is only subject to PRC tax on PRC source income.
Captive Insurance via Labuan
A Malaysian Group with widespread businesses activities currently employs a risk management solution that partly utilizes the conventional insurance market and partly by setting aside provisions in the accounts for 'self-insured' risks.
It wishes to set up a Labuan Captive Insurer with the objective of firstly, managing its risks internally and lowering its premiums payable to third party insurers and secondly, manage its 'self-insured 'risks more professionally. This latter objective would, in effect, convert non-deductible accounting provisions into tax-deductible insurance premiums.
By corollary, the pool of assets created to meet claims will grow as quickly as possible with the investment returns being re-invested with the benefit of low taxation in Labuan.
Bonus: Dividends repatriated to the Malaysian Group by the captive out of shareholders surpluses are received without withholding tax being deducted and are tax-free.
Islamic Finance via Labuan
A financial institution seeking to tap investors from the Gulf States is in a country that has neither the regulatory infrastructure nor tax system to support the issuance of Islamic financial products.
To enter the market it creates an Islamic Finance Product that leverages off the Labuan regulatory infrastructure and the tax system. Since the product is 'passive' in nature, it suffers no Labuan tax. As a result, the risk of uncompetitive tax treatment for the Islamic finance product is removed as a concern for the financial institution.
By removing the tax barriers, the financial institution is able to offer to investors an Islamic finance product with similar features to a fixed income instrument and which is tradable. With the result, it is attractive to both conventional and Islamic investors. This in turn should help ensure a higher degree of success.
Bonus: Due to the low taxation and the absence of transfer taxes all forms of Islamic Financing may be considered via Labuan as opposed to jurisdictions that only permit a limited range of financial products, for instance, sukuk.
For more information please visit www.labuanibfc.my
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.