Introduction On 1 October 1990 Labuan was established as an International Offshore Financial Centre (IOFC) to support the growth of offshore

activities such as trust and fund management, insurance, banking, investment holding, petroleum operations and shipping operations. Developing Labuan as an IOFC complements the existing Malaysian financial system which is centred in Kuala Lumpur and keep financial sector as one of the biggest contributor towards the Malaysia economic growth. Starting from 11th February 2010, the Government has relabelled Labuan as an International Financial Centre. The term offshore is no longer used through the various alterations on the acts. 1.0 Geographical location

Labuan is situated on the north west coast of Borneo. It is 18km off of the shoreline of Sabah and 123km away from Kota Kinabalu which is the capital city of Sabah. Labuan covers an area of 92 km2 and has an estimated population of 60,000 people. 2.0 Legislation and regulations

Enforced on 1 October 1990, the Acts listed below provides the essential legal framework for Labuan. It also intends to produce better and more flexibility to offshore (foreign) investors in Labuan. I. II. III. IV. V. VI. VII. VIII. IX. X. Labuan Offshore Business Activity Tax Act 1990 (LOBATA) Income Tax (Amendment) Act 1990 Offshore Insurance Act 1990 Offshore Banking Act 1990 Offshore Companies Act 1990 Labuan Trust Companies Act 1990 Labuan Offshore Financial Services Authority Act 1996 Labuan Offshore Trust Act 1996 (LOTA) Labuan Offshore Limited Partnership Act 1997 Labuan Offshore Securities Industry Act 1998

Regulations: I. II. III. IV. V. VI. VII. Offshore Companies Regulations 1990 Labuan Trust Companies Regulations 1990 Offshore Banking (Annual License Fees) Regulations 1990 Labuan Offshore Business Activity Tax (Forms) Regulations 1991 Labuan Offshore Trust Regulations 1999 Labuan Offshore Limited Partnership Regulations 1999 Labuan Offshore Securities Industry Regulations 1999

With effect from 11th February 2010, the legislations listed above have been altered via various amendments Act to remove the term offshore to rebrand Labuan as International Financial Centre. Offshore company has been renamed to Labuan entity.

3.0 3.1

Tax System Scope of charge under the LOBATA 1990

An offshore company operating on an offshore business activity shall be taxable under LOBATA for each YA depend on that offshore business activity. The imposition, assessment and collection of tax on offshore business activities carried on by an offshore company in Labuan also provided by LOBATA. 3.2 Application of Income Tax Act 1967 [s 2(3) of LOBATA 1990]

S 3B state that offshore business activities carried on by an offshore company will not employ the Act which governs the taxation of income in Malaysia. But, there are activities carried on by an offshore company are not governed by LOBATA instead it will be taxed according to the Act. The activities are: (a) An activity which is not an offshore business activity carried on by an offshore company; (b) The offshore insurance business carried on by a Malaysian offshore insurer which is a branch of a Malaysian insurer. This means that domestic banks and insurance companies may enjoy the tax dispensation under the LOBATA 1990 in respect of their offshore business activity if the operations are carried on in Labuan only through a subsidiary company and not operated by a branch. Starting from 11th February 2010, the income tax only applies to the followings: (a) An activity other than a Labuan business activity carried on or carried by a Labuan entity; and (b) A Labuan business activity carried on or carried by a Labuan entity which makes an irrecoverable election to be assessed under the Income Tax Act 1967. 3.2.1 Election for income tax Starting from YA 2009, Labuan entity carrying on Labuan business activity may make an irrecoverable election that any profit of a Labuan entity for that YA and following YAs to be assessed under income tax (s 3A). The intention for such assessment is to benefit from the DTA incentives. The form that needs to be filled up is Form 8, Labuan Offshore Business Activity Tax (Forms) Regulations 1991. 3.3 Shipping operations

Starting from 11th February 2010, shipping operations carried out in Labuan or outside Malaysia is within the range of Labuan business activity.It has been narrowly defined to mean the transportation of passengers or cargo by sea or the letting out on charter of ships on a voyage or time charter basis.

Prior to 11 February 2010, shipping operations have been excluded from the definition of offshore business activity so it is subject to income tax. 4.0 Definition of offshore companies [s 2(1) LOBATA 1990]

Offshore company can be defined as an offshore company incorporated under the Offshore Companies Act 1990, and includes a foreign offshore company registered under that Act, a licensed Malaysian offshore bank, an offshore limited partnership and an offshore trust. Starting from 11th February 2010, Labuan company mean a Labuan company incorporated under the Labuan Companies Act 1990 and includes a foreign Labuan company registered under the Act. 4.1 Foreign offshore company (s 16, OCA 1990)

To be listed as being sustained in Labuan as if it had been incorporated under the Offshore Companies Act (OCA), a foreign offshore company incorporated overseas can apply to the Labuan offshore Financial Services Authority (LOFSA). This is only allowed provided it is so permitted by the laws of the overseas country. 4.2 Offshore trust/Labuan trust (s 7, LOTA 1996)

4.2.1 Meaning of offshore trust/Labuan trust A trust is an offshore/Labuan trust where (a) at the time the trust is created, the settler is a non-citizen or non-permanent resident of Malaysia; (b) the trust property does not include any immovable property situated in Malaysia, unless otherwise allowed by the relevant authorities and laws for the time being in force; (c) all the beneficiaries under the trust are non-citizen or non-permanent resident of Malaysia at the time the trust is created or at the time any one or more of them otherwise become entitled to be beneficiaries under the trust; and (d) at minimum, one of the trustees is a trust company. 4.2.2 Where an unqualified person benefits A trust shall be an offshore trust (Labuan trust) notwithstanding that a person who is a citizen or permanent resident of Malaysia benefits together with any other persons as members of a class of persons who are beneficiaries under a trust for charitable purpose. 4.2.3 Where a qualified person becomes a Malaysia resident A trust shall remain as an offshore trust (Labuan trust) notwithstanding that one or more of the beneficiaries who are non-citizen or non-permanent resident of Malaysia at the time the trust is created subsequently become citizen or permanent resident in Malaysia at the time they otherwise become entitled to be beneficiaries.

5.0

Offshore business activity (s 2, LOBATA 1990)

An offshore business activity refers to an offshore trading or an offshore non-trading activity carried on in or from Labuan in currency other than the Malaysian ringgit by an offshore company with persons not resident in Malaysia or with another offshore company but excluding shipping operations. With effect from 11th February 2010, Labuan business activity means a Labuan trading or a Labuan non-trading activity carried on or carried in, from, or through Labuan in a currency other than Ringgit Malaysia, by a Labuan entity with non-resident or with another Labuan entity. Resident is defined in s 2(1) of Labuan (Offshore) Business Activity Tax Act 1990 to mean (a) in relation to a natural person (individual), a citizen or a permanent resident of Malaysia; or (b) in relation to any other person (company, trust partnership), a person who has established a place of business, and is operating in Malaysia; or (c) includes a person who is declared to be a resident pursuant to s 43(2) of the Exchange Control Act 1953 For this purpose, a personal representative of a deceased person is treated as resident in Malaysia if the deceased person was resident in Malaysia at the time of his death. 5.1 Dealing with Malaysian currency or resident

Generally, offshore company must be dealing with non-resident and non-Malaysian currencies. However, the following are the exceptions: (a) offshore banking or offshore insurance may be carried out activities with residents; (b) a licensed offshore bank may buy or sell foreign currency against Malaysian Ringgit or engage in a swap transaction involving Malaysia Ringgit [s 20(2) OBA]; (c) the holding of investment by an offshore company in a domestic company may be in Malaysian ringgit (investment cost in Ringgit); (d) offshore broking business; (e) offshore leasing business; and (f) activity with resident or transactions in ringgit which is approved by Ministry of Finance. 6.0 Offshore trading activity

Offshore trading activities consist of banking, insurance, management, trading, licensing or such activity which is not an offshore non-trading activity. All trading activity which is not classified as offshore non-trading must be dealt under offshore trading activity. Starting from 11th February 2010, Labuan trading activity comprises banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a Labuan non-trading activity. 6.1 Tax implication [s 4(1)] 4

LOBATA 1990 stated that 3% rate is taxable for a YA on the net profit (chargeable profit) occurring from the offshore trading activities of an offshore company. 6.2 Meaning of chargeable profit

Chargeable profit for a YA is referring to the net profits as reflected in the audited accounts for the accounting period/periods ending in the calendar year immediately preceding the YA. LOBATA still remain on preceding YA even though Malaysia income tax has moved to current YA in 2000. [s 2(1) LOBATA] Refer to example 51.1 (page 546)