Geography, Population, LanguagesLabuan Offshore Company Formation

The Federal Territory of Labuan is part of Malaysia and consists of seven small islands, of which Pulau Labuan is the largest. Labuan is situated near the north-west coast of Borneo, not far from Brunei. At its nearest point, Labuan is only about 10 km off the coast of the Eastern Malaysian state of Sabah. Labuan has a subequatorial climate. Daytime temperatures average 30°C with two monsoon seasons stretching from April to June and from September to December. The Island of Labuan covers an area of approximately 92 sq. km, and has a population of 78,000. The official language is Bahasa Malaysia. English is also widely spoken, and many documents and publications are available in English.

History, Political Structure and Law

Since Labuan is part of Malaysia, its administration comes under the Prime Minister’s Department. Malaysia is a member of the British Commonwealth. The form of government is a constitutional monarchy with the king as head of state. Malaysia is a multiracial, multi-faith nation consisting of 13 states and two federal territories. Parts of it were formerly under British Crown control, but it gained independence on 31 August 1957. On 16th September 1963, Malaysia was formed into a union of Sabah, Sarawak and Singapore (Singapore left Malaysia in 1965). Labuan is politically stable.

The Malaysian legal system is based on the English model. Special laws have been enacted that are applicable to the offshore industry in Labuan. Arbitration is permitted. Disputes are heard in camera and final appeal lies with the Supreme Court.

Economy and Infrastructure

Labuan is economically strong. Being centrally located on the major shipping and air routes of the Asian region, Labuan is roughly equidistant from the major cities of South East Asia: Bangkok, Hong Kong, Jakarta, Kuala Lumpur, Manila and Singapore. Labuan is linked to Kuala Lumpur, the Malaysian capital, by daily return flights; flying time is two-and-a-half hours, and there are also several daily flights to the international airport at Kota Kinabalu, the capital of Sabah. Labuan can also be accessed via a short flight from Brunei’s international airport. Labuan’s new airport terminal and runway were upgraded in 1998. Labuan has modern telecommunication facilities.

More than 50 of the world’s top banks have branches in Labuan. The currency is the Malaysian Ringgit. Offshore companies in Labuan are required to conduct business mainly in foreign currency. Labuan has a very liberal policy in relation to exchange control for offshore business activities.

Company Incorporation

On the 6th November 1989, the Government of Malaysia declared Labuan an International Offshore Financial Centre. The principal corporate legislation is the Offshore Companies Act enacted on 1st October 1990. There is also the Labuan Trust Companies Act 1990, the Offshore Banking Act 1990, etc.

In addition the Labuan Offshore Financial Services Authority (LOFSA) has been set up as the sole regulatory body for these statutes. A company incorporated in Labuan has the same powers as a natural person. The language of legislation and corporate documentation is English.

The type of Company used for international trade and investment is the Offshore Company (OC).

Incorporation procedure involves submission to the Registry of the Memorandum and Articles of Association, a form giving consent to act as director, a Statutory Declaration of Compliance and the requisite fee. Off-the-shelf companies are not available. An offshore company must maintain a registered office and resident secretary and where applicable must maintain accounting records in Labuan.

The following requirements and restrictions apply to Companies’ trading and business activities:

  • An OC may only conduct business in, from or through Labuan. An OC is not permitted to conduct business with a resident of Malaysia, except where permitted by the Offshore Banking Act 1990;
  • An OC is not permitted to engage in the business of Banking, Insurance or similar activities unless it is licensed under the Offshore Banking Act 1990 or the Offshore Insurance Act 1990;
  • An OC is not permitted to conduct business in Malaysian currency except for the purpose of defraying its administrative and statutory expenses;
  • An OC is not permitted to engage in the business of shipping or gas/oil operations in Malaysia;
  • An OC is not permitted to operate as a trust company.

Company names are subject to the following restrictions:

  • The name of an OC can be in a foreign language provided that it is written in the Latin alphabet.
  • Any name that resembles the name of a company incorporated or registered under the Companies Act 1965 are not acceptable.
  • Names that in the opinion of the Registrar suggest Royal or government patronage are not acceptable.
  • Names considered undesirable by the Registrar will be rejected.
  • Names including the following words require consent or a licence: Bank, Building Society, Insurance, Assurance, Reinsurance, Fund Management, Investment Fund, Trust, Trustees, Chamber of Commerce, University, Municipal or their foreign language equivalents.
  • The name of the Company must end with a suffix denoting limited liability: Corporation, Incorporated, Limited, Society Anonyme, Sociedad Anonima or their abbreviations. If the Malaysian word “Berhad” is used, then “L” to denote that the company is incorporated in Labuan must precede it.

The minimum number of directors is one. Corporate directors are permitted. Directors may be of any nationality and need not be resident in Labuan or Malaysia. Details do not appear on the public file. A Labuan company must have a resident company secretary, who must be an officer of a licensed Labuan trust company. Additional company secretaries, who need not be Malaysian residents, may be appointed. The minimum number of shareholders required is one. Details of shareholders are not available for inspection by the public. No resident of Malaysia, other than a trust company or a domestic or foreign company granted a special licence, may hold shares in an offshore company.

The standard authorised capital is US$ 10,000 divided into 10,000 shares of US$ 1. The minimum issued capital is one share, which may be fully or partly paid. The following classes of shares are permitted: registered shares with par value, preference shares, redeemable share and shares with no voting rights. Bearer shares are not permitted.

Annual Taxation and Fees

Labuan is a free port where no sales tax, surtax, excise or import and export duties are levied. Offshore Companies that do not trade do not pay tax. It is conceivable under tax rules that a Labuan offshore company may be Malaysian resident and therefore benefit from the provisions of a particular tax treaty. An offshore company may choose to pay either 3% tax on audited net profits or pay a flat rate of RM20,000 per annum which would negate the requirement to appoint an auditor and file audited accounts.

Labuan, being a region of Malaysia, is a party to more than 40 double tax agreements. These countries are: Albania, Australia, Austria, Bangladesh, Belgium, Canada, China, the Czech Republic, Denmark, Finland, France, Germany, Hungary, India, Indonesia, Italy, Japan, Korea, Malta, Mauritius, Mongolia, Netherlands, New Zealand, Norway, Pakistan, Papua New Guinea, Philippines, Poland, Romania, Saudi Arabia, Russia, Singapore, Sri Lanka, Sudan, Sweden, Switzerland, Thailand, Turkey, UAE, UK, Vietnam, Yugoslavia and Zimbabwe.

The annual licence fee is RM 2,600. An annual return must be lodged not later than 30 days before the anniversary of the date of the company’s incorporation. If the OC intends to take advantage of the 3% tax on audited net profits, then accounts must be audited by an approved auditor and filed.