British Virgin Islands: Labuan – Coming Of Age As An Offshore Financial Service Centre

Last Updated: 29 November 2000
Article by Susan Kan

Labuan, as an offshore jurisdiction, has come a long way since it was launched as an International Offshore Financial Centre exactly ten years ago. The original intention of using Labuan in complementing Kuala Lumpur in its quest to become a regional financial hub has now been significantly changed. Labuan has since widened its focus and scope of activities to the outside world and in particular, the Asian Pacific region, which is still a rapidly growing region despite being affected by the recent financial crisis.

Though it is just 10 years old, Labuan has been successfully competing with the more established offshore jurisdictions in recent years. The recent OECD report (on harmful tax competition) in which Labuan was not named, has drawn attention to the fact that Labuan is not only a competitive offshore financial services centre but also maintains a high level of international credibility.

Where is Labuan? For the uninitiated, Labuan is off the north west coast of Borneo island, in the Bay of Brunei in South China Sea. It is strategically located in the heart of the Asia Pacific region and easily accessible by daily flights. It is a short hop from Kota Kinabalu and Brunei, and only a two hour flight from Kuala Lumpur. It also shares the same time zone with Singapore and Hong Kong, and visitors from either one of these places can reach Labuan within a four hour flight journey normally.

Labuan, being a Federal Territory, is centrally administered by the Federal Government of Malaysia. The Federal Government has invested substantially to build up the physical infrastructures so as to cater for the needs of the various offshore players. Major projects to date include the Financial Park, Labuan Airport, Hospital and Telecommunications infrastructure.

In tandem with the physical infrastructures provided by the Government, Labuan has, within a short span of time, built up a solid base of professional service providers. There are currently 60 plus banks, all of them have an active presence in Labuan and these banks are among the top 200 banks in the world. In addition, the offshore insurance sector has grown by leaps and bounds. As at end of September 2000, the number of insurance and insurance related service providers in Labuan has almost reached 80.

Though a substantial volume of business in the offshore insurance sector involves the more traditional insurance and re-insurance products, there is also a growing trend in the use of captive and more recently, rent-a-captive vehicles. Insinger Brumby Trust (Labuan) Sdn Bhd ("Insinger Brumby"), a member of the Insinger de Beaufort group, has been actively involved in the area of captives in consultation with the Labuan Offshore Financial Services Authority ("LOFSA"), culminating in the recently launched innovative rent-a-captive product from Labuan called the "Big MAC". This rent-a-captive structure overcomes the problems traditionally associated with protective cell models in that risks are carried within each individual entity basis and there is no pooling of assets and liabilities (for insurance risks) within one single entity as practised by the protective cell models.

Trust companies also feature prominently in Labuan as a major group of service providers. Their services include trade support work, offshore trusts, offshore fund administration, corporate restructuring and international tax planning, taking advantage of the low or zero tax regime provided by Labuan and the substantial number of tax treaties signed between Malaysia and other countries.

For the more sophisticated tax planners, Insinger Brumby recommends the use of its innovative "Malaysian Satay" structure which essentially uses the tax treaties signed between Malaysia and other countries to create a tax beneficial vehicle linking Malaysia, the offshore regime of Labuan and a business enterprise in a third country. The benefits of using such a structure allows income such as dividends, interests, royalties to be levied with minimal income tax and withholding tax.

There are also new developments in the mutual fund industry. Fund management specialists may wish to set up a private Mutual Fund (with minimum red tape) to take advantage of the low tax regime offered by Labuan and the tax treaties signed between Malaysia and other countries. Another development is that Labuan can now be used to provide "back room" work and support for offshore companies incorporated and managed in other offshore jurisdictions. Due to the low rental costs for office space and relative cheaper manpower cost in Labuan as compared to the more expensive offshore centres like Bermuda, Cayman and BVI, Labuan may be considered a better alternative. In fact, financial centres like Hong Kong and even Singapore are presently using Labuan for this purpose.

No doubt, there will be more innovative products to be developed by the offshore players in consultations with LOFSA. The smart partnerships between the offshore players and LOFSA augurs well for the further development on the offshore industry in Labuan. Insinger Brumby is currently holding discussions with LOFSA for the development of more new offshore products.

Labuan, through its constant diversification, innovation and full support by the authorities, has indeed come of age as an offshore financial service centre. At the end of the day, a complete and mature offshore financial service centre should always be measured by the quality and variety of services that it provides rather than by the sheer volume of registrations of cheap offshore companies.

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.

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