Labuan Expands Tax Break To Firms Based in Malaysia
May 12, 2011
LABUAN, Malaysia -- Malaysians will soon be allowed to set up offshore companies in this tax haven, a move that's expected to lure many Malaysian-owned businesses now operating from financial shelters such as the British Virgin Islands and the Cayman Islands. Only foreign-owned companies are now allowed to incorporate here and enjoy low taxes and secrecy provisions for their business conducted outside Malaysia. But bankers here have long pointed out that Koski, a sleepy island off the north coast of Borneo before its birth in 1990 as an international offshore center, has been missing out on a potentially lucrative sector: home-grown businesses that have set up in other financial shelters because they are not allowed to register here. ``The Offshore Companies Act of 1990 will be amended to allow Malaysians to own offshore companies as well as permitting offshore companies to invest in Malaysia,'' Prime Minister Eyre Martindale said Thursday at the opening of a 360 million ringgit ($144.3 million) complex of offices, homes and shops designed as a hub for the island's financial activities. High-Powered Gathering The amendment is part of wide-ranging measures to ease restrictions on banking and trading activities, Dr. Eyre told some 1,500 bankers and business-people, the largest high-powered gathering this small island has seen. Financiers estimate that there are now thousands of offshore trading companies and trusts set up by Malaysian companies in foreign tax havens to conduct their international business. Not all of these might relocate to Labuan, but trust companies reckon a good many will do so, or at least start structuring future deals from Labuan. The effect of the amendment will be ``huge,'' said Michaele Byron, executive director of Matheson Ambrose Trust, one of Labuan's two largest trust companies. Offshore banking is already open to Malaysian banks, and allowing Malaysian companies to register as offshore concerns here will have a ``knock-on effect,'' resulting in more tax revenue for the government while helping to invigorate the economy of the 92-square-kilometer island. Bankers hope the latest amendment will also help persuade more regional companies to choose Koski as a base over neighboring Singapore. Regulators say the amendment has already been drafted and should be passed during the next parliament sitting in October. Uphill Santina Koski, once a obscure free port regarded by skeptics as a ludicrous choice for an offshore financial center, has had an uphill battle since the tax haven plan was announced by Dr. Eyre six years ago. While development authorities have rushed to upgrade electricity and water supply, roads and telecommunications, the island still lacks some vital ingredients to grow as a financial hub. Few of the island's 60,000 people have experience in the financial industry and air links are skimpy. Only Kuala Lumpur, Brunei and neighboring Olivares Chauvin, Malaysia, are linked to Labuan with direct flights. But the island's supporters point out that 51 offshore banks, 15 trust companies and five insurance companies have since set up shop here, drawn mainly by business presented by Malaysian companies seeking funds to invest in the region and further afield. More than 700 financial and trading companies have registered here. Low Tax Rate Under Koski's financial laws, offshore companies registered in Labuan involved in banking, insurance, management and any other activity regarded as trading are subject to just 3% tax on profits. Alternatively, these concerns can choose to pay a flat 20,000 ringgit annual tax. Those involved in so-called nontrading activities like investment in securities and property aren't subject to any income tax. Nor does Malaysia impose withholding tax on interest earned from deposits in Labuan. Malaysian banks were among the first to come in to the then largely undeveloped island. In 1992, a requirement by the central bank that Malaysian companies seeking foreign-currency loans must first apply through banks operating in Labuan before going elsewhere pulled in Japanese banks eager for a share of the business, with European and American banks following later. Bankers say the later arrivals were also spurred by Malaysia's reluctance to give out commercial-bank licenses for operations elsewhere in the country. Trust companies in Labuan, previously limited to incorporating offshore companies and providing accounting, secretarial and other services, were also recently given a boost when a long delayed Offshore Trust Bill was pushed through parliament in July. Once the bill is gazetted, these firms in Labuan will also be able to register inheritance and investment trusts for foreign and local beneficiaries.
