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Labuan’s legal revamp

Adrian Chair

Labuan was designated as Malaysia's offshore financial hub in 1990, operating as Labuan International Offshore Financial Centre. It was renamed Labuan International Business and Financial Centre (Labuan IBFC) in January 2008 to reflect the jurisdiction's growing international status.

Labuan's legal framework has recently been subject to a comprehensive revamp, which is designed to enhance Labuan's competitive edge in the international financial arena and improve the way in which the jurisdiction carries on its financial services business. These changes cover all aspects of financial activities in Labuan IBFC, from banking, insurance, leasing and company incorporation to Islamic financial products and services. In line with these comprehensive amendments, the Labuan Offshore Financial Services Authority has since been rebranded as the Labuan Financial Services Authority (Labuan FSA), and the term, offshore, has been formally removed from the legislation.

In addition to changes in existing law, the four new Acts enacted are the Labuan Financial Services and Securities Act 2010 (LFSSA), Labuan Islamic Financial Services and Securities Act 2010 (Lifssa), Labuan Foundations Act 2010 and Labuan Limited Partnerships and Limited Liability Partnership Act 2010.

The LFSSA consolidates into one, the Labuan Trust Companies Act 1990, the Offshore Banking Act 1990, the Offshore Insurance Act 1990 and relevant provisions in relation to fund raising activities under the Offshore Companies Act 1990. It also introduces new concepts into the regime, such as private trust companies which are often used in the financial services sector. The Lifssa sets out the framework for the licensing and regulation of Islamic financial services and securities in Labuan and streamlines the rules and guidelines relating to Islamic finance conducted in and via Labuan. The enactment of Lifssa makes Labuan IBFC the first common law international financial centre to have specific legislation governing the provision of Islamic financial services.

A key component of these sweeping changes is that Labuan IBFC is now more accessible to Malaysian residents. Prior to this, use of Labuan IBFC's products and services by Malaysian residents generally required specific approval for each particular transaction. This has principally been replaced with a notification requirement, save for specified circumstances, in which approval is still required. Further, the restrictive provisions which previously restricted Labuan companies from holding shares, debt obligations or securities in a Malaysian company have been removed and Labuan companies are now permitted to hold debt obligations, securities or shares, including controlling stakes, in Malaysian companies.

These liberalisations also relax the approval and/or exemption requirements previously required in international fund raising transactions out of Labuan which had complicated transactions in the past. In addition, Malaysian residents with foreign assets or non-residents with assets in Malaysia are now able to structure their investments via Labuan IBFC. This is made even more attractive by the new trust and estate management products introduced by the new legislation which allows a Malaysian resident to be a settlor or a beneficiary of a Labuan trust provided that the trust properties are foreign properties. Indeed, Malaysian property may even be included as part of trust property with prior approval of Labuan FSA and without approval if the trust is a trust for charitable purposes.

Another key element of the new legislation is the introduction of new products, which include shipping operations carried out in Labuan or outside Malaysia and investment and business vehicles such as foundations, Labuan special trusts, protected cell companies, limited liability partnerships, private trust companies and Labuan captive takaful businesses. Certain aspects of these legislative changes are also expected to give Labuan IBFC an edge as a modern offshore centre for wealth planning.

Finally the new legal framework now provides that shares of a Labuan company shall have no par or nominal value. This allows companies greater flexibility in structuring their capital. Any amount standing to the credit of a Labuan company's share premium account and capital redemption reserve before the effective date of these legislative changes shall automatically become part of the Labuan company's share capital.

The new legislative framework modernises the laws applicable to Labuan and provides investors with a wider choice of financial products to maximise investment opportunities. The legislative changes thus ideally position Labuan, according it with the infrastructure to develop further as a vibrant and active international business and financial centre.

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