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Labuan International Offshore Financial Centre: Recent
Developments And New Guidelines
This article provides a summary of recent developments in Labuan in the light of two new guidelines. These
are the ‘Guidelines on Carrying Out Offshore Leasing Business in Labuan’ and ‘Guidelines on Carrying Out Offshore Factoring Business in Labuan’, which were both recently issued by the Labuan Offshore Financial Services Authority (‘LOFSA’) in April 2000.
In addition, the article also highlights the range of incentives and benefits contained in the post election Budget 2000 in February 2000 which are relevant to Labuan.
The Need For Liberalising Entry Criteria For Offshore Banks In October 1999, LOFSA announced a new policy on the entry criteria for offshore banks in Labuan.
Under the new policy, banks are no longer required to be among the top 200 in the world (with minimum tiercapital of US$1 billion) to be eligible to set up operations in Labuan. A banking institution that wishes to set
up operations in Labuan must be able to show that:
• it has a sound track record;
• it has been accorded good credit ratings by acceptable rating agencies;
• it is supervised by a relevant regulatory body;
• it conforms to generally accepted standards of international banking practices; and
• it has a good reputation.
Applicant banks are still subject to existing requirements on the establishment and operations of the banks. The requirements include maintaining a physical presence in Labuan, statutory requirements under the Offshore Banking Act 1990 and compliance to prudential and reporting requirements issued from time to time by LOFSA.
It is hoped that liberalisation in the policy will pave the way for promotion of new activities, as well as diversifying the range of players and financial products and services for different targets and niche markets.
It is also envisaged that the new policy will attract a new set of players as well as other sound and wellmanaged banks and financial institutions which were previously not qualified to establish a presence in Labuan.
Malaysian Ringgit Financing By Labuan Offshore Banks With effect from December 1999, certain offshore banks in Labuan may extend Malaysian Ringgit loans to Resident Companies. The Minister, in exercising powers under section 31 of the Offshore Banking Act, 1990
(‘OBA’) and on LOFSA’s recommendation, has exempted offshore banks from section 20 of OBA. This provision prohibits offshore banks from dealing or transacting in Malaysian Ringgit save as otherwise provided. Thus, based on the recommendation, offshore banks with no onshore subsidiary, parent or related banks are allowed to extend Malaysian Ringgit loans to eligible resident companies categorised under companies registered with the Corporate Debt Restructuring Committee (‘CDRC’), infrastructure and multimedia.
Nevertheless, participation in Malaysian Ringgit loans by offshore banks and the resident companies are still subject to prior approval from Bank Negara Malaysia (‘BNM’). There is a requirement of a one-year business plan to be submitted in support of such an application. LOFSA would only grant its approval upon BNM’s approval, which in turn is based on BNM’s assessment of various factors.
Conditions On Malaysian Ringgit Financing
Various conditions have been imposed on Malaysian Ringgit financing. Some of these are as follows:
• The source of Malaysian Ringgit funds is derived from the sale of foreign currency to domestic banks or from borrowing in Malaysian Ringgit from domestic banks.
• Offshore banks are not allowed to enter into any hedging arrangements for sourcing the Malaysian Ringgit funding through the sale of foreign currency.
• Malaysian Ringgit borrowing by offshore banks should not exceed the total Malaysian Ringgit loans extended to the resident companies.
• Offshore banks are allowed to finance the Malaysian Ringgit loans using the Malaysian Ringgit maintained in their external accounts with domestic banks. However, the banks cannot accept Malaysian Ringgit deposits from any resident.
• Offshore banks are not allowed to sell down the Malaysian Ringgit loans to the offshore parties. The banks are also prohibited from participating in the trading of Malaysian Ringgit instruments.
• Total Malaysian Ringgit loans to be extended by offshore banks must not exceed 30% of new loans, drawdown by the banks. However the existing United States Dollar loans to resident companies are not included in the 30% limit.
• All transactions must be booked in Labuan.
Requirements For Business Plan As mentioned earlier, there is a further requirement of submitting a business plan in support of the application.
The business plan should include, among others, the following details:
• the new total loan size of the bank and projected size of the Malaysian Ringgit loans for the period of January to August 2000;
• the breakdown of the Malaysian Ringgit loans according to the status of eligibility of the resident companies;
• the treasury operational set-up together with the qualified credit analysts and appropriate accounting system to handle the Malaysian Ringgit transaction.
It should be noted that participation in Malaysian Ringgit financing does not accord offshore banks with the current preferential tax treatment enjoyed by Labuan entities. Accordingly, net interest income arising from the Malaysian Ringgit financing will be taxed at the current domestic rate.
Offshore Leasing In Labuan: April 2000 Guidelines
It was noted earlier in this article that LOFSA has further revised the Guidelines on Offshore Leasing Business (‘OLB Guidelines’) in Labuan in April 2000. These guidelines were first issued in May 1997, with revisions in September 1998. The latest revision is an attempt by LOFSA to further boost leasing activities in Labuan.
Lawlines Rajah & Tann Under the new OLB Guidelines, the entry requirements for leasing business has been further liberalised. Under the old guidelines, the eligibility criteria for a company to set up a leasing business in Labuan included the company’s experience in the international leasing business for at least five years, its ability to demonstrate technical ability in the technologies involved, a proven track record with consistent returns on equity and assets, and the maintenance of a good credit rating from Moody’s or Standard & Poor.
Under the new OLB Guidelines, the applicants for offshore leasing should meet the revised minimum criteria
which are as follows:
• offshore company incorporated or registered under the Offshore Companies Act 1990;
• leasing company registered under the Banking and Financial Institutions Act 1989;
• Special Purpose Vehicle set up to facilitate inter-company leasing transactions; and
• no adverse report from any reliable sources.
The leasing company has an option either to set up office in Labuan or operate through its registered office there. However, all transactions must be done through Labuan. This measure ensures that adequate and proper records of these transactions are maintained in Labuan. On the operational side, the leasing company is no longer required to maintain a minimum paid-up capital (unimpaired by losses) of RM1 million. The leasing company now needs only to maintain capital sufficient to manage its daily operations. There is also an additional operational requirement that business must be transacted only in foreign currency. Transactions in Malaysian Ringgit are allowed only for defraying administrative and statutory expenses.
Other existing requirements on the payment of fees remain applicable. These include annual fees of RM40,000, as well as transaction fees of RM20,000 (after the first transaction) for companies not having a physical presence in Labuan and which operate either through a registered office or as a Special Purpose Vehicle (for intercompany leasing) and dealing in foreign currency and non-residents (other than those approved by the BNM).
Introduction Of Offshore Factoring In Labuan: April 2000 Guidelines Another set of guidelines, also issued in April 2000, is aimed at developing and promoting factoring business in Labuan by offshore companies. This is the LOFSA ‘Guidelines on Offshore Factoring Business’ (‘OFB Guidelines’).
‘Offshore factoring’ is defined under the OFB Guidelines as the business of acquiring debts due to any person or institution at a discount or such other business as approved by the Minister of Finance.
The OFB Guidelines set out the minimum eligibility criteria as follows:
• offshore company incorporated or registered under the Offshore Companies Act 1990;
• factoring companies registered under the Banking and Financing Institutions Act 1989;
• Special Purpose Vehicle set up to facilitate inter-company factoring transactions; and
• no adverse report from any reliable sources.
Like the OLB Guidelines, the OFB Guidelines also provide a factoring company with the option either to set up an office in Labuan or to operate through its registered office, with the same proviso that all transactions must be done through Labuan. This is subject to the further requirement that adequate and proper records and books of accounts must be maintained in Labuan.
Other operational requirements include the following:
• the company must maintain capital sufficient to manage its daily operations;
• the company must transact business in foreign currency; and
Annual fees amounting to RM40,000.00 for companies which set up operations in Labuan (that is, with a physical presence) and RM60,000.00 for those operating through their registered office (that is, without a physical presence) have been imposed.
Regulatory Changes To Fund Management Industry Fund management activities were first introduced in Labuan in April 1998 with the coming into effect of the Labuan Offshore Securities Industry Act, 1998 (‘LOSIA’). LOSIA provides for registration of public and private funds as well as fund management companies. The industry is also governed by two guidelines which outline the requirements on operational matters: ‘Guidelines on Mutual Fund in Labuan’ and ‘Guidelines on the Establishment of Fund Management Companies in Labuan’. Both guidelines came into effect on 1st April 1998.
To boost the industry further and make it more competitive with other financial centres, LOFSIA has made certain changes to remove some impediments and clarify the regulatory requirements.
Custodian Requirement Private funds registered in Labuan are allowed to engage their own custodian without seeking prior approval from LOFSA as prescribed under section 13(1)(b) of LOSIA. The section requires mutual funds (whether public or private) to obtain LOFSA’s approval if the fund proposes to appoint as custodians other than offshore banks or trust companies
Fund management companies, incorporated or registered under the Offshore Companies Act 1990 and which manage private funds registered in Labuan, are not subject to the licensing requirement under section 13(1) of LOSIA. This clarifies section 13(1), which is silent on whether private fund managers need to be licensed.
However, fund management companies must specify clearly in their memorandum and articles of association that the purpose of the incorporation is to be a manager of private funds.
Administrators Administrators in Labuan are allowed to provide services to non-Labuan registered funds. This clarifies sections 6 and 9(1) of LOSIA, which state that no fund should be administered from Labuan unless the fund has received consent or has been granted registration under the LOSIA.
Tax And Other Incentives For Labuan: The Re-Tabled Budget 2000 In its continuous effect to develop and promote Labuan, the government has provided various benefits in Budget 2000 which was re-tabled in February 2000. Some of the relevant benefits are set out below.
Five-year extension to the following tax exemptions to commence on year of assessment 2000:
• – An abatement of 65% (50% on adjusted income prior to the year of assessment 1997) of the statutory income of trust companies.
– An exemption of up to 50% of gross income received by non-citizen individuals employed in a managerial capacity in an offshore company.
Dividends received by a domestic company from an offshore company can be paid to its shareholders as • tax-free dividends.
50% of the housing and regional allowances given to residents working in the public sector and offshore • companies in Labuan will be exempted from tax for the years of assessment 1998 to 2001.
50% of the gross income of a non-resident manager working for a Labuan trust company will be exempted • from tax for the year of assessment 1998 to 2001.
Conclusion The liberalisation of entry criteria for offshore banks through the various incentives and guidelines is both significant and timely. The new policies provide an important tool to garner greater support and interest in promoting Labuan as the premier offshore financial centre in this region.
This article is reproduced from Zaid Ibrahim & Co’s Law & Practice Update Volume 2 June 2000. Zaid Ibrahim & Co is an associate firm of Arthur Andersen network of law firms. For more information on Labuan tax incentives, the lawyers at Zaid Ibrahim & Co may be contacted at zaid.ibrahim@ my.zaidibrahim.com. This article was extracted from LawLines Volume II, Issue III - September 2000.
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