Malaysia: Growth Brings Greater Responsibilities And Compliance

Last Updated: 17 April 2018
Article by Labuan IBFC Inc.

Labuan IBFC has made changes to ensure an uninterrupted history of compliance, commitment to
international standards key to the jurisdiction's and to Malaysia's reputation.

Global financial centres have been under the public spotlight since the Global Financial crisis of 2008, a decade on, fundamental changes are still being introduced to conform to the global requirements for higher transparency and substance creation. For Labuan International Business and Financial Centre (Labuan IBFC), the levelling of the "international playing field" and the shrinking of regulatory arbitrage has meant that its inherent proposition as a Asian-based cost-efficient, substance-enabling midshore jurisdiction has come of age.

The jurisdiction's adherence to international standards has always been important to Labuan IBFC and essentially to Malaysia. Indeed, commitment to the highest international standards has been key in ensuring it is an uninterrupted history of compliance and is part of being a midshore jurisdiction. This was one of the key points made by Farah Jaafar-Crossby, CEO of Labuan IBFC Inc at the recent Asset Leasing Symposium 2018 in Kuala Lumpur.

Speaking at the opening of the Symposium, she said, "After all, we do live in an ever-changing world, and like every other jurisdiction, Labuan IBFC has to also make the required changes to ensure an uninterrupted history of compliance which is essential to the reputation of Labuan IBFC, Labuan Financial Services Authority (Labuan FSA) and Malaysia itself."

According to Farah, the asset leasing sector too, will have to change to meet the needs of international standards of transparency and substance. The leasing industry, which reached nearly USD1 trillion its overall global annual volume in 2017, has been undergoing numerous tax and regulatory changes. In the Asian region, in particular, the industry is expected to grow between 10% and 18% in the next five years.

Hence, to ensure the jurisdiction remains competitive and compliant, the release of the refreshed Guidelines on the Establishment and Operations of Labuan Leasing Business by Labuan FSA is indispensable.

"These changes have long been awaited and seen as setting the next phase of transformation of not only this business line but that of Labuan IBFC itself," said the CEO.

She added that whilst some of these amendments are seen as game changing, it is important to remember these requirements are not in excess of what is prescribed by global standard setting bodies, and as such it is a question of time before these standards will soon be adopted by other jurisdictions.

The changes to Labuan leasing business and operation

A key driver to the introduction of the refreshed Guidelines is to ensure Labuan IBFC remains relevant and complies with the Organisation for Economic Co-operation and Development (OECD)'s ring harmful Base Erosion Profit Shifting (BEPS), particularly to Action 5 Report of BEPS that looks at counteax practices.

The revised areas under the Guidelines issued by Labuan FSA on 29 December 2017 include:

Requirement for operational office

Under the new policy, it is a mandatory requirement for a Labuan leasing company to establish physical business presence in Labuan island.

However, it is possible for related companies – for example: Holding company of the leasing companies, a subsidiary established by the same holding company or a subsidiary or a branch of the leasing company – to share the same office in Labuan.

The need for substantial activities

It must be noted that the core income generating activities, i.e. key leasing activities, are expected to be carried out from the Labuan office. Among examples of these activities are acquiring assets, negotiating terms, soliciting leases, management of leased assets, signing of leasing agreements, decision making, conducting Board meeting or having strategic business discussions.

It is possible for outsourcing arrangements with prior approval from Labuan.

Adequate number of full-time employees

It is necessary to have adequate number of full time employees dedicated to the business operations. Employees are expected to possess the required qualification, skills or experience in the relevant fields related to their role in the business.

Annual business spending

The leasing business is required to incur expenses in Malaysia including in Labuan to support the operations of the business. These include spending on office rental, defraying payments and statutory fee payments.

Annual licence fee and subsequent transaction fee

Annual licence fee and subsequent transaction fee are now applicable for both resident and non-resident dealings.

New definition of assets that to be leased

The term 'asset' now refers to:

  • Big ticket items: High value assets used for oil and gas, aviation, shipping and other sectors. For example, oil rigs; private and commercial aircrafts; tugboats and others.
  • Specialised assets: Assets that are intended for pecuniary or specific purpose. For example, state-of-the- art technology that is not available in Malaysia or short-supply assets such as submarine or aviation simulators; hyperbaric diving chamber; seabed sonar mapping devices and others

Stamping of leasing agreement

The lease agreement is to be stamped and endorsed by the Collector of Stamp Duties at the Labuan branch of Stamp Duty Office of Inland Revenue Board of Malaysia.

Effective date for compliance

It must be noted that all existing Labuan leasing companies are expected to comply with the revised Guidelines by January 1, 2018. Leasing companies are however entitled to a one year transition period to comply to the requirements. This "window" is applicable for both existing and new Labuan leasing companies and all approvals granted prior to the revised Guidelines will remain valid.

On the whole, it is expected that the changes to the Guidelines not only serve to ensure the jurisdiction adheres to international standards of taxation, it will also ensure that all leasing operations in Labuan IBFC meet the substantive needs for substance as dictated by global multilateral organisations such as a the OECD.

Farah added that whilst change has never been easy, a lucrative future is still there to be had for those who embrace it and work within its new parameters in order to carve out an opportunity for themselves.

As such, Labuan IBFC is confident these imminent changes will further strengthen the midshore jurisdiction's proposition to become a preferred hub for asset leasing in the region.

For more information, please refer to the Guidelines here.

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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