NEW LABUAN LAWS New laws have been passed for the Labuan International Business and Financial

Centre (Labuan IBFC), an international financial centre established by Malaysia in the island of Labuan since 1990. In December 2009, the Parliament of Malaysia passed a set of new legislation for Labuan IBFC. This represents the ongoing effort by Malaysia to ensure that the Labuan IBFC laws remain competitive and relevant, especially in light of the increasing world scrutiny on international or offshore financial centres. The new laws have been gazetted by the Minister of Finance and have come into effect on 11 February 2010. The new legislation comprise the following Acts Offshore Companies (Amendment) Act 2010 (Act A1367); Labuan Offshore Trusts (Amendment) Act 2010 (Act A1368); Labuan Offshore Financial Services Authority (Amendment) Act 2010 (Act A1365); Labuan Offshore Business Activity Tax (Amendment) Act 2010 (Act A1366); Labuan Financial Services and Securities Act 2010 (Act 704); Labuan Islamic Financial Services and Securities Act 2010 (Act 705); Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 (Act 707); and Labuan Foundations Act 2010 (Act 706).

The Labuan Trust Companies Act 1990, Offshore Banking Act 1990, Offshore Insurance Act 1990, Labuan Offshore Securities Industry Act 1998 and Labuan Offshore Limited Partnerships Act 1997 are repealed. A general amendment across the new laws is to drop the use of the word offshore, including in the name of the remaining Acts. Hence, the names of the existing Acts will be changed to the Labuan Companies Act 1990, Labuan Trusts Act 1996, Labuan Business Activity Tax Act 1990 and Labuan Financial Services Authority Act 1996. Similarly, in the new Acts, terms are defined (or redefined) without the word offshore. In line with these changes, the Labuan Offshore Financial Services Authority (LOFSA) is now known as the Labuan Financial Services Authority (Labuan FSA). This paper sets out a summary of the key changes in the new legislation in two Parts. Part I discusses the overall key general amendments and Part II provides a short summary of amendments to the specific Acts. Part I General Amendments 1. New types of Legal Entities

There are new types of legal entities that may be established in Labuan.

Under the old laws, the legal entities that may be established in Labuan are offshore companies, offshore trusts (including unit trusts), offshore partnerships and offshore limited partnerships. Foreign companies may register as a foreign offshore company. Whilst over the years these entities have served the businesses being conducted at Labuan IBFC well, it was generally felt that in order to be competitive with other international financial centres, there was a need to statutorily provide for new types of legal entities that have gained popularity in many jurisdictions in the world. They are as follows. Labuan protected cell company This is a Labuan company established under normal company rules with the ability to segregate its assets and liabilities into different cells, separated from the general assets of the protected cell company. This structure allows for increased protection to investors as the assets of each cell is protected from the liabilities of the other cells. Where a liability arises which is attributable to a particular cell of a Labuan protected cell company, only the cell assets attributable to that cell shall be used to satisfy the liability. Labuan protected cell companies are only permitted to carry on the business of mutual funds (conventional or Islamic) or Labuan insurance (including captive insurance) business (conventional or takaful). Labuan protected cell companies may be incorporated under the amended Labuan Companies Act 1990 or converted from existing Labuan companies or foreign Labuan companies with the approval of the Labuan FSA. The Labuan protected cell company is a separate legal entity and can have an unlimited number of cells. It shall have 2 categories of assets, the cell assets (comprising the assets held within the protected cells) and the general assets (assets other than the cell assets). Cellular and noncellular assets must be kept separate. Cell dividends may be declared and distributed in relation to each cell. Separate registers shall be kept with respect to the shareholders of each cell. Separate committees may be appointed to manage the business of particular cells. The provisions on Labuan protected cell companies are found in a new Part VIIIB of the (renamed and amended) Labuan Companies Act 1990. Labuan limited liability partnership (LLP) The LLP model hardly needs any introduction as it is already available as a more flexible structure for doing business in many countries including the United Kingdom, Australia, Canada, Japan, Jersey and Singapore. It is also being considered by the Companies Commission of Malaysia and is the subject of a consultative paper issued by them. Since 1997, Labuan has the limited partnership (LP) which is a structure that has elements of both a partnership and a company the general partner bears unlimited liability whereas each limited partner, who does not participate in the management of the business, bears liability limited to the amount of their contribution (or as the partnership agreement may specify). To a certain extent, the LLP in Labuan is similar to the LP in that it is also intended to have elements of both a partnership and a company. However, unlike the LP, it has a 2

legal personality separate from its partners and can hold assets in its own name, can sue and be sued in its own name and has perpetual succession. Every partner of an LLP is liable only to the extent of its respective contributions to the LLP and each partner enjoys limited liability, similar to shareholders of a company. Unlike a company where the management lies with the directors, all partners in a Labuan LLP may be involved in the management of the business directly. The relationship amongst the partners is provided for in the partnership agreement. The LLP shall have a designated partner who shall be answerable to the Labuan FSA for the doing of all acts and things as are required to be done by the LLP. Like its counterparts in other countries, the Labuan LLP is much less regulated than the Labuan company. There is no requirement to file annual returns and it is only required to file an annual solvency declaration once in each calendar year confirming that it is solvent. A Labuan LLP may be registered under the new Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 or converted from a Labuan LP or a Labuan company, subject to certain conditions being met. The provisions on Labuan LPs previously set out in the repealed Labuan Offshore Limited Partnerships Act 1997 are now found in Part II of the Labuan Limited Partnerships and Limited Liability Partnerships Act 2010, whilst the provisions on Labuan LLPs are found in Part III of this new Act. Under the new Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA), Part X provides for the formation of the Labuan Islamic LP and the Labuan Islamic LLP, being such partnerships whose establishment is undertaken expressly with a view that their respective aims and operations shall be in compliance with Shariah principles. Labuan foundation A foundation is the civil law alternative to a common law trust. It is created by a founder who transfers assets to the foundation, to be administered by a council (supported by officers), for the benefit of and eventual distribution to, beneficiaries. It was used historically by wealthy European families for the transfer of their assets to beneficiaries. The concept of foundations has since, in both civil law and common law countries, evolved into an effective asset protection and wealth management vehicle, generally regarded as a more flexible structure to the common law trust. Under the Labuan Foundations Act 2010, a Labuan foundation is formed when a founder registers a charter by which the founder undertakes to provide assets for the benefit of the beneficiaries. The foundation assets will be managed by a council consisting of individuals or body corporates, in accordance with the terms in the charter and a set of rules or articles providing more detailed terms on how the foundation is to be managed. The Labuan foundation is a separate legal entity and the assets provided by the founder to it are held in the foundations own name and cease to be assets of the founder. The property of the Labuan foundation shall be exclusively managed in accordance with the charter for the attainment of the purposes of the foundation. Unlike a trust, a foundation is administered according to contractual terms rather than fiduciary principles. A foundation is managed at two levels the higher level being the 3

council which is responsible for ensuring that the foundation complies with the terms of the charter and applicable law as well as the general supervision of the management of the Labuan foundation by its officers, and the lower level being the officer or officers who shall administer the foundation to achieve the purposes or objects of the foundation. Under the new LIFSSA, Part IX provides for the formation of the Labuan Islamic foundation, being a foundation whose establishment is undertaken expressly with a view that its aims and operations shall be in compliance with Shariah principles. Labuan Special Trust The Labuan Special Trust is a trust designed to enable owners of a Labuan company or a Labuan LLP to establish a trust to specifically hold shares or partnership interests in the Labuan company or Labuan LLP. The trustee holds these shares (designated shares) while management of the Labuan company continues to be carried out by the directors (or limited partners, in the case of the LLP) without any power of intervention by the trustee. It is modeled after the Virgin Islands Special Trusts Act 2003 (VISTA) enacted in the British Virgin Islands. Under the provisions of the amended Labuan Trusts Act 1996, the designated trust shares must be shares of a Labuan company and the trustee must be a Labuan trust company. The trustees primary duty is to retain the shares and this duty takes precedence over the duty to preserve or enhance the value of the trust fund. The trustee is not accountable for losses arising from holding the shares, in particular losses arising from factors such as absence or inadequacy of financial return or decrease in value of shares. However, the trustee may intervene in specific circumstances. If an interested person (the beneficiary, enforcer or protector) has complaints about the conduct of the companys affairs on a permitted ground (permitted grounds are specified in the trust instrument), he may call upon the trustee to intervene (an intervention call). The trustee may then take appropriate action. The trustee has no fiduciary responsibility in respect of the assets and affairs of the company except when he intervenes based on an intervention call. Voting or other powers in respect of the trust shares will not be exercised by the trustee so as to interfere in the management of the company. The conduct of the companys business, including decisions regarding payment of dividends, is left to the directors of the company. The new provisions also enable the settlor of a Labuan Special Trust to prescribe special rules on how the trustee should exercise his voting powers in relation to the appointment, removal and remuneration of directors. Essentially, the Labuan Special Trust, unlike other trusts, allows the management of the trust to remain in the directors of the company and not the trustee and it is a form of retention of powers of the settlor. The provisions on the Labuan Special Trust are found in a new Part IVA of the (renamed and amended) Labuan Trusts Act 1996. 2. Removal of Malaysian Restrictions

The old restriction on Labuan companies to hold shares, debt obligations and other securities in Malaysian companies is removed through the deletion of section 147 of the Offshore Companies Act 1990. There is no notification or other requirement for such holding. Malaysian residents are also permitted to enter into transactions with Labuan 4

entities with only a requirement, in limited circumstances, to notify the Labuan FSA within ten working days of such transaction. Malaysian residents are also now permitted to register LPs and LLPs in Labuan, as well as establish Labuan trusts and foundations, and the Islamic equivalent entities under the new LIFSSA. Malaysian residents are also permitted to be the beneficiaries of such trusts and foundations. 3. Disclosure of information of Labuan entities

In line with the requirements of the Organization for Economic Co-operation and Development (OECD) on the exchange and disclosure of tax information amongst contracting countries, the Labuan laws now permit the disclosure of such information relating to any Labuan entity to countries which Malaysia has a double taxation treaty with (which as of 19 January 2011, totals up to 69 countries). In the latest progress report issued by the OECD on 18 February 2010, Malaysia is classified in Category 1 under the list of countries which has substantially implemented the internationally agreed tax standards (commonly known as the white list). This puts Malaysia in the same category as other major financial centres like Australia, Japan, United States, Switzerland and Singapore. Part II Specific Amendments 1. Amended and Renamed Labuan Companies Act 1990

Under the amended Labuan Companies Act 1990, the changes are generally to keep up with modern legal developments in other countries and accommodate the conduct of business in Labuan which pace has overtaken existing law. The provisions on public offers of shares and debentures of offshore companies formerly found in Division 1 of Part IV are deleted entirely and replaced by new provisions on offers of securities in Part II of the new Labuan Financial Services and Securities Act 2010 (LFSSA) and Part III of the new LIFSSA. These changes include the abolishment of the concepts of par value and authorized share capital with respect to Labuan companies, permitting companies limited by guarantee and the introduction of protected cell companies as discussed in Part I above. There is greater ease in carrying out share buyback and capital reduction exercises through the satisfaction of a solvency test. New provisions for the statutory amalgamation of Labuan companies and foreign corporations are introduced. There is also now a simplified method of voluntary winding up procedure for solvent companies. In line with the greater ease and flexibility permitted in the amended Act, new provisions relating to directors duties are included which, among other things, expressly provide that directors shall act in good faith in the best interest of the company and shall exercise reasonable care, skill and diligence with the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities. There are also provisions clarifying the requirements as well as matters that a director may rely on, for a director to satisfactorily make a business judgment in matters concerning the company.

2.

Amended and Renamed Labuan Trusts Act 1996

Under the amended Labuan Trusts Act 1996, the key changes include the ability of the settlor of Labuan trusts to reserve certain powers including the power to revoke or amend the terms of the trust, the power to apply income or capital of the trust property, the power to give binding directions to the trustee relating to the trust property and the power to appoint or remove any trustee, enforcer or beneficiary. Greater prominence and statutory protection is given to the purpose trust, which was formerly recognized only under the old section 4(3), and it is expressly provided that the purpose trust shall not be rendered void merely by uncertainty in its objects or mode of execution. The appointment of an enforcer for a purpose trust is now made mandatory. New provisions on the powers, obligations and rights of enforcers are introduced. The powers and duties of trustees are clarified through new provisions on, for example, obtaining and considering proper advice prior to exercising a power of investment. A Labuan trust shall continue to exist for an unlimited period i.e. in perpetuity unless otherwise stated in the terms of the trust. 3. Amended and Renamed Labuan Business Activity Tax Act 1990

Taxation in Labuan remains unchanged at 3% for a year of assessment upon the chargeable profits of a Labuan entity carrying on Labuan trading business activity (previously defined as offshore trading business activity) or RM20,000 as it may elect. There remains to be no tax chargeable for a year of assessment of a Labuan entity carrying on Labuan non-trading business activity (previously defined as offshore nontrading business activity). Pursuant to the amendments to the Labuan Offshore Business Activity Tax Act 1990 (under Chapter V of the Finance Act 2007 (Act 683), a Labuan entity continues to be able to elect to pay tax for a year of assessment under the Income Tax Act 1967 in respect of its Labuan business activity (previously defined as offshore business activity) if it chooses to, instead of under this Act. The amendments in this Act are mainly consequential amendments to the amended Labuan Companies Act 1990 and ensuring that all new types of Labuan entities under the amended Acts and new Acts are captured (and therefore can enjoy) the tax treatment under this Act. The list of Labuan entities are found in a new Schedule to the Act. 4. Amended and Renamed Labuan Financial Services Authority Act 1996

Under the amended Labuan Financial Services Authority Act 1996, as aforementioned, the LOFSA has been renamed as the Labuan FSA. The key changes in this Act deal with the increased supervisory and enforcement powers of the Labuan FSA, as well as its right to disclose information that it obtains from or on the Labuan entity, in light of increasing world scrutiny on offshore financial centres and the increased importance and emphasis placed by international organizations like the OECD and the International Monetary Fund on the ability of the governing authority to disclose information in order to combat money-laundering and terrorism financing activities. The Labuan FSA is, under the amended section 28B, permitted to disclose information that it obtains from or on the Labuan entity in certain circumstances, including (a) to the 6

(Malaysian or foreign) home supervisory authority of the Labuan entity if such home supervisory has the necessary provision in its constituent documents or corresponding laws to safeguard such information from unlawful disclosure, and (b) to the domestic law enforcement agency (meaning an agency that is responsible in Malaysia for the enforcement of laws relating to the prevention, detection and investigation of any criminal offence) when the Labuan FSA has reasonable suspicion that a criminal offence is about to be committed or is being committed or has been committed provided that the domestic law enforcement agency has executed a secrecy undertaking on the information provided. Other events allowing the Labuan FSA to disclose information include pursuant to a court order, and in giving effect to any legal arrangement or memorandum of understanding or agreement with any foreign government or home supervisory authority entered into by (i) the Government of Malaysia (for example double taxation treaties), (ii) the Labuan FSA with the approval of the Minister or (iii) any relevant domestic law enforcement agency with the approval of the relevant minister. New powers include the Labuan FSAs power of entry, search and seizure for the purpose of investigating any offence and the power to examine and search persons. The Labuan FSA may also assist other authorities in Malaysia by supplying to other authorities any information that it has with respect to Labuan entities and allow in investigation or prosecution. 5. Consolidation of the securities and financial services law under the new Labuan Financial Services and Securities Act 2010 and the Labuan Islamic Financial Services and Securities Act 2010

The repealed acts that previously provided for the licensing of financial activities, the Labuan Trust Companies Act 1990, Offshore Banking Act 1990, Offshore Insurance Act 1990 and Labuan Offshore Securities Industry Act 1998 (Repealed Acts) and the provisions on the offer of shares and debentures previously found in Division 1 and 2 of Part IV of the Offshore Companies Act 1990, as well as the licensing of company management activities in Part VIIIA of the Offshore Companies Act 1990, are consolidated into the new LFSSA and, for purely Islamic activities and offers, the new LIFSSA. Under the new Part II of the LFSSA, the Labuan FSAs approval is required for an offer of securities in Labuan unless it is an excluded offer. The excluded offers include private offers (where offers are made to a restricted circle of 50 or less persons, which is an increased number from the previous 20 persons limit), sophisticated offers and mutual fund offers. These provisions are mirrored in Part III of the LIFSSA. While the substantive provisions on the licensing of activities previously set out in the Repealed Acts generally remain, a key change is that all applications for banking and investment banking licences no longer need the approval of Bank Negara Malaysia (Central Bank of Malaysia) and will now be approved by the Labuan FSA. Another key change is that, in addition to the fund management activities, the activities of securities dealing and investment advice are now also licensable activities in Labuan. Under the LIFSSA, it is also now possible to obtain banking, securities or insurance licences for purely Islamic banking, Islamic securities and takaful activities only. In addition, the new legislation has introduced the licence for a private trust company. This is a company carrying on trust company business for a single family trust or a group 7

of related trusts and does not have to be licensed as a Labuan trust company. This private trust company cannot offer trust services to the general public but is incorporated for the purpose of acting as trustee of a single trust, or a group of related trusts. 6. Shariah law framework

The LIFSSA is a new Act that aims to provide a consolidated and comprehensive regulatory framework for Shariah compliant businesses in the Labuan IBFC. The LIFSSA provides for a Shariah Supervisory Council which shall be appointed by the Labuan FSA to be the authority in ascertaining Islamic law and advising on any Shariah issue for any business regulated or supervised by the Labuan FSA. The LIFSSA also contains provisions on the offer of Sukuk, the licensing of Islamic banking and takaful matters, securities dealing and investment advice, the establishment of Islamic private and public funds, the registration of Islamic trusts, Islamic foundations and Islamic LP and LLP as well as the recognition of an Islamic self-regulatory authority in the form of a Shariah adviser or Shariah advisory board. We will be happy to advise you in greater detail on the new laws and the impact or opportunities it may present to your business. Kindly contact Chua Wei Min, director of ZI Labuan Trust Company Limited for further details.