Emerging markets in Asia aren't limited to just China and India.
The countries that make up the Association of South East Asian Nations (ASEAN) are home to 8.8% of the world's population, and have a GDP larger than India. Growth rates in the region compete with the bigger countries, running between 6 and 8% in some of the top performers. And right in the center of it all is the island of Labuan, a Federal Territory of Malaysia and a tax-free port, situated approximately 8 kilometers off the North West coast of Borneo.
After overhauling its legal framework in 2010 to allow a number of new products, and greatly expanding its network of double taxation agreements (DTA), the island is well suited to take a place not just as the geographic center of this area, but as the economic center as well. The business friendly legislation also means that Chinese companies and individuals have a wide range of investment options and wealth preservation tools at their disposal. The island also benefits from Malaysia's strong political and trading relationship with China which will only become more important as the local economy grows and Chinese send more of their money abroad.
Since the island was declared Malaysia's official financial hub in 1990, the Labuan International Business and Financial Center (Labuan IBFC) has made a name for itself by offering an array of products which have only limited availability elsewhere in Asia. Besides the usual array of holding companies, insurance companies, funds and private wealth management solutions, the island also offers Islamic finance products and the option to form captive insurance companies. In February 2010, Labuan enacted four new laws which expanded the products on offer, with the inclusion of Foundations, Protected Cell Companies, Limited Liability Partnership, Takaful captives (a form of Islamic insurance), Special Trusts, and Private Trust companies.
The new framework also added shipping operations to the list of Labuan's business activities and extensively amended the Labuan Companies Act to permit Labuan companies to own controlling stakes in Malaysian companies.
"Labuan IBFC offers a wide range of wealth management vehicles such as Private Trust Companies, Foundation, Protected Cell Company or Private Limited Partnership which makes the proposition of managing wealth in general and both Chinese family and corporate wealth in particular via a Labuan vehicle or structure a highly attractive proposition," said David Kinloch, CEO of Labuan IBFC.
The new Labuan Financial Services and Securities act streamlines the process of setting up companies and private mutual funds, which can now be established without approval from the Labuan regulator. The financial sector comes under a single regulatory body, Labuan Financial Services Authority that acts as a one-stop agency support for incorporation, registration and administration of Labuan companies.
Despite all the reforms of the past year, Labuan is still ready for more. Situated in the middle of the fastest growing area on earth, the jurisdiction knows the value of having a common law legal system that can develop with the times. According to local representatives Labuan's legislation is constantly kept under review and where appropriate, updated to ensure that it stays relevant to the market and regulatory changes.
The legal system also matches the diversity of the region. Islamic Sharia law is applied unto Muslims with respect to matters of personal interest or applied to business activities based on the Islamic principles.
Malaysia complies with the OECD Model Tax Convention on Income and Capital, and shortly after the enactment of the new legislation, Malaysia/Labuan was white listed and is now deemed compliant with OECD's provisions for effective Exchange of Information as set out in Article 26 of the OECD.
Besides being an important offshore center, Labuan is a significant business destination in its own right. The island is home to 7,800 companies, with those of the onshore variety mostly being involved in the Oil and Gas sector, for which Labuan is a major hub in the region.
Trade is where the island really shines.Operation costs in Labuan are also far lower than Singapore or Hong Kong. This combined with modern infrastructure, a large number of DTAs, and a wide variety of support services make Labuan an excellent option for those taking part in the East Asian trade corridor. Besides favorable corporate tax treatment Labuan is complemented by laws that eliminates exchange control, transfer taxes and withholding taxes.
Companies whose activities classified as trading in nature, or have a combination of trading and non-trading activities, can annually choose to pay tax at either 3% of net audited profit or a flat tax of RM20,000 (USD 6,000).
For those not involved in trade, Labuan prides itself on providing quick and lowcost business incorporation. Under the renewed legal arrangement in Labuan, "Chinese financial institutions can apply for relevant licenses in Labuan IBFC and established a co-located office in Kuala Lumpur, Malaysia," Emily Liew, executive director of Equity Trust (Labuan) Limited.
They can also "use a Labuan Company as a holding company for investment abroad, with assurance that the jurisdiction is politically and financially stable with robust legal framework to provide regulation that is easy to understand and follow," adds Liew.
For non-trading activities, investment income is tax exempt. In Labuan, there is also no withholding tax, stamp duty, estate or inheritance taxes and indirect taxes.
"There are a wide variety of products under the new legislation dedicated to international activities that meet investors' needs in many different situations to help them to maximize returns from investing abroad," says Kinloch.