1 January 1970EMEA analysis

Labuan: more than a tropical paradise

More mature readers will, perhaps, remember the 1988 film Cocktail and its theme tune Kokomo, which was a numberone hit in the same year for the Beach Boys. As an insurance man and captive all-rounder who firmly believes that proper music died with Elgar, I went to see the movie convinced that it had something to do with captive insurance. After all, Bermuda, Bahamas, Antigua, Barbados, etc.—aren’t they all captive locations? But no, I was left with the antics of Messrs Cruise and Brown, a thin storyline and only the adorable Elisabeth Shue for some restful thoughts.

But it is true, is it not, that many, if not most, captive insurance centres are to be found on green and pleasant islands festooned with pristine beaches, bejewelled by lush golf courses and embellished by Michelinstarred restaurants? Yes, I will grant you that Guernsey in November may not quite live up to the image and Luxembourg in February is not much better, but the restaurants aren’t bad, are they?

Now it is my great pleasure to invite you to add Labuan, the fastest growing captive insurance centre in the East Asia, to the list.

Situated off the North coast of Borneo, Labuan is in the same time zone as Singapore, Hong Kong, Indonesia, and much of India and China, and is readily available during ‘normal’ office hours to most of the rest of the world. The island is only half an hour by air from Kota Kinabalu or just under three hours flying from Kuala Lumpur. Labuan is a Federal Territory of Malaysia and that country’s International Business and Financial Centre. In every way, Labuan lives up to its Cocktail reputation—beaches, coral reefs, diving, fishing and golf are all readily available, and the island has a number of hotels and restaurants of international standard.

However, it is not just the superficial trappings of a captive location that qualify Labuan to be included at the top-end of the captive scale. Rather it is the fiscal and regulatory environment, the ease of company formation, availability of expertise, competitive costing and a sophisticated communications network that has attracted insurers, reinsurers and captive managers from as far away as Russia and Australia, the US and Japan to the shores of Labuan to establish their risk-financing entities.

Although Labuan has, for some years, been progressing by stealth, in fact, the island has been establishing, regulating and managing captives since 1996. It is, however, only in the last two-and-a-half years that the island has really taken off as a captive centre of choice for international companies. It was in May 2008 that the then regulator, the Labuan Offshore Financial Services Authority was reconstituted and the Labuan International Banking and Financial Centre (Labuan IBFC) was formed. The regulator, now renamed the Labuan Financial Services Authority (Labuan FSA), remains based in Labuan and performs a solely regulatory function. Sales and marketing activity is controlled through Labuan IBFC Inc. Sdn. Bhd., a Kuala Lumpur-based subsidiary and partner of Labuan FSA. Both entities are wholly owned by the Malaysian government.

New legislation introduced in February 2010 has greatly streamlined the administrative procedures for captive insurers and introducedsubstantially simplified and improved structures for protected cell companies (PCCs). In all, a total of four new pieces of legislation were passed covering Islamic finance, trusts and foundations, shipping and leasing, whilst the Companies Acts, including reference to holding companies and insurance entities, were substantially overhauled.

Malaysia has long been regarded as the world leader in Islamic finance, and in the Labuan Islamic Financial Services and Securities Act (LIFSSA ), 2010, which is in itself the world’s first comprehensive piece of Islamic Financial Services legislation, we have set the framework for Shariahcompliant captives to be established in Labuan in order to take advantage of the Island’s pre-eminent position in the global retakaful market.

As icing on the cake, the regulator, the Labuan Financial Services Authority, will introduce guidelines in early 2011 that will enable Labuan licensed insurers (including captives) to co-locate to Kuala Lumpur and have full service operations there, subject to the concomitant availability of information in Labuan.

The ease with which the authority can be accessed is one of the jurisdiction’s unique selling points. In addition to carrying out its duties as the insurance regulator, the Registrar of Companies department is, with the Labuan FSA, the Authority and the Immigration Department, responsible for the issue of Work Permits to Labuan licensed entities, making it a truly ‘one-stop shop’ for the establishment of new companies.

The Regulator’s Charter requires that licences are issued within a maximum of 30 days from receipt of properly completed application documents, but the reality is that this period is often not required. The electronic system within the Registrar of Companies’ department allows for company incorporation within one day from receipt of a correctly completed application and the subsequent approval from the regulator for the granting of a licence can quickly follow.

Company registration fees are RM1,500 (approximately $480) per annum for a trading company and RM10,000 per annum ($3,200) for a captive licence. PCCs are required to pay an annual fee of RM30,000 for the core company and RM10,000 for each individual cell. The cells, however, may benefit from the paid-up capital of the parent. All applications must be made through a Labuan licensed trust company and a Labuan licensed insurance manager, and all captives that do not have resident expertise must likewise operate through a Labuan licensed insurance manager. There are 23 trust companies licensed in Labuan and six resident insurance managers, with other ‘managed-bya- manager’ structures also in place owned by international insurance organisations. Trust company and insurance managers’ fees are flexible and negotiable depending on the amount of work required.

The Labuan fiscal structure is equally straightforward and uncomplicated. Labuan benefits from 63 out of Malaysia’s extensive array of 75 double taxation and tax information exchange agreements. Insurance entities, including captives, have the option of paying tax at a flat rate of RM20,000 ($6,400) per annum, or 3 percent of net profit (DTA /TIEA). In a unique twist to global fiscal planning, the option may be re-elected annually in advance to suit the company’s trading profile for the forthcoming year. Where the Malaysian DTA / TIEA system does not benefit a Labuan company, then the Labuan entity may alternatively elect to be taxed under the Malaysian Income Tax Act at the standard Malaysian tax rate of 25 percent.

The minimum paid-up capital for a Labuan captive is RM300,000 for a pure captive or RM500,000 for an association captive or protected cell structure. A 20 percent margin of solvency is required and, where appropriate, a parental guarantee may be required by the regulator.

At the present time, the Labuan FSA does not require sight of the reinsurance programmes of captives based in Labuan, but at the time of application, an outline of the reinsurance protection proposed for the captive must be submitted as part of the documentation package, and the Authority may require further and more detailed information from time to time. Captives may reinsure any market chosen by the management and owners of the company. They are not restricted to reinsuring with Labuan reinsurers or retakaful companies, although as previously mentioned, the Island’s extensive market of 28 conventional reinsurers and six retakaful companies, writing between them a total of $1.2 billion in annual premium makes an easy and attractive option for the global captive manager.

From the annual double-digit growth in the number of captives being registered in Labuan, and the increasing number of enquiries that we are receiving, it is clear that the island is rapidly becoming a jurisdiction of choice for the forward-thinking captive insurance manager. And the beaches are nice too.

David Kinloch is chief executive officer of Labuan International Business and Financial Centre. He can be contacted at: david@labuanibfc.my

About Labuan IBFC

Labuan International Business and Financial Centre (Labuan IBFC) offers global investors and financial service providers all the benefits of being in a leading international financial centre, as well as access to 63 of Malaysia’s vast network of doubletaxation treaties.

As an integrated financial services centre, Labuan IBFC is increasingly becoming a jurisdiction of choice for investment holding companies, and offers a wide range of products such as captive insurance, trusts, foundations, fund management, leasing, international banking, estate planning and wealth management. Investors can enjoy the benefits of Labuan’s costefficient and market-friendly business environment, supported by professional service providers specialised in all aspects of international tax, trust and law.

This international financial services centre, off the coast of Sabah, Malaysia is also as a hub for Islamic finance, especially in areas of sukuk issuance and listing, takaful and re-tafakul, shariahcompliant captive structures and Islamic trusts and foundations.

For more information please visit www.LabuanIBFC.my