Labuan IBFC: Transforming Trust Business Through Legislative Amendments

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For those who are interested in understanding more about the legislation in the duty-free island, I would like to share the following article by Cheang & Ariff and Equity Trust.


Labuan IBFC: Transforming Trust Business Through Legislative Amendments

Following the introduction of new regulatory framework governing offshore businesses and activities in Labuan, the Labuan International Business and Financial Centre (Labuan IBFC) is expected to draw in more investors, particularly Malaysians, following the introduction of new regulatory framework governing trust businesses on this duty-free island.

Labuan IBFC has been actively implementing changes to its legislative framework to ensure it remains as a global player within the fraternity. This is despite the global economic slowdown, which had forced the Malaysian Government to implement changes to its economic policies. Labuan IBFC was recently further buoyed by its recent "white listing" by the Organization for Economic Cooperation and Development (OECD) as a jurisdiction deemed to have substantially implemented OECD standards for transparency and exchange of information between countries and has undergone a substantial restructuring to further enhance its competitive edge within the international financial services sector.

These new enactments have made positive changes in the way Labuan IBFC operates whilst enhancing its product and services offering. Among the recent changes was the amendments to the Labuan Trust Act 1996 (LTA).

Amendments to the LTA are expected to give Labuan IBFC an edge as a modern offshore centre for wealth planning. This is fortuitous as industry experts forecast that Asia's share of the rich community is poised to grow annually by 12 to 15 per cent until 2013, making the region the largest source of high net worth investors, after the U.S.A. (courtesy of Labuan IBFC Inc. Sdn Bhd).

To a large extent the Labuan Special Trust is modelled after the British Virgin Islands 'VISTA' Trust.

A central provision of the Labuan Special Trust is that it can be used to hold shares in a Labuan Holding Company, which in turn may own assets such as cash, real estate, art, securities, businesses, insurance policies etc.

These shares, which are 'on trust to retain', may be held indefinitely. Interestingly, contrary to conventional approach, as the management of the company is the responsibility of the directors only, there is a distinct separation between the custodian role of trustees and their fiduciary role of investment that is handled by the company directors.

This provision meets the contemporary needs of High Net Worth Individuals or families who recognise that members of the next, younger and better educated generation may wish to attempt more sophisticated investment options; yet by separating the roles indicated above, the founders of wealth (the older generation) can still keep the original legacy intact. This feature is one of the most sought after in Trust Law.

Other advantages of a Labuan Special Trust include the provision for unenforceable claims; a two-year claw-back period and requirements for legal procedures should a creditor attempt to prove a trust is fraudulent; existence of the trust in perpetuity; and the option not to register the trust to protect his privacy.

For expatriates or retiree who may be mulling the benefits of re-locating, consider combining the trust structure with the government’s program called “Malaysia My Second Home” (MM2H). Under the MM2H scheme, a foreigner can own a property in the country and reside anywhere in Malaysia with his family, enjoying the country and its facilities like a resident. The combination of a trust with its tax efficiency, living the good life in a low-cost, tropical location with many fine beaches and modern amenities makes Labuan a proposition that's hard to refuse.

Labuan IBFC, relatively unknown compared to the Caymans or British Virgin Islands, is however, regarded by those who do know it as a safe, and attractive jurisdiction robustly regulated by the newly re-named Labuan Financial Services Authority (Labuan FSA, previously Labuan Offshore Financial Services Authority or LOFSA).

The jurisdiction is already home to more than 7,400 companies; 60 banks; 150 insurance entities; 23 Trust companies and scores of service providers including lawyers, accountants, tax consultants, audit and secretarial staff.

Labuan's strategic location in the heart of South East Asia, off the north west coast of Sabah, Malaysia, has many benefits especially with the current 'flight to quality' plus the continuing economic boom in China and India encourage investments to flow eastwards.