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Improvements To Labuan's Tax Regime On The Horizon

by Mary Swire, Tax-News.com, Hong Kong

02 May 2007


It has emerged that the Malaysian Finance Ministry is working with the financial authorities of Labuan to establish a new tax structure aimed at attracting more companies to the Labuan International Offshore Financial Centre (IOFC).

Speaking at the release of the Labuan Offshore Financial Services Authority (Lofsa) annual report for 2006, Tan Sri Dr Zeti Ahktar Aziz, Bank Negara Governor and Lofsa chairman, said that new tax initiatives may be included in the 2008 budget, due to be announced in September 2007, along with new company forms to better cater for the requirements of offshore investors.

"With the new incentives, LOFSA will be able to compete with other offshore centres in the Asia-Pacific region and the world," Zeti told reporters.

“We want to be competitive and relative to other offshores as the environment is changing very significantly," she added.

The Labuan IOFC, which celebrated its tenth anniversary in 2006, is today home to over 300 financial institutions that provides a comprehensive range of financial services, both conventional and Islamic, including offshore banking, investment banking, insurance and insurance-related activities, investment holding, trust, fund management and leasing. These institutions serve more than 5,500 offshore companies registered in the Labuan IOFC. In addition, the Labuan International Financial Exchange (LFX) further complements capital-raising activities in the IOFC, allowing for listing and trading of financial instruments by international issuers, especially from the Asia-Pacific region.

More recently, the Labuan IOFC has developed into an active international centre for Islamic finance, regionally and worldwide, supported by an infrastructure that provides the foundation for the promotion of Islamic financial services. Part of this infrastructure is the Shariah Advisory Council, which advises LOFSA on issues relating to Shariah-approved financial instruments in Labuan IOFC. This has paved the way for a more efficient and effective introduction of innovative and new Islamic financial instruments.

The first global sukuk by a Malaysian corporation and the sovereign sukuk by the Government of Malaysia are both listed on the LFX. In October 2006, the Labuan IOFC achieved another milestone with the primary listing of the world's first exchangeable and equity-linked sukuk issued on the LFX. The US$750 million sukuk brought the exchange's Islamic capital market capitalisation to US$2.8 billion, representing 18.5% of the total market capitalisation of US$15.1 billion.

The Malaysia International Islamic Financial Centre (MIFC), a joint initiative by the country's financial and market regulators, was launched in August 2006. The MIFC aims to position Malaysia as a leading centre for the offering of Islamic financial products and services in international currencies to the global and domestic financial community. The MIFC seeks to attract global investors and strengthen integration with the international financial system. Through this initiative, Islamic offshore banks, Islamic divisions of offshore banks, offshore takaful operators and offshore retakaful operators in Labuan IOFC are able to expand their physical operations beyond Labuan island to operate on the mainland and conduct foreign currency business, whilst enjoying the full benefits of the IOFC.

The recent liberalisation of exchange control administration rules by Malaysia is also expected to benefit players in Labuan IOFC. Increased investments in ringgit assets for non-resident investors should translate into greater opportunities for product enhancements. Offshore players are also expected to take advantage of opportunities emerging due to growing trade linkages with regional economies and other parts of the world, facilitated by the more flexible exchange control regime.

As competition intensifies, the Labuan IOFC said that it is also repositioning itself through the identification of niche businesses, looking beyond traditional products and services and capitalising on its strengths.

A review of the entire legislation pertaining to Labuan IOFC and an increased range of products and services is currently underway.


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