The offshore center that never took off…

November 18, 2010
Labuan, off the coast of Borneo

About 25-years ago in the mid-1980s, a bunch of Malaysian politicians got together and plotted. Hong Kong, the region’s undisputed financial center at the time, was due to be handed over to those “Communist China” in about 10-years time, and everyone was terrified of what would happen.

Fully expecting Hong Kong to sink into the ocean under Chinese control, Malaysia set out to build its own version of Hong Kong– a new and improved Asian financial center based out of Labuan, a tiny island off the coast of Borneo.

Labuan was officially declared an international financial center in 1990 by the Malaysian government, 7-years before the Chinese takeover of Hong Kong. The idea was simple– offer low-tax/no-tax corporate structures with a sound, modern banking system, and billions of dollars would stream in from Hong Kong.

That’s not exactly what happened. China announced its ‘one country, two-system policy,’ stating that Hong Kong would remain as-is for at least another 50-years. Whoops. The flood of billions never happened, and Labuan has struggled as a financial center.

Frankly, I’m a bit mystified about this, and let me explain why:

There are two categories of companies that can be structured in Labuan– trading, and non-trading. Don’t confuse these terms with financial trading as in buying/selling stocks. A “trading” company essentially means an operating business that generates profits by selling products or services to customers.

Inversely, a non-trading company is like a holding company that simply owns assets or other portfolio companies. It generates profits by receiving dividends, rents, and royalties.

In Labuan, non-trading companies that don’t have any Malaysian-source income have a total tax rate of zero. Furthermore, there is no withholding tax, no capital gains tax, no dividend tax, no assessments against directors’ fees, etc. What you earn is what you keep.

For trading companies that operate a business, it gets rather interesting. These companies have the option to either pay 3% of their profits, or simply pay a flat tax of 20,000 Malaysian ringgits (MYR)… roughly $6,300 USD. That’s it. A company can earn millions of dollars in profit and still pay 20,000 MYR.

The clincher here is that Labuan is part of Malaysia. As such, any country that has a comprehensive tax treaty with Malaysia has a tax treaty with Labuan.

Consequently, foreigners that qualify under a tax treaty can operate a Labuan-based company and be subject to Malaysian tax instead of the higher tax rate in their home country… and as we just saw, Malaysian tax rates in Labuan are either 0%, 3%, or 20,000 MYR.

You don’t get this benefit in other corporate jurisdictions like BVI or Panama, and it can be a serious advantage for entrepreneurs.

Labuan is also a great place to bank, full of well-capitalized financial institutions and a regulatory regime that supports privacy. It’s also possible at some banks to open accounts remotely.

In my case, it only took about 5-minutes to open an account today, including the usual facilities like credit card, online banking, and even a trading platform.

Depending on your circumstances, Labuan may be a fantastic option for you. I’m going to be writing a lot more about it for the next edition of Sovereign Confidential, including my personal contacts who will be presenting at our sold-out conference this February.

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