Malaysia tax haven Labuan to position itself as Islamic finance hub

The Labuan International Business and Financial Centre seeks to attract international Islamic businesses with tax incentives and a well-developed Shariah-compliant finance infrastructure. PICTURE: Malaysia TourismBy Arno Maierbrugger/Gulf Times Correspondent /BangkokMalaysia’s offshore financial centre of Labuan, an island designated as Special Economic Zone off the northern Borneo coast, which has seen a surge in interest in Islamic finance transactions in the last year, now aims at positioning itself as an Islamic finance hub for the Asia-Pacific region.According to its 2014 report, the Labuan International Business and Financial Centre (Labuan IBFC) recorded a 12.3% growth in new companies registered in Labuan to 11,630 as per end-December, a number that continued to rise further in the first quarter of this year. As of March 2015, there were 11,832 Labuan companies. Total assets of the companies and banks registered in the zone grew 3.7% to $44.3bn. The increasing demand for Islamic finance in Labuan saw Islamic finance transactions grow by 28% from $776mn to $993mn, the report, released on May 26, showed.“Greater awareness of the value proposition of the Labuan IBFC is reflected in a double-digit growth in registration of Labuan companies, continuous growth in the registration of foundations and outstanding growth in the establishment of international commodity trading companies,” Zeti Akhtar Aziz, chairwoman of Labuan Financial Services Authority and governor of Bank Negara, Malaysia’s central bank, said at the presentation.The Labuan IBFC was established in 1990 by the Malaysian government as an offshore financial centre and free trade zone to tap investment opportunities in Southeast and East Asia and beyond. Since its launch, the island has become base for a broad range of offshore companies, as well as branches of international banks and financial institutions.Apart from offshore holdings, the Labuan IBFC focuses on captive insurance, public and private funds and wealth management. Its business scope was enhanced in 2006 by the launch of the Malaysian International Islamic Finance Centre initiative in August 2006, which gave Islamic finance on the island an early boost. Last year, the Labuan IBFC introduced Islamic wealth management services, claiming to have been the first institution to introduce this new product to the Islamic finance community globally.In the past years, Labuan IBFC embarked on an aggressive growth strategy in its aim to close up to other financial hubs in the region, namely Singapore and Hong Kong. With regards to Islamic finance, it has a good home position in being a part of Malaysia, one of the countries with the largest Islamic finance industry in the world, and being supported by Malaysia’s central bank in developing innovative Islamic capital market products and generally creating awareness for Islamic finance in the region. With this strong backing, the Labuan IBFC collaborates with and compliments the influential Malaysia International Islamic Financial Centre (MIFC) to promote Islamic financial products and services to an international audience. Malaysia’s Islamic finance infrastructure, coupled with Labuan IBFC’s regulatory framework and open environment for Shariah-compliant businesses, is thus seen as the main strengths for Labuan to expand its Islamic finance market. With the Labuan Islamic Financial Services and Securities Act 2010 it has further streamlined and consolidated Islamic finance-related issues, including specific requirements covering Islamic banking, takaful, retakaful, sukuk issuance, as well as Islamic trust and fund management.According to Aderi Adnan, Labuan IBFC’s Business Development director who is specialised on Islamic finance and wealth management, other advantages of setting up an Islamic finance business on the island are its “competitive tax rates” whereby non-trading companies pay no tax at all while trading companies can opt to pay tax each year at the rate of 3% of the net audited profits or a flat rate of 20,000 ringgit (QR19,828). There are no taxes on profits from passive investment, no capital gains taxes, no withholding taxes, no transfer taxes and no exchange control restrictions, which allows for competitive pricing for Islamic finance products and transactions. Furthermore, Labuan boasts “an ample talent pool of Islamic finance expertise” and “comprehensive legal framework with better clarity for Islamic finance with international recognition”, Adnan says.The concept seems to pay off. Among the latest new international entrances into Labuan’s Islamic finance sector were two Australian companies, a solar power joint venture that seeks to sell a debut sukuk this year, and a mining company that is setting up an Islamic commodities trading business in Labuan. And with Japan’s recent foray into the Islamic market and a planned enhanced co-operation with Malaysia in the sector, a spike in new registrations of Japanese business in Labuan is expected.