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LABUAN OFFSHORE COMPANIES:

POTENTIAL FOR GERMAN TAXPAYERS

 

The potential of Labuan IOFC as an inverstment centre for Europeans, or in this case German nationals, is highlighted by Finanwirtz (FH) Lutz Alpers, a German tax planning and consulting specialist with offices in Germany and Labuan.

 

Labuan IOFC - Asia’s Financial Centre

When the Malaysian government set up Labuan IOFC as an offshore jurisdiction more than 12 years ago, it was initially greeted with “great scepticism” as to whether the jurisdiction would prove a success and gain international acceptance.

 

Today, however, the initial scepticism has given way to cheers as Labuan IOFC has developed to be one of the established offshore centres in the world, exceeding the forecasts of its most ardent supporters

in the industry. Labuan IOFC is now home to over 3,700 trading and holding companies, and 53 multinational banks, including German financial giants Deutsche Bank, Dresdner Bank, Commerzbank and Bayerische Landesbank.

 

Tax Regime

Labuan IOFC offers tax privileges to offshore companies, specifically offshore companies whose earnings are derived from offshore transactions for nonresidents; and offshore companies dealing in foreign currency-based transactions.

 

With regard to assessing taxes, Labuan IOFC makes distinctions between offshore Trading and Non-Trading activities. The former includes, in addition to straightforward trading in goods, activities  directly involved in trading activities such as banking and insurance, business management, licensing etc. Trading income is subject to a flat corporate tax rate of 3%, or limited to a maximum of RM20,000 (EURO5,000). The latter, by definition, includes investment holding, securities and other investment instruments and is not subject to tax.

 

In cases where incomes are derived from a combination of both trading and nontrading activities, there is no differentiation made. Rather, all income (including such items as interest or dividends) derived is considered as trading income and are thus subject to the 3% tax rate. However, this is still considerably more favourable, especially compared with the current tax structures in Germany.

 

Another advantage to consider is the fact that where and when a Labuan IOFC-based company distributes dividends to its nonresident shareholders, or pays licence fees and interest to non-residents, all withholding taxes are waived, i.e. the payments are received ‘gross’ (read ‘net’).

 

 

Facts to Consider When Setting Up Labuan Offshore Companies

Offshore companies may be formed only as corporate enterprises, either as Public Limited (equivalent to the German AG) or Private Limited companies (similar to the German GmbH).

 

In order to prevent Labuan IOFC from being used to  circumvent Malaysian laws by locals, offshore companies are prohibited from having or maintaining commercial relations with Malaysian companies located outside of Labuan. Offshore companies are free of all restrictions in financial transactions by virtue of their exclusively non-resident status, as defined by the 1953 Exchange Control Act.

 

One partner or shareholder is sufficient to form an offshore company. The Register of Companies (ROC) places great importance on a company’s funds being adequate to meet its business objective(s), so obvious imbalances will lead to delays or even a refusal of registration.

 

The same applies if the founding partner or shareholder has a dubious reputation. In such cases, thorough inquiries are made by the Malaysian Central Bank (Bank Negara Malaysia) in cooperation with other national banks. However, if all registration formalities are prepared professionally, registration can take place within 2 days. Only with registration and the issuing of a corresponding document can the company acquire legal status as a body corporate.

 

It is permissible for an offshore company to issue shares of different types and with different rights. They must, however, always be registered shares whilst bearer shares cannot be issued. The shares must be denominated in a foreign currency or even be issued in multiple currencies, although this can lead to complications at shareholders meetings when determining voting rights.

 

Offshore companies can also offer their shares for public subscription. Applications for approval must be made to the ROC along with the submission of a prospectus, also subject to approval. However, if the offer is restricted to a maximum of 20 persons, this considerably eases the demands for quality placed upon the prospectus.

 

The company must also appoint a Company Secretary who must ensure that the provisions of company law are adhered to, and to conduct correspondence with the authorities. Company  Secretaries must be appointed by a trust company licensed in Labuan. Shareholders meetings can be held in any country, even by teleconference, if necessary.

 

Business and banking secrecy is governed by law. Strict penalties may be imposed on any person who breaches these laws, e.g. disclosing information on the ownership of the shares of a company and its financial transactions. Even the hearings in civil proceedings against offshore companies are held in camera and the press can report them only with express permission of the courts. Only in the case of suspicion of drug dealing, money laundering and other similar serious criminal offences may result in information being passed on to the relevant authorities.

 

Approval of a corporation’s name is normally a simple process. Corporate names in foreign languages may be approved if written in Roman script. Names such as “Deutsche Kaufhausgesellschaft GmbH” or “Bundeszentrale für Finanzen GmbH” may be registered. An offshore company can set up branches in Germany or other European countries and in this way, carry the corporate name obtained in Labuan to other countries. This is a good way of bypassing the German Chamber of Commerce which usually approves company names in Germany. Under German law, it is  compulsory for the German branch of a foreign company to carry the name of the head office, thus rendering the Chamber’s approval unnecessary.

 

It is not necessary for the founding partner(s) or shareholder (s) to travel to Malaysia to form the company. The company may be formed in Germany by employing the right specialists, which would be standard practice for Germans. To avoid unnecessary costs, it is also possible, at least initially, to entrust the managing of a Labuan company to management consultants, including the provision of on-site office staff. It is the declared intention of the Malaysian government to attract highly qualified offshore professionals to Labuan to further promote the economic and technical development of the country. Immigration regulations have therefore been considerably liberalized for offshore professionals. In addition, earned income of employees of offshore companies is taxed at only half the progressive income tax rate.

 

Conclusion

In view of the favorable situation, it is expected that more German enterprises will set up Labuan Offshore Companies, which also offers an optimal platform to take advantage of the economic development in the Asian region.

 

 

Reference:

Labuan Digest