Labuan emerging as destination of choice for Licensed Fund Managers

Following recent economic substance requirements for companies in other offshore jurisdictions, Labuan’s more welcoming regulatory environment and tax regime is beginning to attract attention amongst fund managers.

Since the Organisation for Economic Co-operation and Development’s (OECD) recommendations to the G20 on Base Erosion and Profit Shifting (BEPS), more and more jurisdictions are starting to impose economic substance requirements on companies.

Economic substance is the extent to which a company has operational and economic activity in a country. For instance, if the company has an office, transactions, employees and other infrastructure then it is deemed to have substance. Under the BEPS framework, if an organisation does not meet a country’s standards when it comes to substance, then they could face a higher tax burden, loss of tax treaty benefits, denial of local tax residency, revocation or denial of licenses and other penalties.

Multiple offshore jurisdictions have implemented economic substance requirements in order to comply with the OECD. Typically, if a company is registered in one of these jurisdictions yet cannot show substance, their licenses will not be renewed (or won’t be granted in the first place).

Fund Managers who move to Labuan will have to incur local expenses of MYR100,000 per year (excluding taxes, but including license fees etc.) and employ two full-time employees (authorities may allow them to travel to fulfil their tasks, details such as number of days they are to spend in Labuan is yet to be determined), if they are to adhere to economic substance requirements.

Those that do not show sufficient economic substance will be taxed at a rate of between 15% and at most 24% (as opposed to the Labuan rate which stands at 3%). Importantly, though, fund managers and certain other licensed entities that do not show economic substance, while they will be taxed at a higher rate, they will not lose their licence, unlike other jurisdictions.

This is resonating with Asia-based fund managers who have licenses in other jurisdictions and are beginning to look to Labuan as their preferred offshore base. If they remain where they are then they either have to show economic substance (at significantly greater cost) or lose their license altogether.

If fund managers relocate to Labuan they still need to apply for a license. If they comply with substance requirements the will be taxed at the Labuan tax rate of 3%. If they fail to meet the economic substance criteria they will be subject to the higher tax rate (between 15% and 24%, yet to be determined by the government) while they can still get and maintain their license.

For more information on how economic substance requirements can affect your company, and how to do business in Labuan, contact Alpadis Group’s Labuan office here.