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Corporate Compliance

Malaysia: Enhanced transparency in Labuan

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In brief

Wealth management can be an inherently private business, depending on the individual’s personal background, nature and size of assets, and his or her wishes as to the succession of the assets. However, the confidential nature of certain wealth planning structures may also be abused, leading to the facilitation of illicit activities such as tax evasion, money laundering, and other financial crimes.

Now, the world is seeing a clear shift towards greater transparency of identities of individuals behind corporate structures. Following the developments to the Labuan tax regime through the introduction of economic substance requirements in 2019, the Labuan Companies (Amendment) Act 2022 recently came into effect on 10 June 2022 to amend the Labuan Companies Act 1990 (“LCA“) (“Amendments“). These further developments to the Labuan corporate and regulatory regime clearly highlight Malaysia’s commitment towards adhering to international legal standards of corporate governance and transparency.

Contents

  1. The New Beneficial Ownership Reporting Regime
  2. Prohibition on The Issuance of Bearer Shares or Bearer Shares Warrants
  3. LFSA’s Expanded Powers to Strike Off Labuan Company
  4. Conclusion

In this client alert, we focus on some of the key Amendments introduced, such as the introduction of the beneficial ownership reporting regime and the prohibition on issuance of bearer shares. Further, the Labuan Financial Services Authority’s (“LFSA“) power to strike off a Labuan company from the company’s register has been widened considerably.
 

The New Beneficial Ownership Reporting Regime

A pertinent change introduced in the LCA is the establishment of a beneficial ownership reporting regime for Labuan companies. A beneficial ownership reporting framework would not be foreign to most companies incorporated under the Malaysian Companies Act 2016 (“MCA”) given that requirements under the regime have already been implemented from 1 March 2020 onwards.

Generally, the beneficial ownership reporting requirement mandates companies to take steps to identify, keep records of and report its beneficial owners. In Labuan, ‘beneficial ownership’ is now defined under section 108A of the LCA to mean: “a natural person who owns or controls a Labuan company or foreign Labuan company, in whole or in part, through direct or indirect ownership or control of shares or voting rights or other ownership interest …, or who exercises effective control and influence … as may be determined by the [LFSA].”

The extensive framework is set out in the new sections 108A – 108H of the LCA and is generally applicable to all Labuan companies (including a foreign Labuan company). We summarize some of the key provisions of the LCA below:

  1. Section 108B imposes an obligation on the Labuan company to take reasonable steps to identify its beneficial owners. To that end, a Labuan company may issue a written notice to its members or any other person who is reasonably believed to be its beneficial owner or is likely to have such knowledge, to request relevant information or particulars regarding beneficial ownership. The Labuan company may also issue a written notice to its members to request information on whether ownership or control of such member in the Labuan company is subjected to an agreement or arrangement under which another person is entitled to control the member’s exercise of his interest or right and if so, to give particulars of the agreement or arrangement and the parties to the agreement or arrangement.
  2. Section 108C provides that the Labuan company or its resident secretary is required to lodge the particulars of beneficial ownership obtained under section 108B of the LCA with the LFSA as part of the annual return filings of the company. The LFSA may also invoke powers to direct a Labuan company to provide information obtained under section 108B of the LCA.
  3. Section 108D empowers the LFSA to issue guidelines in respect of the particulars of beneficial ownership required under subsection 108B of the LCA. As at the date of publication of this client alert, no such guidelines have been issued by the LFSA.
  4. Section 108E imposes a duty on the Labuan company to maintain and keep the particulars of beneficial ownership in its register of members. Further, the Labuan company must lodge information on any changes to those particulars with the LFSA within 30 days of such changes.
  5. Section 108F confers power on the LFSA to issue a written notice requiring a Labuan Company to furnish necessary particulars or information in relation to a beneficial owner and to have the said particulars and information verified by a statutory declaration.
  6. Section 108H provides that the removal of an entry relating to a natural person as beneficial owner, shall be made only after the expiration of 6 years from the date on which the natural person ceases to be a beneficial owner.

Any failure to comply with the relevant provisions is considered an offence under the LCA and certain penalties may apply.  

Whilst the LFSA has not released guidelines to provide further clarity on the particulars of beneficial ownership required as part of the reporting framework and other general requirements, the introduction of this reporting regime is no doubt a step towards the trend of enhanced transparency in the corporate sphere.

Pending the release of the LFSA guidelines in this space, it remains to be seen whether the regime will largely mirror the requirements and guidelines issued by the Companies Commission of Malaysia, which are currently applicable to companies incorporated under the MCA. For example, it is not yet clear if a Labuan company may also be required to give Malaysian competent authorities access to the information on its beneficial ownership.
 

Prohibition on The Issuance of Bearer Shares or Bearer Shares Warrants

Bearer shares were popular in the past due to the fact that the ownership of such shares were not registered, but rather evidenced by the holding of a physical document which could change hands at any point in time. Although the holding of bearer shares provides anonymity and confidentiality, bearer shares held a poor reputation for being associated with tax evasion, fraud and other illicit practices.

Finally, as we now see in Labuan, the new section 46A of the LCA now specifically prohibits a Labuan company (including a foreign Labuan company) from (a) issuing bearer share or bearer shares warrants; (b) converting a share into a bearer share or bearer share warrants into share warrants; or (c) exchanging a share for a bearer share. Further, the Amendment provides that any purported issuance, conversion or exchange of any of the bearer shares or warrants, and any provision in a Labuan company’s memorandum or articles which purports to enable the company to conduct the same, is void. Therefore, this new provision will foster enhanced transparency on the ownership of Labuan companies, mitigating the risk of misuse of such instruments.
 

LFSA’s Expanded Powers to Strike Off Labuan Company

Previously, the LFSA’s power to strike off a Labuan company could be exercised only when the company fails to pay its annual fee to the LFSA.

By way of the new section 151BA of the LCA, the LFSA’s power to strike off is now extended to include situations where (1) a Labuan company fails to appoint a replacement resident secretary after the resignation of the former resident secretary; (2) a Labuan company contravenes any provision of the LCA or any law relating to Labuan financial services; (3) the licence, approval or registration of a Labuan entity licensed under the Labuan Financial Services and Securities Act 2010 or Labuan Islamic Financial Services and Securities Act 2010 is surrendered or revoked by the LFSA; and (4) the Labuan company is not carrying on any business or is not in operation.

The new Section 151BB of the LCA goes on to outline the procedure of striking-off a Labuan company. Before the Labuan company is struck off, the LFSA will send a written notice and allow the Labuan company an opportunity to show cause to the contrary, failing which the name of the company shall be struck from the register within 30 days from the date of the said notice or any extended period as may be approved by the LFSA.  

In view of the LFSA’s widened powers, it is even more imperative for Labuan companies to ensure compliance with the various corporate and regulatory rules.
 

Conclusion

The Amendments highlighted above are only a few of the many changes introduced in the LCA. As a whole, it is clear that the Labuan Companies (Amendment) Act 2022 brings about a host of new or revised obligations centered on robust corporate governance and compliance with international standards. The idea of greater transparency in corporate ownership is in fact a reality and those keen on undertaking wealth planning structures in Labuan will need to embrace the potential visibility of individual ownership through structures. It is also timely for those with existing interests in Labuan companies to take steps to review their organisational structures and corporate practices to ensure continued compliance with the newly introduced Labuan laws.

This client alert was issued by Wong & Partners, a member firm of Baker McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner or equivalent in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. 

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Author

Adeline Wong heads the Tax, Trade and Wealth Management Practice Group of Wong & Partners and the Tax and Trade Practice Group of Baker McKenzie member firms in the Joint Asian Offices. She has over 30 years of experience in the area of corporate tax planning, advisory, audit and investigation work. Adeline won the Euromoney Asia Women in Business Law Awards for the Tax category in 2013, 2018 and 2020. Her practice was named the Tax and Trusts Law Firm of the Year by the Asian Legal Business Malaysia Law Awards in both 2020 and 2021. She is ranked as a Band 1 practitioner by Chambers Asia Pacific for Tax and by the Chambers High Net Worth Guide for Private Wealth Law. Clients commend her as "a leading tax lawyer" and a "standout name in the private wealth market in Malaysia" in the Chambers guides. She is also listed as a Leading Individual by Legal 500 Asia Pacific and as an Elite Practitioner by Asialaw Profiles for Tax. The International Tax Review also ranks Adeline as a Highly Regarded practitioner among its Tax Controversy, Indirect Tax and Women in Tax Leaders Guides. She has presented in both domestic and international tax conferences, including conferences organised by the Tax Executive Institute in the US, Society of Trust and Estate Practitioners in Singapore and Bloomberg BNA's Global Transfer Pricing Conference in Shanghai. She is also a regular contributor to established publications on tax-related legislation and developments in Malaysia, such as Bloomberg BNA and the International Bureau of Fiscal Documentation.

Author

Istee is a partner in the Tax, Trade and Wealth Management Practice Group of Wong & Partners. Her key practice areas are wealth management and succession planning. Her Wealth Management practice was named the Tax and Trusts Law Firm of the Year by the Asian Legal Business Malaysia Law Awards in both 2020 and 2021, and is ranked as a Band 1 practice by the Chambers High Net Worth Guide for Private Wealth Law.
She has collaborated on several guides and publications including LexisNexis Practical Guidance - Tax, where she co-authored the Taxation in Malaysia: Overview, Taxation of Trustees and Trust Funds, Automatic Exchange of Information and Succession Laws in Malaysia articles.

Author

Tanya Chantal Tan is an Associate in Wong & Partners, Kuala Lumpur office.

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