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Unless permitted by LOFSA, a Labuan offshore company is prohibited from carrying on business activities with a resident of Malaysia.[1] Resident means a natural person, a citizen or permanent resident of Malaysia or any other person who has established a place of business and is operating in Malaysia.[2]

A Labuan offshore company that is not to be treated as carrying on business with a resident of Malaysia by reason only that-

a) it maintains a bank account with a bank in Malaysia;

b) it hires professionals to do work for it;

c) it prepares books and accounts in Malaysia, holds meetings in Malaysia, holds lease of property, holds shares in one or other offshore companies; and

d) a resident of Malaysia holds shares in it.

An exemption was recently given by LOFSA in the form of a blanket approval allowing a Labuan offshore company to deal with a resident as follows;

i) carrying on business with a resident,

ii) invest in a domestic company, and

iii) wholly own a domestic company to conduct offshore business.

The blanket approval is subject to the conditions that i) the Labuan offshore company sends notice (in a prescribed form) to LOFSA not later than 10 days from the date of transaction that took place with the non-resident, and ii) the transaction undertaken by the Labuan offshore company and the resident (where applicable) has obtained the necessary approval from the relevant domestic regulatory authorities like BNM, SEC, FIC, etc. The notice should at least specify a) details of the transaction/investment, b) the rationale and advantage of the transaction using a Labuan offshore company including tax benefits, etc, and c) total amount and source of funding in the transaction or investment.

Further and pursuant to a clarification[3] by LOFSA, the following transactions between a Labuan offshore company with a related Malaysian domestic company or individual or vice versa do not require approval from LOFSA under Section 7(3) (a) OCA 1990;[4]

a) advances or payment made to each other for whatever purpose;

b) loan without interest or fees, i.e. loan that does not involve any interest or fee irrespective of the purpose of the loan given;

c) loan carrying interest or fee, i.e. loan that involves any interest or fee irrespective of the purpose of the loan given.

The total amount of the loan payment or advance shall not exceed RM100 million in aggregate in a year.

Two companies are related companies if one is the holding of the other, or is a subsidiary of the other or is a subsidiary of the holding company.[5] In the absence of any guidelines as to the circumstances in which an individual is related to a Labuan offshore company, it is submitted that at least the director and the shareholder of the Labuan company are individuals related to the Labuan offshore company. It could further be extended to cases where an individual is a director or shareholder of the Labuan offshore company’s parent or subsidiary.

A Labuan offshore company is also prohibited from doing or engaging in any of the following;

a) carrying on banking, insurance, reinsurance or trust company businesses unless licensed to do so;[6]

b) carrying on business in Malaysian Ringgit except for paying its administrative[7] and statutory[8] expenses;[9]

c) carrying on shipping operation in Malaysia; or

d) carrying on any business of a trust company.