Labuan Companies Amendment Bill 2022: Key Updates

Under the amendments of the Labuan Companies (Amendment) Bill 2022, at least one director of a Labuan company must be a resident director. Further, any persons convicted of a criminal offence is forbidden to be appointed as a director of a Labuan company. Other amendments include new provisions regarding beneficial ownership, and increased powers of Labuan Financial Services Authority to stroke off a company from the register. Located in Malaysian territory, Labuan is a base for the offshore financial industry.

On March 31, 2022, the Dewan Nagara, Malaysia’s upper house of parliament, passed the Labuan Companies (Amendment) Bill (2022) (the “Bill”). The Bill updates the Labuan Companies Act (1990) (Act 441) (the “Act”), which provides rules for the incorporation, registration and administration of domestic and foreign Labuan companies.

Labuan is a territory of Malaysia known for its offshore financial industry. Due to the territory’s low tax environment and business-friendly regulations, Labuan is a popular destination for foreign investors in Southeast Asia to base their operations.

The Bill has four main purposes: to update procedures relating to the qualification of a director, ascertaining beneficial ownership, and striking off a Labuan company, and to increase penalties for offences. Businesses registered in Labuan should review the Bill and update their registration in line with the Bill’s new provisions to avoid exposure to heightened penalties for noncompliance.

Key new provisions in the Labuan Companies (Amendment) Bill 2022

Director requirements

The Bill substitutes section 87 of the Act, concerning procedures relating to directors. Per the update, a Labuan company must have one or more directors, at least one of whom shall be a resident director. Previously, Labuan companies had to have at least one director, who may be a resident director.

Further, a resident director must be:

1. A trust officer of a Labuan trust company approved by the Labuan Financial Services Authority (the “Authority”) under the Labuan Financial Services and Securities Act 2010, made available by the Labuan trust company to be appointed as a resident director; or
2. Any natural person who has attained the age of 18, who is otherwise of full legal capacity, who fulfills such criteria or requirement as may be determined by the Authority and has consented in writing to be appointed as a resident director.

The updated section 87 includes other provisions, such as concerning retirement of the resident director and fees payable for the appointment as a resident director. Companies that have a director who no longer meets the updated requirements have six months from the date the Bill comes into force to comply.

Director disqualifications

Additionally, the Bill substitutes section 90 of the Act with a new section delineating persons disqualified from being a director. According to the new section, a person shall not be appointed as a director, hold office, or take part in or be in any way directly or indirectly concerned with or in the management of a Labuan company if the person:

1. Has been convicted of any offence in connection with the formation or management of a corporation or company;
2. Has been convicted of any offence involving fraud, bribery or dishonesty;
3. Is an undischarged bankrupt or insolvent; or
4. Is deemed unfit by the Authority.

Labuan companies must ensure that no person acting or nominated to act as a director, holding office, or associating with the company’s management is a disqualified person. The penalty for violating this provision is 1 million ringgit (US$227,550) and/or up to five years in jail.

Beneficial ownership

The Bill includes many new provisions regarding beneficial ownership, with new sections inserted after section 108 in the Act. The Bill defines beneficial ownership as “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 in the Labuan company or foreign Labuan company, or who exercises effective control and influence in the Labuan company or foreign Labuan company as may be determined by the Authority.”

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According to section 108b, Labuan companies must take reasonable steps to identify the beneficial owner of the company. The company may require any member of the company to state whether they are the beneficial owner and provide relevant information if the company has reasonable grounds to believe they are a beneficial owner.

New sections in the Bill provide numerous other provisions about beneficial ownership, such as reporting requirements to the Authority and penalties from non-compliance. Notably, section 108f allows the Authority to require a company to furnish all necessary information of a beneficial owner within seven days of receiving the notice.

Strike off

With the amendment, the Bill increases the ability of the Authority to strike companies off the register. This is delineated in new sections following 151b in the Act.

According to section 151BA, the Authority may strike a company off the register if the company:

1. Fails to pay its annual fees or any additional amount in addition to the annual fee within the time specified pursuant to section 151;
2. Fails to appoint a replacement resident secretary after the resignation of the former resident secretary pursuant to subsection 93(2c);
3. Contravenes any provision of this Act and any other law relating to Labuan financial services;
4. Being a licensed entity under the Labuan Financial Services and Securities Act 2010 or Labuan Islamic Financial Services and Securities Act 2010, has its license, approval or registration surrendered or revoked by the Authority; or
5. Is not carrying on any business or is not in operation.

Other provisions in the Bill about striking off companies include requirements surrounding the Authority’s notice of intention to strike off a company and the procedure to strike off a company.

Compliance and penalties

The Bill brings Labuan’s incorporation, registration, and administration regulations more closely in line with international standards. Malaysia has faced pressure from some countries to change these regulations amid criticism of Labuan being an offshore tax haven.

Besides making qualifications and reporting requirements stricter, the Bill increases penalties for many offences to as high as 3 million ringgit (US$682,670). In light of these reforms, foreign investors in Labuan should reassess their registration strategy to ensure continued compliance.

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