What is Labuan factoring business?

A factoring business is a financial transaction whereby a business or company sell its account receivables to a third party at a discounted price.

COMMENT

By Sazali Suzin

Have you ever heard the term factoring business? The first thing that usually pops up in our mind will be business in relation to factory operation.

In general, a factoring business is a financial transaction whereby a business or company sell its account receivables (i.e. invoices) to a third party at a discounted price.

In factoring business, the third party will purchase the accounts receivable from the seller, which is usually less than the purchase price (around 70% – 85%). When the accounts receivable is paid by the seller’s debtors at the full price, the balance between the purchase and selling price will belong to the third parties who purchase the account receivables.

But please take note that factoring business cannot be considered as a loan. Usually the seller will only sells their account receivables to the any potential buyer, to raise funds or cash that will be used to maintain the cash liquidity of the company.

Factoring business can be done through Labuan International Business Financial Centre (IBFC) and can gain benefits for conducting the business through Labuan IBFC.

Labuan factoring business can be defined under Labuan Financial Services and Securities Act (LFSSA) 2010 as the business of acquiring debts due to any person. The Labuan factoring business is regulated under Section 86 of Labuan Financial Services and Securities Act (LFSSA) 2010.

Qualification and application requirements

There are some qualifications and criteria that must be met by the applicants who wish to apply for factoring licence in Labuan IBFC. The applicants must meet the following minimum requirements:

• A Labuan Company or Foreign Labuan Company incorporated under Labuan Companies Act 1990;

• Factoring companies registered under the Malaysian Banking and Financial Institutions Act 1989;

• Special Purpose Vehicle (SPV) set up to facilitate inter-company factoring transactions; and

• Must have a good record within the industry without any negative reports from reliable resources.

The applicants who fulfil the minimum requirements can apply for the factoring licence through any registered and licensed Labuan Trust Company. The licensed Labuan Trust Company will assist the applicants to submit the application to Labuan Financial Services Authority (Labuan FSA).

The following documents should be accompanied together with the factoring licence application:

• The nature of the applicant’s business;

• A list containing the details of the Board of Directors and senior management of the applicant.

• Written approval must be obtained from Labuan FSA before appointing the Directors, Controller or Chief Executive Officer (CEO);

• A comprehensive business plan outlining the applicant’s strategies and operations in regards to its Labuan entity;

• Audited financial statements for at least two (2) years, if applicable; and

• Any other information that may be relevant to the application or requested by Labuan FSA.

Once the application for the factoring licence approved, the applicant need to pay the licence annual fee of RM 40,000 to Labuan FSA for applicant who have an office in Labuan and RM 60,000 for those who did not have physical presence in Labuan.

The annual fee of the factoring licence must be paid on or before every of 15th January each year.

The applicant also has to ensure that the directors and the senior management sign the declaration on confidentiality and secrecy as per Labuan FSA’s requirement.

Operational requirements

The Labuan factoring business company must comply with the following operational requirements as required by Labuan FSA:

• Has an option to either set up an office in Labuan or operate through its registered office. However, the all business activities and transactions must be done through Labuan IBFC;

• The company’s record books and accounts are maintained properly in Labuan;

• Must ensure that there is sufficient capital being maintained to support the company’s business operations;

• All business transactions must be done in foreign currency, except for the payment of statutory and administrative expenses such as office rental, salary, stationeries and other relevant expenses;

• Prohibited from dealing with Malaysian residents other than those approved by Labuan FSA;

• Must submit a copy of its audited financial statement to Labuan FSA, within three (3) months after the close of each financial year;

• Need to submit statistic report and any other information of the business operations, if required by Labuan FSA; and

• Any changes to the company’s constituent documents, shareholdings, management or business plans must be notified to Labuan FSA through the appointed Labuan Trust Company.

Benefits to conduct factoring business through Labuan IBFC

A Labuan factoring business company can enjoy significant tax benefits for conducting the business through Labuan IBFC.

The Labuan leasing company is deemed as a Labuan trading company under Section 2 of Labuan Business Activity Tax Act (LBATA) 2010, and therefore have the option either to pay a flat tax rate of RM 20,000 or 3% of audited net profit.

Besides that, there is no withholding tax for any dividends paid by a Labuan factoring business company out of its profits.

Other main benefit is the strict confidentiality legislations offered by Labuan IBFC. Labuan IBFC has a comprehensive regulatory framework that ensures Labuan complies with international standards of services, secrecy and confidentiality.

Conducting factoring business through Labuan IBFC has a lot of benefits and opportunity, which a lot of people still unaware of it. Labuan IBFC offers competitive tax regime and benefits, and at the same time provides the opportunity for a company to conduct their factoring business operations cost effectively and safely.

For more information about Labuan factoring business in Labuan IBFC, you can log on to www.labuanfsa.gov.my and www.labuanibfc.my.

The writer is a Trust Officer and Chartered Accountant at Labuan Borneo Trustees Limited. He has deep knowledge about Labuan International Business Financial Centre (IBFC) structures and finance.