Labuan Foundation
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With the promulgation of the new legislation in 2010, Labuan is now one of the few common law jurisdictions offering investors a choice of common law trusts and civil law foundations. As part of Labuan IBFC’s efforts to heighten the awareness of its wealth management products and services, Labuan Financial Services Authority (“Labuan FSA”) has designated year 2013 as its Wealth Management Year.

Traditionally used in civil law countries, a foundation is tailor-made for wealthy individuals, families as well as corporations and non-profit organisations who wish to have control over their assets and businesses whilst being accorded legal protection. All aspects of Labuan Foundations are governed by the Labuan Foundations Act 2010 (“LFA”). A Shariah compliant version is also available pursuant to the Labuan Islamic Financial Services and Securities Act 2010 (“LIFSSA”) whereby its aims and operations must be in compliance with Shariah principles.

Foundation is a registered body corporate with a separate legal entity, usually established by the founder to hold with the objective of managing these assets for the benefit of a class of persons on a contractual basis. It is typically used for private wealth management, business succession, asset preservation, charitable purposes and other lawful activities.

The legislation in Labuan requires the engagement of services of a Labuan IBFC registered trust company to act as its incorporation agent and secretary of the foundation in Labuan. For your information, Kensington Trust Labuan Limited is a licensed trust company in Labuan.

A. Purpose and Object of Labuan Foundation

Labuan foundation may be established to manage its own property for any lawful purpose which may be charitable or non-charitable. Specifically for a Labuan Islamic foundation, its operations shall be in accordance with Shariah principles and other requirements stipulated in the Guidelines on the Establishment of Labuan Foundation including Islamic Foundation issued by Labuan FSA.

    A charitable purpose means and includes any of the following description of purposes:
  • The prevention and relief of poverty;
  • The advancement of religion, profession or education;
  • The advancement of health including the prevention and relief of sickness, disease or of human suffering;
  • Social and community advancement including the care, support and protection of the aged, people with a disability, children and young people;
  • The advancement of culture, arts and heritage;
  • The advancement of amateur sport, which promote health by involving physical or mental exertion;
  • The promotion of human rights, conflict resolution and reconciliation;
  • The advancement of environmental protection and improvement;
  • The advancement of animal welfare; or
  • The advancement of facilities for recreation or other leisure-time occupation in the interest of social welfare.

B. Labuan Foundation Structure And Composition


Founder – person who establishes the foundation

  • Minimum One, either natural person or corporate entity
  • Subscriber to the Charter
  • May be residents or non-residents of Malaysia
  • May also be a council member and one of the beneficiaries

Beneficiaries

  • May include individuals, corporate entities or charities and are those who have vested interest in assets of the foundation
  • May be residents or non-residents of Malaysia
  • Unless specifically provided in the charter or articles, beneficiaries have no rights to the foundation’s assets and are not owed any fiduciary duties

Officer

  • Compulsory appointment
  • One or more must be appointed by Founder prior to registration of the foundation
  • May be either natural person or corporate entity
  • May be residents or non-residents of Malaysia
  • Founder or Beneficiary may be appointed as Officer (but not be a council member at the same time)
  • Duties are inter alia to ensure proper administration of the foundation and to carry out decisions of the Council

Council Members

  • Not a compulsory appointment, at the discretion of the Founder
  • If appointed, one or more, either natural person or corporate entity
  • May be residents or non-residents of Malaysia
  • Cannot act as Officer at the same time
  • Council is similar to the Board of Directors in a company context. The council is responsible to manage and oversee operations (general supervision) of the foundation by its officer and to ensure compliance by the Labuan foundation and its officer with the charter of the foundation and provisions of the LFA.
  • Council members supervise Officers of the foundation. The council’s decision must be in line with the objectives and purposes for which the foundation was established
  • Council members do not owe fiduciary duty to beneficiaries and hence, this eliminates competing beneficiaries interests

Secretary

  • Compulsory appointment
  • The secretary must be a licensed Labuan Trust Company
  • Acts as service provider to the foundation and performs a compliant agent function and acts as a conduit between foundation and Labuan FSA

Protector / Supervisory Person

At the discretion of the Founders, there may also be a protector or supervisory person. These parties may monitor the Council’s decision, power to add or remove Officers, Council members etc.

C. Key Features of Labuan Foundation

Registered Office

Mandatory to maintain a registered office in Labuan which shall be the address of the Secretary of the foundation

Capital / Wealth Requirements

  • No capital requirements as a foundation does not have share capital
  • Minimum endowment of USD1.00 as an initial asset at time of establishment

Legal Status

  • It is a legal entity with rights and status of a separate and independent person
  • It can be shareholder of a company
  • It can enter into contracts, buy and sell properties, own bank accounts or own shares or interest in other corporations

For purposes of minimizing risk, it is encouraged that all trade activities (if any) should be carried out through an underlying company or partnership. Trade or commercial activities are incidentals or ancillary to its main purpose which is the management of its property.

Registration

All Labuan foundations are required to be registered with Labuan FSA through the secretary of the foundation

Duration

May be fixed or infinite life span

Currency

Labuan foundations are expected to carry on business in any currency other than the Malaysian currency except as permitted by the relevant authorities

Compliance

Every Labuan foundation shall ensure compliance with the Anti-Money Laundering and Anti-Terrorism Financing Act 2001.

Property

  • Assets of every kind whether corporeal or incorporeal, tangible or intangible, movable or immovable, however acquired may be endowed to a Labuan foundation; and
  • Legal documents or instruments in any form, including electronic or digital, evidencing title to or interest in, such assets as described in the above bullet point including bank cheques, money orders, shares, securities, bonds, bank drafts and letters of credit.

Property of the Labuan foundation is owned legally and beneficially by the foundation and is to be utilised solely for the purposes and objects stated in the charter of the foundation. For Labuan Islamic foundation, the source and the intended utilisation of the property must be in accordance to Shariah principles.

Property of the Labuan foundation can be Malaysian and/or non-Malaysian property.

Malaysian Property

Labuan foundation for charitable purposes may hold Malaysian property(ies) and NEED NOT seek prior approval from Labuan FSA.

For Labuan non-charitable foundations, including foundations established for the benefits of family members that intend to include Malaysian property(ies) must seek prior approval from Labuan FSA.

The qualifying criteria for approval shall include but not limited to the following:
  • Obtain all necessary approvals from the relevant authorities in relation to the endowment of property(ies) to the foundation;
  • Property(ies) to be endowed shall be unencumbered. For encumbered property(ies), consent should be obtained from the person(s) who encumbers the property(ies); and
  • Property(ies) to be endowed shall be obtained through lawful means.

Property(ies) endowed or to be endowed to the Labuan foundation must include consent letters from relevant authorities, where necessary, to be submitted with the application or within 60 days from the registration date of the endowment of the property(ies). The relevant authority(ies) in this context may include the respective land office or local authority such as Bank Negara Malaysia, Companies Commission of Malaysia and Securities Commission of Malaysia.

Malaysian founders are free to endow Malaysian property to a Labuan foundation as permitted by Foreign Exchange Administration (FEA). However, Labuan non-charitable foundations are required to provide in the charter that any subsequent conversion or transfer of the endowed property for investment abroad would need to comply with FEA rules.

Founder retains control

  • Founder may be appointed as sole council member and one of the beneficiaries
  • Founder may reserve rights and powers in the charter or articles of the foundation

Creditors’ claims

Being a separate legal entity, if the transfer of assets was completed prior to the claim arising, the assets are beyond the reach of a creditor’s claim against the Founder. However, it is important that the transfer of assets:

  • takes place before the creditor’s cause of action accrued
  • takes place two (2) years from date of registration
  • must not render the Founder’s insolvent; and
  • must be made without any intent to defraud the creditor

Accounts

  • accounting records and other records shall be maintained in Labuan
  • must be made available for inspection by the council members, supervisory person, officers and the approved auditor, if appointed

Redomiciliation

Allowed. A foundation established in another jurisdiction may be legally redomiciled to Labuan and vice versa, provided that the other corresponding jurisdiction permits

Dissolution

The foundation may be dissolved upon the passing of a resolution by the officer on the basis that:

  • the foundation is established for a definite period and that period has expired
  • the purpose of the foundation is fulfilled or becomes incapable of fulfillment; or
  • the charter requires such dissolution

After the dissolution, the ownership of the remaining assets will be transferred to the beneficiary

D. Specific Requirements for Labuan Charitable Foundation

Jurisdiction of operation

All Labuan charitable foundations are required to comply with the legal requirement(s) of the jurisdiction they intend to operate in.

Donations from Public

A Labuan charitable foundation that solicits donation from the public shall comply with the following:
  • Appoint a council of at least three (3) fit and proper persons;
  • The founder may be a council member. However, the majority of the council members shall be independent of the founder;
  • Appointment of a supervisory person for the foundation who is fit and proper in accordance to the Guidelines on Fit and Proper Person issued by Labuan FSA;
  • Provide information memorandum or such other information document for the public which shall include but not limited to the following minimum information:
    • Name of the foundation;
    • Purpose and object of the foundation;
    • List of its founder, council members, supervisory person, officer and secretary, where applicable;
    • Statement of its establishment under LFA or LIFSSA;
    • Whether it has been accorded the status of an “approved institution or organisation” under the Income Tax Act 1967 for donations made to the foundation to be tax deductible, where applicable;
  • Submit a proposed general operating plan, which include the management of the property in regard to the utilisation and distribution of the property, the strategy of the foundation including its investments and other related information; and
  • Submit annual audited accounts to Labuan FSA within six (6) months after the close of each financial year of the foundation.

Private Endowment and Public Donation

  • If the endowment of property(ies) is from a corporation, Labuan charitable foundation is required to submit a copy of the certified resolution from the corporation approving the endowment of the property(ies) to the foundation.
  • If the endowment of property(ies) is from an individual, Labuan charitable foundation is required to submit a copy of an undertaking to endow the property(ies) to the foundation.

E. Labuan IBFC Tax System

Labuan Business Activity Tax Act 1990 (“LBATA”) governs the imposition, assessment and collection of tax on a Labuan business activity carried on by a Labuan entity in, from or through Labuan. Only Labuan entities carrying on a Labuan business activity are able to take advantage of the provisions under LBATA. Labuan entities that carry on a non-Labuan business activity are subject to the provisions of the Malaysian Income Tax Act, 1967 (“ITA”).

“Entity” in LBATA includes Labuan Foundation established and registered under the Labuan Foundations Act 2010.

If the foundation does not engage in trade in its own right (but through subsidiaries), its activities are non-trading and therefore, not subjected to any tax in Labuan.

Where the property of the Labuan Foundation includes Malaysian property, the ITA shall be applicable for any income derived from the Malaysian property.

F. Advantages of Labuan Foundation
  • Registered corporate body with separate legal entity with the ability to -enter into contracts or any other lawful dealings on its own
  • Protection from creditors’ claims (subject to conditions mentioned under item B) and against claims or intent to defraud with regards to the act of establishing the foundation, the disposing property and founder as beneficiary
  • Protected from foreign claims and cannot be forcefully liquidated to satisfy other obligations such as claims arising from divorce, lawsuit or creditors
  • Protection against forced heirship
  • Not subject to compulsory perpetuity period
  • Confidentiality and anonymity. Information concerning the Labuan foundation is not on any public record.
  • Simple and straight forward tax systems in Labuan. No tax in Labuan on non-trading activities
  • Distributions by a Labuan foundation to its beneficiaries are tax-exempted in Labuan. However, the beneficiaries will need to satisfy their own tax liabilities in their respective jurisdictions of tax residence.
  • No foreign exchange controls
  • No withholding tax /capital gain tax / inheritance tax
  • No stamp duty on all instruments relating to offshore business activities
G.Fees Labuan foundation is required to pay to Labuan FSA the following fees:
: RM750
  • (b) Annual fee on or before anniversary date
: RM750

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The information in this document is not advice of any kind but general information only and should not be relied on as legal advice. Kensington Trust Group recommends seeking professional advice on legal or tax issues affecting you before relying on it. While Kensington Trust Group tries to ensure that the content of this document is accurate, adequate or complete, it does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. Kensington Trust Group does not assume legal liability for any loss suffered as a result of or in relation to the use of this document. To the extent permitted by law, Kensington Trust Group excludes any liability for negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this document.