a) Introduction
A Foundation is an incorporated legal entity similar to a company that can be used to hold assets in its own name with the objective of managing these assets for the benefit of a class of person on a contractual basis. Labuan Foundations are ideal for wealthy individuals, families, companies, and non-profit organizations who wish to control their assets and business while enjoying legal protection.
Typically, Labuan Foundations are used for asset protection, charitable purposes, business succession, wealth management and other legal activities. Labuan Islamic Foundation are provided as well where operations must be in compliance with Shariah principles.
b) The Foundation Defined
A Labuan foundation, as provided by the Labuan Foundations Act 2010, is a corporate body with a separate legal entity, established to manage its own property for any lawful purpose, be it for charitable or non-charitable purposes. Established by a founder, a typical structure for a Labuan foundation is depicted below:
c) Internal Structure of Labuan Foundation
✓ Founder endows his asset to foundation.
✓ Council oversees the foundation management and ensure purpose of foundation is fulfilled.
✓ Officer ensures proper administration of the foundation.
✓ Secretary performs all secretarial functions including the filing and lodging of documents with LFSA.
✓ Constituent document sets out the parameters within which the Labuan Foundation is to be managed and governed.
✓ Beneficiaries who have vested interest in the assets of the foundation. Beneficiaries have no rights to the foundation’s assets and are not owed any fiduciary duties.
✓ Officer must be independent from council member.
✓ Founder, council member and beneficiary can be the same person.
✓ Custodian, auditor, and supervisory person is required for public foundation.
d) Characteristics of Labuan Foundation
✓ No Minimum Capital Required.
✓ Labuan foundation must be registered and have a registered office.
✓ The Charter sets out the parameters of how the foundation is to be managed.
✓ Exists in perpetuity at the discretion of the Founder.
✓ Founder can be a council member of the Foundation which provides authority over the management of assets.
✓ No statutory requirement for an audit unless ordered by Court.
✓ All liabilities remain as corporate liabilities of the Foundation.
✓ Labuan foundation is protected from foreign claims and cannot be forcefully liquidated to satisfy obligations from external events or parties.
✓ Foundation established in another jurisdiction can be legally re-domiciled to Labuan and vice versa provided that the other jurisdiction permits.
✓ Council members do not owe a fiduciary duty to beneficiaries and hence, this eliminates beneficiaries’ interest.
✓ All aspect of the foundation is kept confidential except for the charter and strictly no information relating to the foundation shall be disclosed unless required by law and court.
e) TAXATION: Substance Requirement under LBATA
As foundation is classified under investment holding, it is generally categorized as either Pure Equity Holding or Non Pure Equity
Holding, which are not subject to tax with fulfilling its Substance Requirements as follows:
Type | Tax | Audit Required | Substance Requirements | Remarks |
Non-Pure equity holding company | 0% | Optional | – Minimum annual spending: RM20,000 – Minimum one full-time staff | – Companies that hold a variety of assets and earn different types of income (e.g., rent, royalties, bond, sukuk, debt instrument, properties, securities) |
Pure equity holding company | 0% | Optional | Minimum annual spending of RM20,000 Board meeting in Labuan | – Company that holds equity participations and earn only dividends and capital gains. |
Failing which, the Labuan incorporated entity shall be charged a tax rate of 24% for that year of
SUMMARY
ADVANTAGES
✓ Assets endowed are creditor proof
✓ Avoid Internal conflict between family members
✓ Ensure continuity of assets through countless generations of family
✓ Founder reserve rights to manage assets
✓ Confidentiality provision of foundation ensures privacy of asset owners
PURPOSE
✓ Private wealth management
✓ Business succession tool
✓ Family business ownership preservation
✓ Charitable purposes
EXAMPLE OF ASSET
✓ Business
✓ Property
✓ CDS Account
✓ Shares
✓ Cash
✓ Insurance policy
✓ Unit trust
✓ Other onshore and offshore investments
EXTRA INFORMATION
Differences between Will, Trust and Foundation
Differences | WILL | TRUST | FOUNDATION |
Type | A legal document | An arrangement between Settlor & Trustee | A legal entity |
Reserved rights | N/A | Transferred assets managed by Trustee | Founder(s) reserve(s) rights to manage assets |
Appeal by creditors? | No creditor proof | Claw back period of 5 years. | Claw back period of 2 years. |
Confidentiality | No confidentiality | Confidential | Confidential |
Capital transfer | Probate required. | Probate NOT required. | Probate NOT required. |
Cost | Low | High, depends on assets value | Relatively low, fixed cost |
Distribution | Net of liabilities | Based on the trust deed | Based on the charter & articles |
Global assets transfer | N/A | Hassle Free of transfer | Hassle Free of transfer |
Inheritance tax applicable? | Yes | No | No |
Differences between Private Trust Company and Foundation
Differences | Private Trust Company (PTC) | Foundation |
Purpose | The PTC acts like a licensed trust company. However, the PTC may only provide services to the companies within a private trust created by a settlor or individuals who are persons connected to the settlor. The PTC is not permitted to extend services to other third parties. | Used for private wealth purpose, i.e., asset protection, wealth preservation, succession planning. Unlike a trust whose assets are managed by a trustee, the assets of the Foundation are managed the Foundation itself via the Council Members. |
Compliance | Since it is a licensed trust company of sorts, LFSA requires a PTC to comply with the law relating to PTCs and various guidelines, directives and reporting requirements such as anti-money laundering guidelines and fit and proper persons guidelines. | Similar to companies, the Council Members and Officers of Foundations do not have to ensure compliance of specific guidelines, directives or reporting requirements other than as stated in the Foundations Act 2010. |
Resource | Personnel with knowledge of trust administration and other areas of compliance is required since these functions are undertaken by the PTC. | Compliance functions are typically outsourced. |
Cost | Higher cost due to personnel cost and licence fee. | Lower cost as most functions could be outsourced. |
Advantages | The main advantage is to ensure confidentiality of the trust as it is managed by the PTC. | Lower cost and less complicated. |