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Labuan Foundation – The Key For Your Asset Protection | Wealth Distribution | Estate Planning

The truly wealthy understand that maintaining their fortune for generations is as important as actually earning it. Many explore investment options such as Trusts and Foundations as an effective means of sustaining wealth. There is a Chinese proverbs saying "wealth does not pass (survive) three generations". America has its own version of this saying: “From shirtsleeves to shirtsleeves in three generations.” As with most old proverbs, there is a grain of truth to this—and the new rich are searching for ways to avoid history's curse.

BACKGROUND
Offshore private interest foundations utilized today are rooted in history dating back to the days of the Roman Empire. The Catholic Church was one of the first to utilize the concept that we now refer to as a foundation. The Church was considered a "divine foundation" with the various organizations within the church having legal control over its "patrimony". Foundations were initially conceptualized for communal purposes. They were not utilized for private purposes such as serving the interests of individuals or families.

The concept of the "private interest foundation" did not come about until 1926 when the Principality of Liechtenstein created the "Law of Persons & Companies" (Personen und Gesellschaft Recht - P.G.R.), which first established the concepts of the "Family Foundation" and "Mixed Foundation". The former being for the benefit of one or more members of a family and the latter enabling the Foundation to add a charitable capacity for other persons or specific charitable purposes.

Wealthy families have incorporated family foundations in Liechtenstein for many years in order to ensure the protection and safe transition of assets to family beneficiaries. Liechtenstein, being a completely neutral principality for purposes of war (similar to Switzerland) has provided a safe haven for the assets of wealth families for many years.

BIRD’S EYE VIEW ON LABUAN FOUNDATION
Perhaps it is best to first start by defining the Private Foundation. One of the most comprehensive definitions of Private Foundation comes from John Goldsworth, founding editor of "Trusts and Trustees" and an internationally renowned expert on Trusts and Private Foundations:

"A Private Foundation" is an independent self-governing legal entity, set up and registered or recorded by an official body within the jurisdiction of where it is set up, in order to hold an endowment provided by the Founder and/or others for a particular purpose for the benefit of Beneficiaries and which usually excludes the ability to engage directly in commercial operations, and which exists without shares or other participation."

A Foundation is a corporate body with a separate legal entity, usually established by the founder to hold assets with the objective of managing these assets for the benefit of a class of persons on a contractual basis. It is deemed a separate legal entity from its managers (i.e. its officers and its council) and is typically used for private wealth management and charitable purposes. The best way of describing a foundation is as a trust enveloped in a corporate shell.

All aspects of Labuan Foundation are governed by the Labuan Foundations Act 2010 (“LFA”). Islamic Foundations are provided for in Labuan and are required to ensure its aims and operations comply with Shariah principles.

The LFA provides for asset protection, wealth distribution and estate planning, allowing you to create a legacy of philanthropy or to preserve your wealth for future generations.

KEY FEATURES OF LABUAN FOUNDATION
  • A Labuan Foundation is a civil law solution that is governed by a Charter and Articles or Regulations. It is a registered legal entity
  • The assets of a Labuan Foundation are the property of the Labuan Foundation and acquire their own legally independent status and legal personality within the Labuan Foundation. A Labuan foundation may hold assets, transact and sue, or be sued, in its own name. It can also act as an incorporated body and is not subject to the ultra vires doctrine.

  • The Founder and Beneficiaries of a Labuan Foundation may include both residents and non-residents

  • A Foundation can be ‘in perpetuity’

  • The LFA provides for rights to information, confidentiality and other span supervisory and enforcement powers

    Confidentiality is of great importance. Section 71 of the LFA deals with this and provides a criminal offence with a possible custodial penalty for wrongful disclosure of any information concerning the Foundation.

    Exceptions:-
    • Labuan Financial Services Authority (Labuan FSA, the Authority) in its regulatory capacity, requirements under a Court order (but even then an effected person must be notified and can contest the order); and

    • information provided with the consent of the Labuan Foundation.

    Further, Labuan is a ‘white listed’ jurisdiction that endorses the OECD ‘level playing field’ approach to the bilateral exchange of tax information with foreign tax authorities. Notwithstanding this, Labuan has safeguards in place and limitations on the sharing of information which ensures that no ‘fishing expeditions’ will be entertained.

    Rights to information are clearly dealt with. Any Officer, or the Secretary, if requested to do so must provide accurate information to the Court, the Authority, Founder, Council Member, Supervisory Person or any Beneficiary, except when there is duress. Even so, the Court may restrict the rights of any such individual. Section 73 of the LFA also provides strict confidentiality requirements on Council members, the Supervisory Person and any Officer and the Secretary.

    Section 63 of the LFA provides for confidentiality with regard to disclosure of information to a Beneficiary, if other Beneficiaries have requested this or if the Council, Supervisory Person or Officers determine confidentially to be in the best interests of the Beneficiaries. Even so, the Court may on an application by a Beneficiary, order information to be provided (Section 64 of the LFA).

    Section 62 of the LFA provides for a Beneficiary having a vested interest to obtain information and documents relating to his interest.


  • The LFA prevents foreign forced heirship claims such as consequences of marriage, divorce or succession rights

    Section 61 of the LFA is concerned with preventing a foreign claim or judgement being enforced against a validly established Labuan Foundation with particular regard to the personal and proprietary consequences of marriage or succession rights or the claims of creditors in insolvency. In this way, claims in respect of foreign forced heirship are also protected, as they are for Trusts in many jurisdictions.


  • Modern and innovative structures of Labuan Foundation

    Purpose – The main purpose of the Labuan Foundation shall be the management of its property. However, the purpose or object of the Labuan foundation may include any purpose or object which is not unlawful, immoral or contrary to any public policy in Malaysia and such purpose or object may be charitable or non-charitable. The purpose or object of a Labuan Foundation shall be clearly stipulated in its charter. A Labuan foundation may, in the course of the management of its property, do such things and exercise such powers as are necessary for the proper administration of its property, including but not limited to buying and selling of such property and engaging in any other acts or activities that are not prohibited under any law for the time being in force in Malaysia, but such acts and activities shall be ancillary or incidental to the purpose or object of the Labuan foundation.

    Property – Property includes
    (a) assets of every kind, whether corporeal or incorporeal, movable or immovable, tangible or intangible, however acquired; and
    (b) legal documents or instruments in any form, including electronic or digital, evidencing title to or interest in, such assets as described in paragraph (a), including bank cheques, money orders, shares, securities, bonds, bank drafts and letters of credit;

    Registered Office – A Labuan Foundation must be registered through Licenced Labuan Trust Company with Labuan Financial Services Authority (“Labuan FSA”) and have a registered office, where the administration and operations of the Labuan Foundation is carried out in accordance with contractual principles.

    Charter – The Charter sets out the parameters within which the Labuan Foundation is to be managed and governed. There are clear and detailed provisions for the amendment of the Charter in Section 9 of the LFA, which go further to provide assistance than in other jurisdictions.

    Key Management – The key management of a Labuan Foundation consists of a Council, Officer and Secretary. The Council is responsible for the general supervision of the management of the Labuan Foundation, ensuring that the purpose for which the Labuan Foundation was established is fulfilled in accordance with the charter, articles and the law. In effect, the Council is similar to the Board of Directors of a company. The duties of the Officer are to ensure responsible and proper administration of the Labuan Foundation. The Secretary of the Labuan Foundation shall be the Labuan Trust Company who acts as the service provider to the Labuan Foundation and performs all secretarial functions including filing and lodging of documents with Labuan FSA.

    Founder

    Council Members

    Officer

    Secretary

    Resident or non-resident

    ≥ one (1)

    At least one (1)

    Labuan Trust Company

    Person subscribing his or her name to the Charter to establish the foundation.

    Natural person or corporation

    Natural person or corporation

    Can be appointed as Council Member at the same time but cannot be sole Council Member

    Founder or Beneficiary who is not the Officer can be appointed as the Council Member or Secretary

    Founder or Beneficiary who is not the Council Member can be appointed as the Officer or Secretary


    Assets – Assets placed in the Labuan Foundation are owned by the Labuan Foundation and are to be applied according to identified purposes. However, these assets must be non-Malaysian properties unless the said Foundation is a charitable foundation or said Malaysian assets have been approved by Labuan FSA. Asset protection is also most important. Section 8 of the LFA contains provisions covering what is a fraudulent disposition to a Labuan Foundation which will leave the Labuan Foundation liable to meet the claims of creditors in that respect. In particular, the property of a disposition is saved from such a claim if the Foundation was established or registered, or the disposition took place after two years from the date on which the creditor’s cause of action arose.

    Beneficiaries – This may include individuals, corporate entities or charities and are those who have vested interest in the assets of the foundation. Unless specifically provided in the charter or articles, beneficiaries have no rights to the foundation’s assets and are not owed any fiduciary duties. There are good default provisions contained in Section 65 of the LFA concerning distribution to a Beneficiary. Unless the Charter and Articles otherwise provide, a valid distribution is only made when the document providing for it is signed by all the Officers. However, all the Officers may delegate the power to one of their number. No such distribution can be made to defeat the claim of any creditor of the Labuan Foundation.

    Redomiciliation – Sections 23 and 24 LFA cover the redomiciliation of a Foundation into or out of Labuan.

    Dissolution - Sections 67 to 69 of the LFA provide a good legislative framework for dissolution and entitlement to property remaining at the end of dissolution. A Labuan Foundation can 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 beneficiaries.

TAX FRAMEWORK
Pursuant to Section 23 of the Labuan Business Activity Tax Act 2010 (“LBATA”), “Labuan business activity” means a Labuan trading or a Labuan non-trading activity carried on in, from or through Labuan, by a Labuan entity with non-resident or with another Labuan entity: Provided that —
(a) in relation to a Labuan entity carrying on any business under Parts VI and VII of the Labuan Financial Services and Securities Act 2010 [Act ] and under Parts VI and VII of the Labuan Islamic Financial Services and Securities Act 2010 [Act ], such activity may be carried on with residents, and where permitted, may be carried on in the Malaysian currency;

(b) in relation to the holding of investments by a Labuan entity in a domestic company, such holding may be with residents and in the Malaysian currency;

(c) subject to paragraph (f), in relation to the holding of debt obligations by a Labuan entity in a domestic company, such holding may be in the Malaysian currency;

(d) in relation to the shipping operations, the operations may be carried out in Labuan or outside Malaysia;

(e) subject to paragraph (f), in relation to the carrying on of such activity with the residents under subsection 7(4) of the Labuan Companies Act 1990 [Act 441], such activity may be carried on in the Malaysian currency; and

(f) in relation to the carrying on of any other transactions, such transactions may be carried on with the residents or in the Malaysian currency as approved by the Minister under section 2A of this Act”.

Further, “Labuan entity” means the entity specified in the Schedule of the LBATA. Clearly, Labuan Foundation is specified as “Labuan entity” and thus eligible for any tax concessions applicable to Labuan IBFC that relevant to Labuan Foundation such as:

  • Labuan foundation carrying on a Labuan trading activity;
  • Income derived from Labuan trading activity (Non Malaysian Property) for the basis period for a Y/A will be subjected to Labuan Business Activity Tax thus can enjoy the preferential tax rate of 3% of its audited net profits.
  • Income derived from Malaysian Property will be subjected to Income Tax Act 1967
  • Income derived from a Labuan non-trading activity for the basis period for a Y/A is exempt from tax for that year of assessment; and
  • Labuan Foundation may make an irrevocable election to tax its income from Labuan business activity under the Income Tax Act 1967 (ITA 1967), instead of the Labuan Business Activity Tax Act 1990 (LBATA 1990);
  • Other Tax Benefits i.e. No Stamp duty | No indirect taxes such as (i.e. Sales Tax | Service Tax | GST | VAT | Custom Duty) | No tax estimation i.e. no CP204 | no CP205
It is good that an Asian jurisdiction i.e. Labuan IBFC through its modern, innovative as well as sensible legal framework offers such opportunities for solutions to a world which needs Labuan Foundation for asset protection, wealth distribution and estate planning.