Labuan Foundation

With the promulgation of the new legislation in 2010, Labuan is one of the few common law jurisdictions offering investors a choice of common law trusts and civil law foundations.

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. Guidelines on the Establishment of Labuan Foundation including Islamic Foundation may also be issued by Labuan Financial Services Authority (“FSA”) from time to time (“Guidelines”).

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.

 

PURPOSE & 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.

Category

Private Foundation

  • For wealth management 
    Endowment of properties can only be done by founder and his assignee.
  • For charitable 
    Not permitted to receive donations from third parties or the public.

Public Charitable Foundation

Endowment of properties can be done by third parties and/or public.

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

 

LABUAN FOUNDATION STRUCTURE

 

FOUNDATION COMPOSITION

FOUNDER

  • Minimum One (1), either natural person or corporate entity
  • May be residents or non-residents of Malaysia
  • May also be one of the beneficiaries

BENEFICIARIES

  • May include individuals, corporate entities, class of beneficiaries or charities and are those who have vested interest in assets of the foundation
  • May be residents or non-residents of Malaysia

OFFICER

  • Compulsory appointment
  • Minimum One (1), 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 MEMBER

  • Not a compulsory appointment, at the discretion of the Founder (unless foundation that solicits donation from the public)
  • May be 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 management 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

SECRETARY

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

SUPERVISORY PERSON

  • Compulsory for foundation that solicits donation from the public.
  • Role to monitor the Council’s decision, power to add or remove Officers, Council members etc.

 

KEY FEATURES OF LABUAN FOUNDATION

  • Name
    Shall end with the words “Labuan Foundation” or “(L) Foundation”.
  • Registered Office
    Mandatory to maintain a registered office in Labuan which shall be the address of the Secretary of the foundation.
  • Legal Status
    It is a legal entity, it can enter into contracts, buy and sell properties, own bank accounts or own shares or interest in other corporations.
  • Duration
    May be fixed or infinite life span.
  • 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.
  • Assignment of Founder’s rights, powers and obligation
    A founder may transfer its rights, powers and obligations if allowed by the charter of the foundation or any instrument in writing (e.g. deed of assignment) to be executed between the founder and his assignee. In this regard, the assignee who is assigned with such rights, powers and obligations shall be deemed to be a founder when exercising them or performing such obligations. The assignee also has the rights to endow his own assets into the Labuan foundation.
  • Property of Foundation
        1. 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.
        2. Property of the Labuan foundation can be Malaysian and/or non-Malaysian property.
        3. Any assets endowed to a Labuan foundation shall be the properties of such foundation.
        4. This includes:
          (d.1)   Assets of every kind whether corporeal or incorporeal, tangible or intangible, movable or immovable, however acquired may be endowed to a Labuan foundation; and
           (d.2)   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.
        5. The accounting records and other records shall be kept at the registered office of the Labuan foundation or at such other place in Labuan as the officers think fit and shall at all times be open to inspection by the council members, supervisory person, officers and the approved auditor, if appointed.
        6. A Labuan foundation shall ensure that its founder, council member, officer and secretary remain as fit and proper persons throughout their appointment with the foundation as may be prescribed in the Guidelines on Fit and Proper Person Requirements issued by Labuan FSA.
        7. A Labuan foundation shall ensure compliance with the Anti-Money Laundering and Anti-Terrorism Financing Act 2001.
        8. Dissolution of Labuan foundation may happen:
          >  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;
           >  when the purpose of the foundation is fulfilled or becomes incapable of fulfilment; or
           >  when the charter requires such dissolution.

           After the dissolution, the ownership of the remaining assets will be transferred to the beneficiaries.
  • Property in Malaysia
    1. Labuan foundation for charitable purposes may hold Malaysian property and NEED NOT seek prior approval from Labuan FSA.
    2. For Labuan non-charitable foundations, including foundations established for the benefits of family members that intend to include Malaysian property MUST seek prior approval from Labuan FSA.

 

SPECIFIC REQUIREMENTS FOR LABUAN CHARITABLE FOUNDATION

Jurisdiction of operation

All Labuan charitable foundations are required to comply with the legal requirements of the jurisdiction or market 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) persons.
  • The founder may be a council member. However, majority of the council members shall be independent of the founder.
  • Appointment of a supervisory person for the foundation.
  • Provide information memorandum or such other information document for the public.
  • Submit a proposed general operating plan to Labuan FSA during the application for establishment of the foundation.
  • Submit annual audited accounts to Labuan FSA within six (6) months after the close of each financial year of the foundation.

Representative Office

The Labuan charitable foundation is required to obtain prior approval of Labuan FSA before establishing a representative office outside of Labuan including Malaysia. The purpose is confined to carrying out facilitation of meetings and other administrative functions as approved by Labuan FSA.

Income generating or fund raising activities including investments related activities, as well as maintenance of records and books of accounts of the foundation shall not be undertaken at the representative office.

Private endowment and Public donation

  • If the endowment of property 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 to the foundation.
  • If the endowment of property is from an individual, Labuan charitable foundation is required to submit a copy of an undertaking to endow the property to the foundation.

 

LABUAN ISLAMIC FOUNDATIONS

  • A Labuan Islamic foundation may be established under the LIFSSA and all the provisions of the LFA shall apply to the Labuan Islamic foundation unless specifically provided. The object, purpose and activity of the Labuan Islamic foundation must be in compliance with Shariah principles.
  • The officer of a Labuan Islamic foundation is required to appoint or consult a Shariah adviser to advise on matters relating to the operations of the Islamic foundation to ensure its compliance with Shariah principles.
  • The endowment of property(ies) into the Labuan Islamic foundation can be done through hibah or hadiah.
  • The Labuan Islamic foundation must have a clearly executed legal transfer of ownership of the property(ies) from the founder to the foundation.

 

LABUAN IBFC TAXATION 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.

Labuan entities that carry on a non-Labuan business activity are subject to the provisions of the Malaysian Income Tax Act, 1967 (ITA).

“Labuan business activity” means:

  • a Labuan trading or a Labuan non-trading activity carried on in, from or through Labuan
  • excluding any activity which is an offence under any written law

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

If the foundation carries out Labuan non-trading activity an activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties by a Labuan entity on its own behalf, such activity is not subject to tax 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). Where the property of the Labuan Foundation includes Malaysian property, the ITA shall be applicable for any income derived from the Malaysian property.

Substance requirements for Labuan business activity -
For those Labuan entities (licensed entities and Holding Company) listed in the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018, the following would be required:

  • adequate full time employees in Labuan; and
  • adequate amount of annual operating expenditure in Labuan.

 

DEALINGS WITH RESIDENT

All Labuan entities are allowed to conduct transactions with residents of Malaysia in Ringgit Malaysia. “Resident” here means:

  • in relation to a natural person, a citizen or permanent resident of Malaysia; or
  • in relation  to any other person, a person who has established a place of business, and is operating in Malaysia.
  • and includes person who is declared to be a resident pursuant to s.43 of the Malaysian Exchange Control Act 1953.

The amount of deductions allowed in respect of payments made by Residents to Labuan entities are as follows:-

>  Interest expense67% deductible
>  Lease rental67% deductible
>  General reinsurance premiums100% deductible
>  Other type of payments3% deductible

 

WHY FOUNDATION IN LABUAN?

  • Build your LEGACY
  • Registered corporate body with separate legal entity
  • Can be for private or charity purposes
  • Protection from creditors’ claims
  • 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
  • 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
  • Founder can reserve powers and rights
  • 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