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The Benefits of a Labuan Foundation

Mark Lea, Partner at Lea & White and Managing Director at Lea & White International Advisers Limited, introduces the general concept of a foundation as provided by the Labuan Foundations Act 2010, and explains some of its important features and impact on Malaysian residents and property.

Abstract

In this article on Labuan Foundations, the author seeks to introduce the general concept of a Foundation as provided by the Labuan Foundations Act 2010. The important roles of the Founder, Supervisory Person, and the Secretary are dealt with. The impact of Malaysian residence and property are considered. General provisions covering the administration of a Labuan foundation are briefly covered. Then the article explains that a particular feature of Labuan's Foundations Law is the introduction into it of important features from Labuan's Trust Law covering asset protection, anti-forced heirship, liability, migration of foundations, and secrecy and provision of information.

Introduction

The introduction of the Labuan Foundations Act 2010 ('the ACT') was one of a number of additions or changes to the wealth management solutions offered by Labuan. In the usual way, the Labuan Foundation is a legal entity with no beneficial owners, like the shareholders of a company. It receives property from the Founder and becomes entitled to and owns that property; the property of a Foundation does not become that of a Beneficiary unless it is distributed by the Foundation in accordance with the provisions of the Charter or the Act. The Foundation is run by a Council which appoints Officers to administer it. The constituent and governing documents of a Labuan Foundation are its Charter and Articles. The Charter must state the particulars set out in the First Schedule to the Act and may make other provisions, which can include but are not limited to matters mentioned in the Second Schedule to the Act. If the Charter so provides, the Foundation may also have Articles, which may make provisions, including but not limited to matters set out in the Third Schedule to the Act. If there are no Articles or the Articles do not provide for a matter, then the provisions of the Act on that matter apply.

The Foundation must have a purpose. The main purpose of a Labuan Foundation is the management of its property but it may have any lawful purposes or objects which may be charitable or non-charitable. The Charter can be amended in accordance with its provisions in that respect. If it contains no such provisions, then the Founder, or the Officers of the Foundation, will convene a meeting of the Founder, or his estate, the Officers and the Council and if they unanimously agree upon a resolution for amendment of the Charter, such amendments will be adopted; otherwise, the Officers will need to make an application to the Court for such amendment.

The founder

As with all Foundations, a Labuan Foundation has a Founder, who establishes the Foundation by subscribing his name to the Charter of the Foundation and by complying with the requirements of the Act. The Charter can reserve to the Founder rights and powers, which the Founder can, by the terms of the Charter or by instrument in writing, revocably or irrevocably assign or transfer to another person of his choosing. The Founder can appoint members of the Council prior to registration of the Foundation and, once the Foundation is registered, the Founder, or someone empowered by him in the Charter or Articles, can appoint the members of the Council. The Founder, or indeed any Beneficiary, who is not an Officer of the Foundation, may be a member of the Council. The appointment of a member of the Council is not effective unless his written consent to such appointment has been given to the Founder or to such other person who has appointed him. If the Charter provides for the appointment of a Supervisory Person, then the provisions concerning the appointment of the Supervisory Person are similar as for a member of the Council. Similarly, the Founder must, before the registration of the Foundation, appoint at least one person to be an Officer of the Foundation. The Founder, or a Beneficiary, who is not a member of the Council, may be appointed as such Officer. Again, the appointment of that Officer is not effective until he has delivered to the Founder his written consent to such appointment. Before the registration of the Foundation, the Founder must appoint a Labuan licensed Labuan Trust Company to be the Secretary of the Foundation. The Founder's name and address (or registered office if the Founder is corporate) must appear in the Charter. The Founder may request information as to the state and amount of the property of the Foundation and as to the administration of the Foundation. Thus, the Founder is crucial to the establishment and registration of the Foundation and may play an important continuing role.

"The Founder is crucial to the establishment and registration of the Foundation and may play an important continuing role."

Residents and non-residents and Malaysian property

A 'resident' means a citizen or permanent resident of Malaysia and a person who has established a place of business and is operating that business in Malaysia (with certain exceptions relating to Labuan). The Founder can be a resident or a non-resident and so can any Beneficiary. 'Malaysian property' means any property which is situated in Malaysia and property has a very wide meaning. Unless the purpose of the Foundation is wholly for charitable purposes, the prior approval for the transfer of Malaysian property to a Labuan Foundation has to be obtained from the Labuan Financial Services Authority ('the Authority'). Where Malaysian property is held by a Labuan Foundation, the income from it is subject to the Malaysian Income Tax Act. Therefore, there are disadvantages for a Malaysian resident in creating a Labuan Foundation with Malaysian property.

"There are disadvantages for a Malaysian resident in creating a Labuan Foundation with Malaysian property."

The supervisory person

The role of a Supervisory Person is all important. Such a person can be appointed additionally to the Council, as a check and balance to its intentions, acts and omissions, or in lieu of the Council to take on its role. The Supervisory Person is treated for the purposes of the Act as a member of the Councilor or as the Council. Consequently, the powers, rights, and duties of the Council, which are provided for in the Act, as with all Foundations, apply equally to the Supervisory Person.

"The role of a Supervisory Person is all important."

The secretary

Foundations Laws seek to have one person involved which is a regulated entity in the relevant jurisdiction. Here it is the Secretary. The Secretary makes the application for registration of the Foundation and is responsible for verifying all the documents lodged with the application. The Secretary provides its address as the registered office of the Labuan Foundation. This is the address for service of documents. Certain documents and records have to be kept at the registered office. All documents to be filed with the Authority have to be filed by the Secretary. The Secretary has to ensure the validity, veracity, and authenticity of all documents which it files with the Authority. Every request for a copy or extract of a document or for any certificate from the Authority has to be made by the Secretary. Except where the request is from the Founder, Officers, a Council Member, or a Beneficiary and the document requested is for the personal use of that person.

Powers, rights, duties, administration, and procedure

As with all laws relating to Foundations, there are provisions concerning the powers, rights, and duties of the Council. There are provisions for the disqualification of Council members. There are provisions for the appointment, disqualification, resignation, and duties of Officers. There are detailed provisions covering meetings of the Council and of its Officers. The administrative requirements of running a foundation and for its dissolution are covered in detail.

What is of more interest for these purposes is the introduction into the Act of certain matters taken from Trust Law. These are dealt with in the remainder of this article.

"What is of more interest for these purposes is the introduction into the Act of certain matters taken from Trust Law."

Asset protection

The provisions of the Trust Law are imported into the Foundations Law: If the creation of a Labuan foundation or the disposition of property to it was with the principal intent of defrauding a creditor and rendered the Founder insolvent or without property to meet a successful claim by that creditor, then the relevant property of the foundation is available to meet the creditor's claim.

The creation of a Labuan foundation or the disposal of property to it ('the transfer') is not a fraudulent disposition if either:

  1. the transfer took place before the creditor's cause of action arose; or 
  2. the transfer took place more than two years after the creditor's cause of action arose; or 
  3. the transfer took place before the end of that two year period and the creditor does not commence action with one year after the transfer. 

The other detailed provisions relating to this are also imported from the Trust Law.

Anti-forced heirship

As with the Trust Law, no foreign claim or order of a foreign court will be enforced against a Labuan foundation in respect of:

  1. the personal and proprietary consequences of marriage or the termination of marriage; 
  2. succession rights, whether testate or intestate; 
  3. any claims or orders of a foreign court in respect of the matters referred to in (4) or (5) by reference to the personal laws of the Founder or the Beneficiaries; and 
  4. the claims of creditors in an insolvency by reference to these matters.

Liability

These provisions concerning the liability of those involved with a foundation are similar to the provisions concerning trustees of a trust with regard to the consequences of the decision in Armitage v Nurse.

First, no member of the Council, Supervisory Person, Officer, or Secretary of a Labuan foundation shall be personally responsible for any liability of a Labuan foundation, unless that liability arose because of that person's fraud, dishonesty, misconduct, wilful default, or gross negligence.

Secondly, any exculpation provision in the Charter or Articles of, or any document relating to, a Labuan foundation, which seeks to protect any of those persons in respect of any negligence, default, misconduct, or breach of duty, which he would otherwise be liable for by any rule of law, is void.

There are then the provisions under which the Court may grant relief despite that.

Migration

As with trusts, there are detailed provisions concerning the ability to transfer Labuan foundations elsewhere and to transfer foreign foundations into Labuan.

Provision of information

A Beneficiary, who has a vested interest, is entitled to request information and documentation relating to his interest and the Act specifies to what in particular he shall be entitled.

If other Beneficiaries have requested confidentiality or the members of the Council, Supervisory Person, or Officers determine that confidentiality is in the best interests of the other Beneficiaries, they must do all they can to preserve that confidentiality.

If a Beneficiary does not receive information or documentation requested by reason of the above two paragraphs, he may apply to the Court for an order.

There is an absolute rule of secrecy regarding Labuan foundations; any proceedings concerning them, other than criminal proceedings, are to be heard in camera and no details are to be published without leave of the Court.

These secrecy provisions do not apply where disclosure:

  1. is required by a court; even then, if the order was obtained ex parte, the Labuan foundation may notify the person affected, so that that person may contest the order; 
  2. is required by the Authority in its supervisory function; or 
  3. is with the consent of the Labuan foundation. 

Even so, the Court may order disclosure.

The Officer or Secretary of a Labuan Foundation, on receipt of a request, shall provide accurate information as to the state and amount of the property of the Labuan Foundation and the administration of the Labuan Foundation to:

  1. the Court; 
  2.  to the Authority under its powers; and 
  3. to the Founder, any member of the Council, Supervisory Person, or Beneficiary, unless it is believed that the request has been made under duress. 

Even so, the Court may restrict the right to the information requested.

Except as otherwise provided by the Act, the Court or the Charter and Articles, every member of the Council, Supervisory Person, Officer, or Secretary shall deal with and treat all documents and information relating to a Labuan foundation as secret and confidential.

"Labuan foundations provide a considerable level of legal secrecy."

Thus, Labuan foundations provide a considerable level of legal secrecy.

This article is reproduced with permission granted by the author. It was first published in Trusts & Trustees (Vol. 20, No.6, July 2014).


About Author

mark lea

Mark Lea is Partner at Lea & White, and Managing Director at Lea & White International Advisers Limited.

Born in 1944, Mark Lea was educated in England at Eton College, where he was President of the Eton Society. He qualified as a solicitor in 1970 in London, before joining the Merchant Bank N.M. Rothschild & Sons Limited, where he worked closely with the Chairman Lord Victor Rothschild KCMG GC at a time when he was Head of the UK Government Think Tank. Mark Lea became a Director of Rothschild’s Trust Companies and of its Guernsey Bank.

Since 1971, Mark Lea has been concerned with international estate planning and structure and international comparative taxation. Having been a partner and then Chairman in one of the UK's most successful provincial law firms, he moved permanently to Asia and was admitted to practice as a solicitor in Hong Kong in 1995.

Mark Lea is also a Member of the Inland Revenue Board of Review of Hong Kong. For some five years he served on the executive committees of the Hong Kong Trustees Association and of the Society of Trust and Estate Practitioners (Hong Kong Branch). He has since been a member of their Joint Law Reform Committee.

Mark Lea advised the Government of Singapore with regard to the Trustees Act of Singapore. He originated the proposals for changes to the Trust Law of Hong Kong and advised on such changes. He advised the Malaysian Government on changes to the laws of Labuan, including Trust Law, Foundations Law and Limited Partnership Law. He remains an international adviser to that government. Mark Lea is advising the Government of Samoa on new Trust Law and new Foundations Law and on changes to other relevant laws in consequence.

Mark Lea has taught a course on international estate planning including the use of trusts and foundations and is Adjunct Professor of Law at the National University of Singapore for the last 10 years.

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