Things to know and what would be the deciding factors
Trust arrangements are a familiar concept in the common law world, including in Malaysia. In the case of Labuan trusts, the law governing Labuan trusts was enacted by the Government of Malaysia in 1996. Their uses in the context of succession and wealth planning as well as philanthropy are well established. Labuan foundations, on the other hand, are relatively newer in the scene, as it was introduced by the Government only in 2010. As a result, there are fewer of them registered with Labuan FSA. They are however, being increasingly used as structures for succession planning and philanthropy purposes.
We often get questions like, should I establish a Labuan trust or register a Labuan foundation? Is one preferable to the other? This article takes a brief look at how Labuan trusts and foundations differ, common features and the circumstances in which one might be used instead of the other.
Labuan trusts in general
A Labuan trust is created when the settlor transfers legal ownership of those assets to a Labuan trust company (the trustee), typically for the benefit of certain beneficiaries. Once a trust is established, the legal ownership of the trust property will vest in the trustees, and the beneficial ownership of the property will belong to the beneficiaries.
There are different types of trusts. Trusts for the benefit of beneficiaries, as described above, are the most common. However, trusts can also be established for purposes (charitable or non-charitable or both) and even without beneficiaries, i.e. Labuan purpose trusts.
Labuan foundations in general
As mentioned above, Labuan foundations are a less familiar concept than Labuan trusts. They are akin to a hybrid entity between a trust and a company. A foundation resembles a company in that it is a body corporate, albeit without shareholders, with separate legal personality that owns its own property like a company. A Labuan foundation is governed by its council members in accordance with its charter and articles in much the same way that a company is managed by its board members in accordance with company’s M&A.
A foundation also shares similarities with a trust. It has a founder who provides property to be held by the foundation in the same way that a trust has a settlor who makes disposition of a property to be held subject to the terms of a trust. Also like a trust, a foundation must have one or more objects which may be a purpose (charitable or non-charitable) and/or be for the benefit of certain beneficiaries. Foundations have no beneficial owners and are therefore ’ownerless’ structures (even where the foundation property is held for the benefit of beneficiaries).
Features that Labuan trusts and Labuan foundations have in common
Flexibility
Trusts and foundations are very flexible arrangements. They can both be discretionary in that it will be for the trustees/council members to determine which of the beneficiaries are to benefit, when, on what terms and so on.
Appointment of a supervisory person is possible to monitor the running affairs of the trust/foundation. In the case of a Labuan trust, a protector may be appointed to monitor the trustees in their management of the trust whereas a supervisory person may be appointed to monitor the council members in connection with their foundation’s management. The appointment and role of protector/supervisory person can be incorporated in the trust/foundation’s constitutional instruments.
Other similarity between the two arrangements is the retention of certain rights/powers afforded under the laws for a settlor/founder of the trust/foundation. Key powers such as powers to direct investment and powers to direct distribution of assets to the beneficiaries can be reserved to the settlor/founder in connection with the trust/foundation.
Unlimited duration
Both Labuan trusts and Labuan foundations can be of unlimited duration. It is common for Labuan trusts, however, to have a period of 100 years. This makes them well suited for use as dynastic private wealth structures as they can hold family wealth over many generations.
Privacy
Requirement to register a trust with Labuan FSA is optional. So, the relationship may be kept completely private, and information is not publicly available. Further, a Labuan trust can be established by a unilateral declaration by the trustees subject to meeting certain requirements under the law. Thus, this provides further confidentiality on the part of the settlor. Whereas a Labuan foundation must be registered with Labuan FSA, with limited information are on record at Labuan FSA but the identity of the founder, beneficiaries or purposes of a foundation are not publicly available.
Benefits of a Labuan trust
There are a few areas where a Labuan trust may be preferred over a Labuan foundation –
· Labuan trust is relatively easy to establish. A valid trust will be established provided the following elements are sufficiently certain: the intention of the settlor making a testamentary disposition on trust or to a trust, the property to be subject to the trust and the objects of the trust (beneficiaries or purposes). A trust comes into existence when the first trust property is transferred from the settlor to the trustees, in which the trustees must be a licensed trust company by Labuan FSA. A Labuan foundation by contrast is a registered entity so there are more formalities involved with the establishment of a foundation.
· Malaysian law is based on the common law model. So, Labuan trusts are very much a familiar concept. With that comes confidence in a long-established concept as with other most common law jurisdictions around the world. By comparison, Labuan foundations are relatively new to Malaysia (and in Labuan). This can mean that some families’ legal advisors prefer to use trusts over foundations.
Benefits of a Labuan foundation
There are also a few areas where a Labuan foundation may be attractive over a Labuan trust –
· Labuan foundation makes an appeal alternative to trusts where the concept of a trust, i.e. the split between legal and beneficial ownership in the arrangement, is an alien concept for people from civil law jurisdictions.
· Labuan foundation is a form of incorporation entity and has a separate legal personality. Both the legal and beneficial title to foundation property is held by the foundation itself. Quite a straightforward concept where any beneficiaries of the foundation do not have any interest in the foundation property.
· Labuan foundation has a separate legal personality, it can have contractual relationship with third parties itself unlike a trust where the trustees will enter into contracts on behalf of the trust. This is particularly useful when the Labuan foundation wishes to enter into a contract for activities which are taking place in civil law jurisdictions that do not recognise trust arrangement.
· The Labuan foundation’s articles may be drafted so that there is no requirement for beneficiaries of a foundation to be provided with any information about the foundation. This contrasts with a Labuan trust, where a beneficiary would ordinarily be entitled to certain information in relation to his/her trust.
· Beneficiaries under a Labuan foundation have no interest in the foundation’s assets and are also not owed fiduciary duties by the foundation’s council members. This differs to beneficiaries of a Labuan trust who are owed fiduciary duties by its trustees. Trustees may be reluctant to take in certain types of assets that can be very volatile in value or high risks in general, hence duty to ensure that they act in the best interest of the beneficiaries are at the highest level to avoid property value depreciates. So, a foundation can be an attractive entity for holding of such high-risk assets as far as a fiduciary duty factor is concerned.
Take a closer look at some of the features of Labuan trust and Labuan foundation –
Key Info You Should Know | Labuan Trust | Labuan Foundation |
Brief definition | A trust is established when a settlor transfers legal ownership of the assets to a trustee for the benefit of certain beneficiaries. Trustee is vested with legal ownership of the trust property and the beneficial ownership will belong to the beneficiaries | A foundation is established by a founder, endows the property into the foundation, making it the legal owner of those assets. The foundation’s council members govern the foundation and its property for the benefit of certain beneficiaries |
Legal structure, in short | · Not a separate legal entity, but a relationship · Trustees contract in their own name on behalf of the trust · Trustees can sue and be sued in their own name | · Separate and registered legal entity, a hybrid concept neither a company nor a trust · Can contract and hold assets in its own name · Can sue and be sued in its own name |
Who can set it up? | Resident or non-resident of Malaysia | Resident or non-resident of Malaysia |
Purposes | Charitable and non-charitable | Charitable and non-charitable |
Its legal origin | Common law | Civil law |
The law | Labuan Trusts Act 1996 | Labuan Foundations Act 2010 |
Who initiates it? | Settlor | Founder |
Retention of certain rights/powers | Settlor has certain reserved rights/powers but does not retain any ownership rights over trust assets | Founder has certain reserved rights/powers but does not retain any ownership rights over foundation assets |
Constitutional documents | Deed of Trust | Charter and Articles |
The manager/administrator | Trustees | Council members and officers |
Personally liable | Trustees have unlimited lability in respect of the trust | Those who administer are personally liable to the founder and the beneficiaries The liability of a Labuan foundation is limited to the value of its net assets |
Their role and duty | Dispositive and administrative powers are vested in the trustees, carried out in accordance with the terms of the trust | Council members to manage and oversee the operations, and officers administer the foundation and carry out decisions made by the council members |
Property | All kinds of assets (note however, immovable property situated in Malaysia will be treated under the domestic ITA 1967) | All kinds of assets (note however, immovable property situated in Malaysia will be treated under the domestic ITA 1967) |
Property owner | · Trustees (legal owner) · Beneficiaries (beneficial owner) | The foundation (there are no shareholders) |
Who benefits from it? | Beneficiaries | Beneficiaries |
Registrable with Labuan FSA? | Optional | Mandatory |
Confidentiality | Yes, only to trustees | Yes, only to Labuan FSA |
Supervisory role | Protector/Enforcer | Supervisory person |
Asset protection purposes? | Yes | Yes |
Succession planning? | Yes | Yes |
Period | Can be perpetual, but period of 100 years is common | Can be perpetual |
Tax rates (for holding of assets) | 0% under LBATA | 0% under LBATA |
Tax treatment
Note: Specific tax advice should always be taken | Not taxable under LBATA (unless it owns real estate in Malaysia, then ITA 1967 will apply) | Not taxable under LBATA (unless it owns real estate in Malaysia, then ITA 1967 will apply) |
Economic substance requirements (“ESR”) | Yes, depending on the trust’s activity, ESR will be organised by the trustees | Yes, depending on the foundation’s activity. ESR to be complied by the foundation Note that a foundation officer is considered as full-time employee under a directive issued by the Inland Revenue Board of Malaysia |
Proof of domicile in Labuan | Yes, under the trustees’ registered office address in Labuan | Registered office address must be in Labuan, normally provided by the Labuan trust company |
Secretary based in Labuan | Not required | Required, normally provided by a Labuan trust company |
Audit | Prudent | Required if ESR is not complied |
Documents/Records kept in Labuan | Yes | Yes |
Forced heirship rule and foreign claim or judgment | Unenforceable | Unenforceable |
Statutory fees (payable to Labuan FSA) | One-time registration fee of USD200.00 (optional) | · One-time registration fee of USD200.00 · Annual fee – USD200.00 |
Annual maintenance estimated fees (minimum) | Establishment fee – USD5,000.00 Annual fee (asset based) – minimum from USD10,000.00 | 1st year fee – USD5,000.00 Annual fee – USD4,000.00 |
Customised constitutional instruments | Legal fees – starts from USD7,500.00 for drafting the Deed of Trust | Legal fees – starts from USD5,000.00 for drafting of the Charter and Articles |
How to establish a Labuan trust or a Labuan foundation?
When you are ready to take the next step either in establishing a Labuan trust or a Labuan foundation, please first ensure that you have a clear idea of what is your objective and why do you choose a trust over a foundation. And why Labuan is in mind. It may come down to your personal preferences and costs, taking into account the use of the vehicle for your purposes, and what assets it will hold. The key is that both Labuan trust and Labuan foundation are capable, with careful planning and structured correctly, for you to achieve your objectives in the context of wealth and succession planning.
Conclusion
Which is better, a Labuan trust or Labuan foundation? Both have their pros and cons, guess the answer depends on your objectives and what you intend to benefit from your (and your future generations) planning.
Article penned by HMR Konsultan
Please note that whilst considerable care has been taken to ensure the information contained within this article is accurate and up to date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information. The information given in this document is based on our present understanding of the current laws and regulations and may therefore be subject to change without notice.