A Labuan Foundation is a separate legal entity with a corporate body. A foundation can manage its own properties for any lawful purposes and can be charitable or non-charitable.
The laws governing foundations are:
• Labuan Foundations Act of 2010
• Labuan Financial Services and Securities Act of 2010
• Labuan Islamic Financial Services and Securities Act of 2010
Labuan Island is a territory of Malaysia situated in East Malaysia off the coast from the Malaysian state of Sabah. Its official name is the “Federal Territory of Labuan”. As part of Malaysia, it was a British Colony from 1848 until 1946.
A Labuan Foundation enjoys the following benefits:
• Complete Foreign Participation: Foreigners can form foundations with complete foreign founders, beneficiaries, management, and assets located around the world.
• Low Taxes: The maximum tax currently is only $6,600 USD. Note: that U.S. taxpayers and all others paying income taxes on global income must declare all income to their governments.
• Privacy: The names of the founder, beneficiaries, officers, and council members are never included in the public records.
• Fast Formation: A foundation could be created and registered within two business days.
• Asset Protection: Every asset held is owned by the foundation. The founder’s and beneficiaries’ creditors cannot seize the assets.
• Estate Planning: Like every private foundation, they are perfect estate planning structures for wealthy families seeking to pass on assets to future generations of their beneficiaries (heirs) without going through probate and inheritance laws.
• English: Labuan was a former British Colony where English is one of its official languages.
Labuan Foundation Name
A foundation cannot select a name which is identical or closely resembling any legal entity’s name in Labuan.
The name must end with the word “Foundation” to avoid confusion with other legal entities.
Applications to register a foundation are filed with the Registrar of Company using forms adopted under the Labuan Foundations Act of 2010 (LFA) for registration as a foundation and a declaration by the foundation’s secretary. The names of the founder, beneficiaries, officers, and council members and description of the assets are not part of the public records.
Foundations’ administrative and operational functions are carried out under contractual laws rather than fiduciary ones. Therefore, the governing documents are its charter and articles.
Labuan foundations follow their charter as to how they are governed and managed.
A foundation’s articles are similar to a company’s bylaws which describes how it operates along with the powers, responsibilities and duties of its management.
The person or legal entity creating a foundation is called the “founder”. Founders can be citizens of and reside in any country. The founder authors the charter and the articles utilizing as much discretion as desired to describe the foundation’s purposes, the initial assets and how future assets will be donated, the beneficiaries including their rights to the assets, and how the foundation is managed and administered.
Foundations are managed by a council, its officers, and a secretary. The council provides general supervision of its managers and ensures that the foundation’s purposes are fulfilled as its charter, articles, and the law require. Councils are similar to a corporation’s board of directors.
Officers fulfill administrative functions ensuring the day to day operations are fulfilled. Officers may be the founder or a beneficiary. However, council members cannot be officers, as well.
The secretary performs all secretarial functions including filing required documents with the Labuan Financial Services Administration (FSA).
Every foundation must ensure that the founder, officers, secretary, and council members are proper persons and fit to hold their positions at all times pursuant to the Labuan FSA’s “Guidelines on Fit and Proper Person Requirements”.
In addition, every foundation’s management will ensure compliance with the Anti-Terrorism Financing Act of 2001 and the Anti-Money Laundering Act of 2001.
The officer(s) may appoint a council for the foundation. The council ensures compliance with the charter and the LFA law. In addition, the council is responsible for supervising the foundation’s officers and other management personnel.
All funds and properties (assets) held are owned by the foundation. Assets are owned in order to comply with the charter’s and article’s purposes to benefit specific persons or legal entities (beneficiaries). Such assets must be non-Malaysian.
Beneficiaries can be natural persons or legal entities residing in any country. The foundation’s charter and articles identifies who the beneficiaries are and what benefits and rights they possess. Under the law, beneficiaries do not have inherent rights to the assets and are not owed any fiduciary duties. However, the charter and articles typically provide certain rights to the foundation’s assets and may provide certain fiduciary duties from the council, officers, and/or the secretary.
Every foundation must maintain a local registered office.
An annual general meeting of the council is required where resolutions are approved along with the prior fiscal year’s accounting.
All books, accounting records, and copies of financial statements must be maintained at the registered office or another location approved by the officers.
All records are open for inspection at any time by council members, officers, the secretary, management personnel, and the appointed auditor (if one is appointed).
A private (non-charitable) foundation is subject to the following taxes in Labuan:
• For earning from international sources the corporate tax rate is 3% or the payment of a flat fee of 20,000 RM (currently approximately $6,600 USD);
• Income earned within Malaysia the corporate tax rate is 24%;
• The corporate tax rate for income derived as a holding company of investments is 0%;
• There are no taxes on withholding of interest, royalty fees, or distribution of profits to the beneficiaries.
Note: U.S. taxpayers and all others subject to income taxes on their worldwide income must report all income to their governments’ tax authorities.
A foundation may be dissolved upon:
• The passage of a resolution by the officer(s) because the foundation was established for a specific period of time which will soon expire;
• The fulfillment of the foundation’s purposes or inability of fulfillment; or
• The charter specifies another reason for its dissolution.
When the dissolution is complete, all assets will transfer to the beneficiaries.
Neither the charter nor the articles are filed with the Registrar so there are no public records identifying the founder, council members, officers, beneficiaries, or the assets.
Time for Formation
Depends on how much time the preparer takes to write the charter and the articles. Filing with the Registrar can be accomplished within one day.
A Labuan Foundation enjoys the following benefits: total foreign participation, privacy, fast formation, low taxes, asset protection, estate planning, and English is one of its official languages.