Labuan Foundations (Part 2)

Recently, I had the opportunity to connect with Mr Mark Meah of Portcullis Trustnet (Labuan) Limited, on the topic of Labuan Foundations.

Here's a summary of our conversation.

Introduction

Labuan Foundations are creatures of the Labuan Foundations Act 2010. Historically, a foundation had its roots in civil law jurisdictions, so as a result of the aforesaid statutory enactment Labuan IBFC can now say that it is one of the few common law jurisdictions offering investors a choice between common law trusts and civil law foundations.

Foundations are regarded as separate legal entities that hold assets with the objective of managing the assets for the benefit of a class of persons on a contractual basis. These structures are used typically for private wealth management and charitable purposes.

Key Features

Some key features of a Labuan Foundation are as follows:

      It must be registered and have a registered office in Labuan;

     There are no capital requirements as a foundation does not have share capital; the minimum endowment of USD1.00 as an initial asset at the time of establishment is sufficient;

·        It must have a Charter. It is a document that sets out the parameters within which the Foundation is to be -managed and governed.

·         Key management of the Labuan Foundation is separated into the founder, council, the officers and a secretary;

·         Assets placed in the Labuan Foundation are owned by the Foundation and are to be applied only for the benefit of the identified purpose. However, these assets must be non-Malaysian properties UNLESS it is a charitable foundation, or as approved by Labuan Financial Services Authority.

Compliance Requirements

·       The Secretary to the Labuan Foundation will provide secretarial functions such as filing and lodging of documents to Labuan FSA; this a compulsory appointment and the secretary always must be the licensed Labuan Trust Company;

      Every Labuan Foundation shall ensure compliance with the Anti-Money Laundering and Anti-Terrorism Financing Act 2001;

·     The Founder, Council (members), and Officer(s) shall remain as fit and proper persons throughout their appointment as prescribed in the Fit And Proper Person Requirements issued by Labuan FSA.

Fees:

Labuan Foundations are required to pay Labuan FSA the following fees:

·         One-off payment of Registration Fee                     – RM750

·         Annual fee on or before anniversary date            – RM750

There are recurrent fees to pay to the Authority. In addition there are secretarial fees for a registered office and filing, audit, etc. some of which are also paid out annually.

Preparation of the Charter is also a cost you have to look into.

Tax considerations

-For me to explain the tax framework in Labuan, I shall need to touch upon the principal legislation the Labuan Business Activity Tax Act 1990 (LBATA).

-However, I shall begin by saying that the Malaysian Income Tax Act 1967 is territorial, what it means is that it covers the whole of Malaysia, including Labuan. Therefore any income accruing in or derived from Malaysia is taxable. But know that LBATA is regarded as a tax exemption under the ITA.

-S.3 of LBATA says that “a Labuan entity carrying on a Labuan business activity shall be charged to tax in accordance with this Act…”

-The definition of a “Labuan Business Activity” means: A Labuan Trading or a Labuan non-trading activity, carried on in, from or through Labuan in foreign currency, by a Labuan entity with non-residents or with another Labuan entity.

To delve deeper into its definition:

-A Labuan Trading is any activity that includes banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a Labuan non-trading activity.

-A Labuan Non-Trading Activity is any 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.

-Reverting to S.4 of LBATA, it says that the tax rate for a Labuan trading activity is based on 3% of chargeable profits. Here chargeable profits = net profits in the accounts. In the alternative, the entity may elect to pay tax at a fixed rate of RM20,000 (S.7 LBATA).

-Know that for non-trading activities, they are not chargeable to tax.

Furthermore:

·         -Distributions by a Labuan foundation to its beneficiaries are tax-exempted in Labuan. However, the beneficiaries of the foundation will need to satisfy their own tax liabilities in their respective jurisdictions of tax residence.

·         -There are no withholding tax/capital gain tax.

·        - No stamp duty on all instruments relating to offshore business activities.

-Specific requirements for Labuan Charitable Foundations.

-For all Labuan charitable foundations, they are required to comply with the legal requirements of the jurisdiction they intend to operate in.

-If a Labuan charitable foundation were to solicit donations from the public, it shall comply with the following:

·        

     a) Appoint a council of at least three (3) fit and proper persons

     b) founder may be a council member. However, the majority of the council members shall be independent of the founder;

    c) Appointment of a supervisory person for the foundation who is fit and proper in accordance to the Guidelines on Fit and Proper Person issued by the Labuan Financial Services Authority (LFSA);

   d) Provide information memorandum or such other information document for the public which shall include but not limited to the following minimum information:

-     -Name of foundation;
       -Purpose and object of the foundation;
-      -List of its founders, council members, supervisory person, officer and secretary, where applicable;
-Statement of its establishment under Labuan Foundations Act 2010;
-Whether it has been accorded the status of an “approved institution or organization” under the Income Tax Act 1967 for donations made to the foundation to be tax deductible, where applicable;

·         
   e) Submit a proposed general operating plan, which include the management of the property in regard to the utilization and distribution of the property, the strategy of the foundation including its investments and other related information, and

    f) Submit annual audited accounts to LFSA within six (6) months after the close of each financial year of the foundation.

Please feel free to contact the following for more information on Labuan Foundations, trusts and other vehicles.

Mr Mark Izzeddeen Meah,

Business Development Director

PORTCULLIS TRUSTNET (LABUAN) LIMITED

Level 6D, Main Office Tower

Financial Park Labuan Complex

Jalan Merdeka, PO Box 80887

87018 Labuan, F.T. Labuan

Malaysia

Tel: +6087 451310 / +6087 439191

Fax: +6087 439193 / +6087 451311

email: mark.meah@portcullis-trustnet.my

website: www.portcullis-trustnet.my