High-net-worth individuals (HNWIs) or families and those involved in wealth management in search of a safe refuge can expect a warm welcome at Labuan International Business and Financial Centre (Labuan IBFC), especially now with the new and amended laws, enacted earlier in 2010.
The range of business entities permitted in the jurisdiction has been expanded to meet the changing needs of modern business and wealthy individuals. Depending on the objective, an investor can now structure a protected cell company (PCC), a limited partnership or limited liability partnership, a private trust company or a foundation. These options were previously not available in Labuan IBFC but the jurisdiction has now moved forward to broaden the opportunities.
For those contemplating investing in the domicile but uncertain as to the tax obligations their proposed business structure would attract, the new provisions provide certainty and clarity.
Once a structure has been planned by a prospective client and their professional advisers, it may be submitted to the Malaysian Inland Revenue Board for an advance tax ruling. This avenue is provided for under the revised Labuan Business Activity Tax Act 1990 (LBATA) as part of Labuan IBFCs move to deliver greater certainty and clarity to investors.
The good news does not end there. With four new laws and radical amendments to four existing Acts governing the jurisdiction, there are significant opportunities waiting for those intrepid enough to seek them out.
The new Acts are the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA); Labuan Financial Services and Securities Act 2010 (LFSSA); Labuan Foundations Act 2010 (LFA); and the Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 (LLPLLPA). Those Acts radically amended are the Labuan Companies Act 1990 (LCA); Labuan Business Activity Tax Act 1990 (LBATA); Labuan Financial Services Authority Act 1996 (LFSAA), which renames the regulator, formerly known as Labuan Offshore Financial Services Authority); and the Labuan Trusts Act 1996 (LTA).
This article is confined to highlights of those Acts relating to wealth management, the amended LTA 1996 and the new LFA 2010.
Labuan Trusts Act - as modern as can be
Because the times "they are a-changing", Labuan has amended the LTA 1996 to enhance the jurisdiction's appeal.
An instance of this modernisation is the retention of day-to-day control over the direction and management of investments and businesses by a settlor or protector. This highly sought-after feature in Trust Law is addressed in the LTA 1996, which offers reserved powers to a settlor.
Another feature is the Labuan Special Trust (LST), which provides for "a trust of company shares" to be established under which (a) the shares may be retained indefinitely; and (b) the management of the company may be carried out without power of intervention by the trustees.
The Labuan Special Trust goes even further to meet contemporary needs as the trustee is not liable for losses from speculative or imprudent activities of the company.
Duration of a trust is important and Labuan IBFC allows for a trust to exist in perpetuity as a default provision. There is flexibility for a fixed term trust to be converted to a perpetual trust and vice versa; to shorten or extend the duration; and to make this retrospective for existing trusts.
There is protection in Labuan IBFC in the case of a foreign law claim or enforcement of a foreign law judgement arising from marriage, divorce, succession rights, or creditors' claims in an insolvency.
The types of trusts that can be structured in Labuan IBFC are as wide ranging as those in other domiciles. In Labuan IBFC, the list includes purpose trusts, charitable trusts, the promotion of religion and one currently unique to Labuan IBFC – "the advancement of human rights and fundamental freedom".
As far as confidentiality is concerned, Labuan IBFC has provisions to ensure this issue is balanced against those requiring trustees to provide information. Labuan IBFC's guidelines covering the right for beneficiaries, a settlor, protector, enforcer and for the court to receive information, position Labuan IBFC at the same level as other jurisdictions.
There are provisions covering beneficiaries, protectors, letter of wishes, redomiciliation into or out of Labuan IBFC in the Act, including the requirement that a Labuan trust shall be in writing and can be by unilateral "declaration of trust", which need not name the settlor. Thus, Labuan IBFC provides the clearest and most user friendly provisions in trust law.
Building a strong case for Labuan Foundations
For people more familiar with the civil law code or who want complete control over their assets, a foundation may be a preferable alternative to a trust. Labuan IBFC is one of a few common law jurisdictions in Asia Pacific that caters for both trusts and foundations.
Trusts and foundations share many similar features. Both have beneficiaries and both vehicles can exist in perpetuity. Where a trust has a settlor with reserved powers, a foundation has a founder who may have rights reserved to him over the management of the foundation; a trust has a trustee, a foundation has a council and officers; a trust has a trust deed but a foundation is governed by a charter, which states the objectives or purposes and articles that provide a set of detailed rules on its administration; a trust is not a legal entity but a foundation is a registered, legal entity.
In the case of liabilities, trustees have unlimited liability in respect of the trust but a foundation's administrators and the founder who comply with the requirements of the charter and articles are not personally liable for the debts of the foundation. The liability of a foundation is limited to the value or its net assets.
Much thought and consultation have gone into the crafting of the LFA 2010 to ensure that it is comprehensive and modern enough to meet contemporary needs. Some of the distinctive features of the Act – which other jurisdictions may not offer - are summarised here.
The LFA 2010 provides for it to be a criminal offence (with a possible custodial penalty) to wrongfully disclose any information concerning the foundation. Exceptions include the Labuan Financial Services Authority ("the Authority") in its regulatory capacity; requirements under a court order; and when the information provided is with the consent of the foundation.
Although Labuan is a "white listed" jurisdiction that endorses the OECD "level playing field" principle on the bilateral exchange of tax information with foreign tax authorities, there are significant safeguards in place and limitations on the sharing of information which ensure that no "fishing expeditions" will be entertained.
Rights to information
Any request to an officer or the secretary of a foundation by an individual with vested interest, if requested to do so, must result in the provision of accurate information to the court, the Authority, founder, council member, supervisory person or any beneficiary, except when there is duress. Notwithstanding, the court may restrict the rights of any individual seeking information.
The LFA 2010 also provides strict confidentiality requirements on council members, the supervisory person, any officer and the secretary. There is a provision for confidentiality with regard to disclosure of information to a beneficiary, if other beneficiaries have requested this or if the council, supervisory person or officers determine that confidentiality to be in the best interests of the beneficiaries. Even so, the Court may, on an application by a beneficiary, order information to be provided. The LFA 2010 provides for a beneficiary having a vested interest to obtain information and documents relating to his interest.
The LFA 2010 contains provisions defining a fraudulent disposition to a foundation, which may leave it liable to meet the claims of creditors. In particular, the property of a disposition is saved from such a claim if the foundation was established or registered or the disposition took place after two years from the date on which the creditor's cause of action arose.
Unenforceability of foreign claim or judgement against a validly established foundation is addressed, with particular regard paid to the personal and proprietary consequences of marriage or succession rights or the claims of creditors in insolvency. Just as in trusts, there is protection against claims in respect of foreign forced heirship.
Distribution to a beneficiary
Unless the charter and articles otherwise provide, a valid distribution is only made when the document providing for it is signed by all the officers. However, all the officers may delegate the power to one of their number. No such distribution can be made to defeat the claim of any creditor of the foundation.
Other features of a Labuan foundation include redomiciliation of a foundation into or out of Labuan as well as clear and detailed provisions for the amendment of the charter. There are provisions covering the change of name of a foundation and how this shall not affect the rights or obligations of the foundation; provisions for a supervisory person who may be in addition to, or in lieu of, the council; and legislative framework covering dissolution and entitlement to property remaining at the end of dissolution.
Tax and Exemptions
Labuan IBFC is a low tax jurisdiction and under the Labuan Business Activity Tax Act 1990 (LBATA), Foundations and Trusts domiciled here enjoy the same generous tax benefits as other Labuan business entities.
Under LBATA 1990, trading activities are taxed at three per cent of audited profit or a flat tax of MYR 20,000 while non-trading activities (such as investment holding) pay no tax.
A foundation or trust with income from non-Malaysian property qualifies to be taxed under LBATA 1990 but income derived from the holding of Malaysian property will be subject to the Income Tax Act 1967 (ITA). The Exchange Control Act 1953 does not apply to Labuan foundations and there are also no withholding taxes on the income distribution to beneficiaries.
Alternatively, a Labuan entity can make an irrevocable election to be subject to tax under the country's ITA 1967 at the prevailing corporate rate (currently 25 per cent) thereby gaining more secure access to more than 80 double taxation agreements that Malaysia has signed with its treaty partners.
Labuan IBFC is a very attractive and safe domicile for high net worth individuals or families to set up a trust or foundation. The combination of retention of management control, the confidentiality issues addressed, and the flexibility offered add up to an irresistible opportunity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.