First published in STEP Journal (July 2015), this article by Dr Nico Francken summarises the characteristics of the Indonesian foundation, based on Dutch civil law, and the Labuan foundation, based on common law.
The foundation is a very attractive vehicle for dynastic structuring of international wealth, especially for families from civil-law jurisdictions. During the past few years, a number of articles have been written about foundations and the use thereof in international estate planning and asset management. Unfortunately, there is very little information about foundations in 'old' jurisdictions, such as Dutch and Indonesian foundations (respectively called 'stichting’ and 'yayasan'). The same can be said of other Asian foundations.
Both Malaysia and Indonesia are majority Muslim countries but, as a result of their colonial histories, they have different legal systems. Indonesian law is based on Dutch civil law, while Malaysia has developed a system based on the common law. Furthermore, Indonesia has a system of adat law (village law) and both countries are strongly influenced by Shari'a law.
Key Points
  • What is the issue? The Indonesian yayasan and Labuan foundation are effective, but little known, estate-planning structures. 
  • What does it mean for me? The structures can be used for dynastic structuring of international wealth, especially for families from civil-law jurisdictions. 
  • What can I take away? The structures have different strengths. While the yayasan is stronger from an asset-protection point of view, the Labuan foundation is more attractive to investors who like the idea of creating a structure in which they can retain management and control.
The Yayasan
The Indonesian foundation (yayasan) has its origins in the Dutch foundation or stichting (dating back to early Roman law in Europe). The yayasan was widely used in Indonesia and, during the Suharto era, also abused by people in and around his family. Consequently, Indonesia introduced a new foundation law to avoid the problems with the old system.[1]

In the new law, the foundation is described as 'a legal entity consisting of segregated capital intended to achieve certain goals in the social, religious and human areas that has no member'. This definition is similar to the definition of a Dutch foundation: 'a segregated purpose capital set aside to achieve certain objects'.[2] The purpose of the foundation cannot be to pay any of the people involved in its management or control, or anybody else for that matter. It has no members. The capital more or less leads a life of its own. This concept of a legal entity without owners can be difficult for practitioners from a common-law background to understand.

The Indonesian foundation has three organs: trustees, a board and supervisors (commissioners). The foundation can invest in business activities within certain limits. The law requires strict separation between the bodies of the foundation and the underlying business activities. Even the business activities must contribute to the achievement of the foundation's objectives. The organs of the foundation must be individuals, and some of the people involved must be Indonesian nationals or at least residents.

The Indonesian foundation must be created by notarial deed and it must be approved by the Ministry of Justice and Human Rights thereafter. This process seems very cumbersome but the Ministry of Justice and Human Rights has stated that, provided the criteria of the law are met, approval can be given online within one hour of the completed application. Under certain circumstances, other government departments also need to give their approval. The law provides for strict time limits and, if these other government departments do not adhere to the time limits, approval is automatic. The yayasan must also have a registered office in Indonesia.

As to its three organs, the trustees' main role is to ensure the foundation adheres to its constitution; all changes to the constitution must be approved by them. The board is responsible for the day-to-day management of the foundation, and the commissioners' role is to supervise the board.

The main criterion for the yayasan is that its own capital is used to achieve its object. Bank accounts can be opened both within and outside Indonesia. In Indonesia, the yayasan can be used for charitable activities but also for other social objectives. For example, businesses often use the yayasan to manage pension funds for their staff. These foundations have no profit objectives; the funds contributed are not part of the foundation capital but must be used to pay for pensions.
The Labuan Foundation
Labuan has been developed by Malaysia as a separate jurisdiction within the country, with its own legislation and tax system. One of its legal entities is a relatively recent creation, the Labuan foundation. 

This is a structure with limited liability, created by deed and registered with the Labuan Financial Services Authority (FSA). In my opinion, the Labuan foundation is modelled on its namesakes in Panama and the Channel Islands. The Labuan foundation is not allowed to carry out any business in its own name, but it can own companies that do. The foundation itself does not pay any tax.

The Labuan foundation has a charter and few internal regulations (if any) but otherwise is regulated by the foundations law, and its assets are well protected. Creditors of the founder cannot claim against the foundation after two years following its establishment. The foundation is managed by a council and one or more officers and must be administered by a Labuan-licensed trust company. Both council and officers can be corporate persons.

The founder can retain a strong influence in the foundation and, essentially, can keep all its assets firmly under their control. The foundation must involve a local-licensed trust company that will maintain contact with the Labuan FSA and other authorities. The foundation must have a registered address in Labuan. It must also have beneficiaries who are ultimately entitled to its assets. The Labuan foundation in a way is similar to a trust but, contrary to a trust, has limited liability and legal personality. It operates through its council and officers, acting as organs of the foundation. Their role is similar to that of a board of directors in a company.
The Yayasan and Labuan Foundation: A Comparison
When comparing the Indonesian yayasan and the Labuan foundation, the most striking difference is that the yayasan has an object or purpose for which its assets must be used. The Labuan foundation ultimately works for beneficiaries. In other words, the yayasan is a more abstract entity, while the Labuan foundation has been created as an asset-management structure for investors.

Both structures have limited liability and own their assets. However, only the Labuan foundation can be controlled directly or indirectly by the contributor of the funds. The founder of an Indonesian yayasan has no further role in the entity after its creation.

The Labuan foundation seems much more flexible and easier to create and manage. Clearly the designers of the structure have looked at certain aspects of the Anglo-Saxon trust and other modern foundations. Many clients using these structures like the flexibility they offer and the fact that the founder can retain control of the investments - i.e. decisions taken at the outset can be revisited.

The Indonesian yayasan is less flexible. Once assets have been contributed, they must be used to achieve the objects of the yayasan. From a legal and tax point of view, the Labuan foundation can leave 'management and control' with the founder, which in many jurisdictions is a reason to look through the structure. Naturally the protection - that the assets are in the foundation - prima facie is there and the creditor (tax inspector) must prove that the structure is a mere charade.

The Indonesian yayasan does not allow the founder to withdraw their investment in the yayasan or to make a different investment choice: the founder loses management and control. Consequently, it is much more difficult for creditors to attack the structure, except if they use the so-called' actio pauliana'. This is an action created under Roman law whereby a creditor can demand reversal of a non-contractual payment (such as a gift) on the grounds that it has been made with the intention to damage the interests of the creditor. The evidential burden is on the person making the claim, except in certain situations, such as bankruptcy.

The Indonesian yayasan is stronger from an asset-protection point of view. The Labuan foundation is more flexible and, therefore, more attractive for the many investors who would like to place their assets in a structure with the option of retaining control of the investments.

The Labuan foundation is easier to 'sell' to clients who, very often, like the idea of creating such a structure but do not really want to lose management and control. The Indonesian yayasan does not offer that possibility. In practice, clients can get their money back but only when they are paid a pension or benefit. In the meantime - i.e. between making the contribution and receiving the benefit - they no longer have management and controL Many clients may not like that but in the end they have to choose between full asset protection and a (temporary) loss of control, and the flexibility offered by the Labuan foundation.
This article was first published in STEP Journal, July 2015.

[1] Law No. 16 of 2001
[2] Article 2015, Book 2, Dutch Civil Code

About Author
Dr Nico J.C. Francken
Dr Nico J.C. Francken is Chairman of IN Fiduciary Services Group. He has experience in working with major multinational companies in New Zealand, Spain and The Netherlands. He is also the founder of the Company and the director of the IN Group, with offices in New Zealand, The Netherlands and Singapore.

Dr Francken holds a law degree from Leiden University in The Netherlands and a Diploma of Advanced European Studies from the College of Europe, Bruges, Belgium. He is a full member of the Society for Trust and Estate Practitioners (STEP), The New Zealand Trustee Association, the International Tax Planners Association and the Asia Offshore Association. In June 2012 he has been re-admitted to the Bar in Amsterdam. He also is a member of the Dutch and International Bar Associations.

In 1981 he established his own legal practice in The Netherlands and worked as a barrister and solicitor. He specialised in corporate, financial and business advice, working for private clients as well as for small and medium-sized companies. His practice involved travel and experience in many countries all over Europe, Asia and Australasia. He assisted a plethora of clients in organising and structuring their businesses and investments, using both onshore and offshore structures.

Dr Francken can be contacted via email at [email protected]. For more information on IN Fiduciary Services Group, please visit
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