A foundation is essentially a civil law creation, but how does it work in a common law country like Malaysia? Carolyn Oh, Principal of Carolyn and Co discusses the appeal of foundations as a wealth management tool and its application in Malaysia both onshore and offshore.
1. Preface
This article focuses on the word “foundation” in its natural or common definition, as well as the wealth management product known by the same name, both of which are widely used around the world. Here, the author examines how the “foundation product” may be a way forward for persons or parties in search of tools that facilitate succession planning and/or asset protection.

For the purposes of this article, the author is cross-referencing the “foundation product” as offered by Labuan International Business and Financial Centre (Labuan IBFC) and making observations to its application from the point of view of a legal practitioner in Malaysia.
2. Foundation in its natural definition
The natural definition of “foundation” or rather the definition which appears in dictionaries defines “foundation” as being inter alia a “basis or base; …institution supported by an endowment…”.
Taking the first breakdown of the definition “basis or base;” a foundation purports to be a platform on which one can build on. The implied meaning is that a foundation is a strong structure. In wealth management there is no such thing as a prêt-a-porter structure or solution, i.e. a ready-to-use structure or solution. In fact, the contrary is true, in that an “off the shelf” solution generally will not be able to cater to the true needs of the client. A true adviser would examine each case or family setup carefully and advise on the best possible structure that might suit the said case or family, hence creating a bespoke structure. When a person or party sets out to manage their wealth, they look to form the best plan, i.e. the most solid base or foundation they can establish for the benefit and welfare of their family.
3. Foundation as a product
Onshore in Malaysia (which is to be distinguished from Labuan IBFC which is Malaysia’s offshore jurisdiction), foundations have long been linked to charitable causes. These “foundations” or locally called “Yayasan(s)” are normally set up by royal, private or corporate benefactors, who seek to marry the concept of commerce and charity. Many who have heard about foundations onshore in Malaysia would not akin a foundation for purposes of succession planning or asset protection; similarly, those who regard the “foundation vehicle” as having those attributes may erroneously believe that a foundation is like a trust, but named differently. The purpose of mentioning the above is to stress that there are still those who are unaware that the foundation product in itself can be a succession planning and/or asset protection tool, which is different and distinct from the trust product. Nevertheless, it is to be clarified that the foundation product is not being offered per se as a succession planning and/or asset protection tool onshore.

At this juncture it is pertinent to briefly examine how the foundation product came to be introduced to this part of the world and in our current context through Labuan IBFC. Until 2008, Malaysian nationals were not allowed to deal with or through Labuan IBFC and any limited allowance was always subject to the relevant authorities’ approval. In 2010, with the enactment of the Labuan Financial Services and Securities Act 2010 (“LFSSA”), the doors to Labuan IBFC were opened to Malaysian residents, allowing them to structure both their international as well as domestic assets and properties.

One such other statute enacted in 2010 was the Labuan Foundations Act 2010 (“LFA”), which formed the statutory law for the registration of foundations for all or any lawful purposes subject to the several requirements therein stated. With the introduction of the LFA, a new product in the form of a foundation was offered as an alternative to the long utilised trust. According to the Labuan Financial Services Authority (“Labuan FSA”), 115 foundations have been registered in Labuan IBFC as at July 2014.   
4. Understanding the foundation as a product
To understand the foundation as a product is to first understand its origins as a civil law creation. To put things into perspective, about one-third of the world’s population adopt common law, which originated in England. Malaysia being a former British colony is also a common law jurisdiction. If one were to limit the comparisons between common law and civil law then one is to understand inter alia that:-
Common Law
Civil Law
  • Is based on case law/precedence, i.e. developed through judges’ decisions in court 
  • Adversarial
  • Is code law – strictly relying on statutory provisions without liberty to “make law” when no legislation exists  
  • Inquisitorial
Hence for the purposes of succession planning and/or asset protection in Malaysia, practitioners and clients alike are mostly familiar with the last will and testament, coupled with a trust element therein. For patriarchs or matriarchs who would prefer to leave a more comprehensive succession plan, stand-alone trusts are generally the “go-to structure”.
5. Why one might gravitate towards a foundation as opposed to a trust - “To Give or Not to Give, That is the Question”
If there is that one main point which distinguishes a foundation from a trust, it is that the foundation allows both the legal and beneficial ownership to remain within the foundation entity, which in itself is a legal entity.

A very common struggle when planning has always been the ironic fact that the settlor/founder would ideally still want to retain some form of control. With trusts, barring any revocation or reservation clauses, once the trust is settled, it is settled. Onshore in Malaysia, the concept of revocable trusts is non-existent or at best, extremely rare. Once settled in a trust, the trustee holds the power and duty to manage but always for the benefit of the beneficiaries who from the onset would already have clear beneficial rights.

In comparison, a foundation under the LFA not only allows the founder the right to revoke the foundation; the founder may also reserve powers and rights which the founder deems necessary unto himself. The founder can go on to assign all or any of the powers and rights to a third party, which can then stand in his stead and act on the founder’s behalf. The founder can also be a Council Member who supervises the Officer managing the foundation; alternately, the founder can even appoint himself to be the Officer whose duties are to carry on with the day-to-day running of the foundation. The founder can also be one of the named objects/beneficiaries. This more or less summarises the fact that the founder, even by endowing assets to the foundation, does not in fact “give” up too much control or ownership of the assets or even the management of that said asset. Moreover, the beneficiaries (even so expressly named) cannot demand for their benefits, rights or interests until the same are duly distributed to them in accordance with the constituent documents of the foundation.

The only three rigid requirements of the LFA (and seemingly, not as rigid compared to other jurisdictions) are:-
  • the need for at least one officer, which may be a natural person or a corporation; 
  • the secretary for the foundation shall be a company registered as a Labuan trust company; and 
  • a person or party cannot undertake both the roles of Council Member and Officer at the same time. 

Furthermore, the foundation has been marketed as a product which marries both a trust and a company. So foundations easily resonate with founders from a corporate and common law background.
6. What might be the concerns pertaining to foundations
As previously mentioned in item 3 above, while Malaysian residents have been welcomed under the LFSSA to participate in the products of Labuan IBFC, how Labuan entities such as the foundation is to be treated onshore is yet to be ascertained, simply because it is a case of a civil law product trying to find its ground in a common law jurisdiction. Although Labuan FSA may approve the endowment of certain Malaysian properties into the foundation, the registration of these Malaysian properties to the name of the foundation with the respective state land registries in Malaysia may also be of concern.

Following item 5 above, founders who appreciate the foundation as a hybrid of a trust and a company might want to utilise the foundation as an active legal entity and not merely as a wealth management or succession planning tool. . On this note, there is a grey and cautious line as to whether Labuan entities are permitted to conduct businesses in the Malaysian currency Ringgit Malaysia and if so, can the business be conducted onshore in Malaysia. In addition, as an active legal entity, there is then the question on the impact of the Income Tax Act 1967 (“ITA”) and how it might prevail over the Labuan Business Activity Tax Act 1990 (“LBATA”) and the taxation benefits it allows.

Lastly and to reiterate, the foundation as per the LFA is a civil law product. As mentioned in item 4 above, it bows to code law and code law alone. Hence, are the statutory provisions under the LFA all encompassing? The proof might regretfully be in the litigation pudding.
7. A suggestion rather than a conclusion
Finding a foundation is not as daunting a task as one might imagine if one goes through the process with the assistance of efficient service providers and advisers.

In any event if a foundation is the structure selected (as the LFA is merely five years old), then one should be prepared to expect some adjustments regarding both its procedures and utilisation ability, compared to the trust structure which has been honed for some time now.

Ultimately, clients themselves have to be clear from the onset with regards to their intentions, purposes and objectives in order to ensure their service providers and advisers are mentally armed with the right perspective in order to best advise them.
About Author
Carolyn Oh
Carolyn Oh is the principal of Carolyn Oh and Co, a boutique law firm based in Penang, Malaysia which serves a select group of international and local clients. Her firm focuses on high value private/commercial property conveyance, family law, estate and wealth management/succession planning.

Ms Oh has had significant experience in the areas of advising private families and individuals with regards to structuring, establishing, managing and monitoring their family structures and assets therein, which includes the formation of private trust companies, trust and foundation vehicles as required by such clients. She is a strong advocate of “bespoke-structures” which she feels is “key” because each individual and/or each family is different with different sets of consideration all of which should be catered for specifically.

With regards to onshore practices, Ms Oh has from her earliest years in practice been a regular will writer for most of her clients and her clients’ other family members and has todate written countless of wills. Ms Oh also regularly instructs and/or represents clients in estate dispute cases.

Ms Oh is regularly invited as a speaker at various conferences and seminars in the region to speak about the trends and developments in wealth management from the Malaysian perspective.

Ms Oh read law at the University of Kent at Canterbury, UK attaining her Bachelor of Law degree with Honours [LLB (Hons)] in 1993 and thereafter went on to qualify as a Barrister-at-Law from Middle Temple, UK in 1994. Ms Oh was admitted as an Advocate and Solicitor of the High Court of Malaya in 1995 and has continuously practised over 20 years in the legal profession. Ms Oh currently also holds the following positions:
  • 1.Chairperson of the Penang BAR’s Conveyancing Practice Committee; 
  • 2.Panel Member of the Malaysian BAR’s Disciplinary Committee; 
  • 3.Committee Member of the BAR Council’s Conveyancing Practice Committee; 
  • 4.Notary Public admitted under the Notary Public Act, 1959; 
  • 5.Specialist Consultant for the Labuan International Business and Financial Centre (LIBFC); 
  • 6.Registered Trust and Estate Practitioner with STEP UK. 
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