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.
Confidentiality
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.
Asset protection
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.