Malaysia: A Comparative Analysis Of Labuan's Wealth Management Offerings

Last Updated: 14 June 2016
Article by Chua Wei Min

Chua Wei Min, a partner at ZICOLaw and a seasoned industry practitioner lays out the advantages of establishing trusts and foundations in Labuan IBFC, and draws practical comparison with other international financial centres.

Overview

Labuan is a Federal Territory of Malaysia and has its own laws and regulations for financial activities carried on within the Labuan International Business and Financial Centre (Labuan IBFC)1, separate from the domestic Malaysian laws. The Labuan Financial Services Authority (LFSA) is the sole authority of the Labuan IBFC and is empowered under legislation to administer all financial activities that take place within the Labuan IBFC and to enforce the Labuan laws. 

The Labuan IBFC was established on October 1st, 1990 and achieved the milestone of celebrating its 25th anniversary last year. During the last 26 years, it has grown steadily and at present, there are more than 11,000 Labuan companies registered, from more than 100 countries2. As at 26 November 2015, there are a total of 57 banks approved by the LFSA and 215 insurance (including insurance related) entities3.

Labuan Trusts have been statutorily recognised since the formal establishment of the Labuan IBFC in 1990, under the Labuan Offshore Trusts Act 1996. Under the amendments to the Labuan laws in February 2010, they now come under the Labuan Trusts Act 1996 (LTA). Labuan Special Trusts and Labuan Foundations are new, brought into being through the 2010 law amendments. 

Labuan Trusts

Creation of a Labuan Trust
A Labuan Trust exists where it is created by a will or other instrument in writing (including a unilateral declaration of trust) and at least one trustee is a Labuan trust company. There are no restrictions on who can be settlor or beneficiary of a Labuan Trust. Notwithstanding that, a unilateral declaration of trust that does not contain the name of the settlor has to be accompanied with a statement by the trust company that the settlor is not a resident in Malaysia on the date of declaration. Save for purpose trusts and charitable trusts, a beneficiary must be identifiable and ascertainable. 

In addition to that, Labuan Trust shall not include any property which is situated in Malaysia unless prior approval from the LFSA is obtained (for such Malaysian property to be held under such trust) or unless the trust is a trust for charitable purposes. Labuan shares are not considered Malaysian property in this instance.

Settlor's retention of powers
The LTA allows a settlor to retain certain rights without affecting the validity of the trust or the trust instrument. Such powers, in brief, include the power to amend the terms of a trust or powers arising under the trust, the advancement of income or capital of the trust property or to give directions on such advancement, to give binding directions as to the appointment or removal of an officer of any corporation owned by the trust, to appoint or remove any trustee, enforcer, protector, beneficiary, investment manager or investment advisor, to change the proper law of the trust and to restrict the exercise of powers of a trustee. 

Similar settlor's reserved powers can be found in Jersey4 and Guernsey5, while these type of provisions are absent in Singapore6 and Dubai International Financial Centre (DIFC)7.

Duration
The duration of a Labuan Trust, which used to be limited to 100 years, can now (a) be expressed to be for a fixed duration, (b) continue for an unlimited period unless otherwise stated in the terms of the trust, and (c) in the terms of the trust set out that the trustee be authorised to appoint a fixed duration, convert a fixed duration to an unlimited period, or alter, by limiting or extending, the duration of the trust.

The Singapore Trust that is created on or after 15 December 2004 is subject to a fixed perpetuity period of 100 years or such shorter period as specified in the instrument by which the trust is created8.The Jersey Trust may continue in existence for an unlimited period unless its terms provide otherwise9.The DIFC Trust may continue indefinitely or terminate in accordance with the law or with the terms of the trust10. The Guernsey Trust may also be of unlimited duration subject to the terms of the trust11.

The Labuan Trust can thus be distinguished in that the trustee has the ability (if authorised under the deed) to determine the duration of the trust. Taken at its extreme, in the event that there are legal issues related to the perpetuity rule, the trustee ultimately has the statutory power and discretion to determine the trust period.

Purpose trusts and enforcers
The LTA also enhances the statutory recognition of purpose trusts for both charitable and non-charitable purposes. It is mandatory for an enforcer to be appointed for a Labuan purpose trust. The enforcer has statutory rights to take administrative actions, protection, indemnity and payment of expenses out of trust property, and the personal and proprietary remedies for breach of trust against a trustee and against third parties as a beneficiary. The settlor or his personal representatives may be appointed as the enforcer but no person shall act as both trustee and enforcer of the same trust.

There is no provision providing for non-charitable purpose trusts in Singapore. Express provisions allowing for non-charitable purpose trusts can be found in Guernsey, DIFC and Jersey all of which require the appointment of an enforcer or protector for such a purpose trust.

Protectors
The provision on protectors under the LTA was amended in 2010 to be more specific on the powers of protectors under the terms of a Labuan trust. Similar to DIFC and Mauritius, the LTA now allows protectors to remove or appoint trustees, determine the proper law of the trust, to change the place of administration of the trust and to withhold consent from specified actions of the trustees if provided under the terms of the Labuan trust. The settlor or the beneficiary may be the protector of the Labuan trust.

Trustee's powers
Like most other trust legislation, the trustees of a Labuan Trust has specific powers to insure, invest and delegate. In addition, they have duties to observe the standard investment criteria and to obtain and consider proper advice before exercising any power of investment. This requirement on having to observe standard investment criteria and the obligation to seek proper advice is similar to the position of the Trustees Act of Singapore.

Right to information
Settlors, enforcers, protectors may request for information on the state and amount of trust property and the administration of trust. A beneficiary having a vested interest in the trust may, only where the terms of a trust so authorise, also request for such information12. (This right of the beneficiary is more restrictive than the old provision prior to the 2010 amendments, where the right of the beneficiary to obtain information was absolute.) 

In DIFC, a trustee shall, on application in writing by a beneficiary, disclose to the applicant beneficiary all documents which relate to or form part of the accounts of the trust. This is however subject to the terms of the trust and any order of the Court. Not all trust jurisdictions have this express statutory right. 

Similar to Guernsey, Mauritius and DIFC, a trustee is not required to disclose any document relating to his deliberations on the exercise of his functions, the reasons for any decisions made in the exercise of his functions, any material upon which such a decision was or might have been based and any letter of wishes.

Liability for breach of trust
The remedies available for a breach of trust is specifically dealt with under the LTA and includes, among others, the suspension or removal of a trustee, compelling the trustee to redress a breach of trust by paying money, restoring property or other means, compelling the trustee to perform his duties and to invalidate an act of a trustee or trace property wrongfully disposed of and recover the property or its proceeds. Similar provisions only exist in DIFC, and not others.

Asset Protection and Forced Heirship Rules
The Labuan Trust enjoys clear statutory asset protection provisions, which apply to the Labuan Special Trust and the Labuan Foundation also. Where a Labuan Trust is validly created in accordance with the LTA, the Malaysian courts shall not vary it or set it aside or recognize the validity of any claim against the property of the Labuan Trust pursuant to the law of another jurisdiction or the order of a court of another jurisdiction in respect of claims arising from, amongst others, marriage or its dissolution, succession and creditors13.

Labuan Special Trusts

The key difference between the Labuan Trust and the Labuan Special Trust is the recognition under the LTA that the trustee has limited rights under the Labuan Special Trust. There are special rules surrounding such a trust, one of which is that the trust property can only comprise either Labuan company shares or Labuan limited liability partnership units ("designated shares"), which will then hold the principal trust assets. The trust is established over these designated shares. 

This concept is largely similar to the BVI VISTA14 which contains similar provisions to achieve the same effect. A BVI VISTA can only be over Virgin Islands shares as the designated shares – the difference with the Labuan Special Trust is that there is no restriction on the Labuan company or Labuan LLP to be unlicensed companies, whereas for the BVI designated shares, this must be of an unlicensed BVI company.

The management of the Labuan company or the Labuan LLP will be carried out by the company directors or the designated partner of the Labuan LLP (as the case may be)15. This management is without intervention by the trustee. The trustee's primary duty to retain the designated shares takes precedence over the duty to preserve or enhance the value of the trust fund16. Voting or other power in respect of the designated shares will not be exercised by the trustee so as to interfere in the management of the Labuan company or Labuan LLP17

The conduct of the company's business, including decisions regarding payment of dividends, is left to the directors of the company or the designated partner of the LLP. The settlor of a Labuan Special Trust can prescribe special rules on how the trustee should exercise his voting powers in relation to the appointment, removal and remuneration of the director or designated partner. These provisions can similarly be found in the BVI VISTA.

A Labuan Special Trust must have a sole designated trustee, which is a licensed Labuan trust company. This is the same for the BVI VISTA, where the trustee must be a holder of a trust licence under the Banks and Trust Companies Act 1990 and must be the sole trustee of the trust. While there have been comparisons with the Cayman Island's STAR trust18, the latter provides primarily to the statutory purpose trust, rather than a special trust like the Labuan Special Trust or the BVI VISTA and it does not have the same statutory provisions limiting the trustee's rights over the trust assets.

Labuan Foundations

Labuan Foundations, which is a new statutory creature under the new Labuan Foundations Act 2010 (LFA), are generally no different from foundations found in other jurisdictions where it is a separate legal entity that holds assets with the objective of managing the assets for the benefit of a class of persons on a contractual basis. Labuan Foundations are also typically used for private wealth management and charitable purposes. Labuan Foundations are in some aspects different from other jurisdictions such as Bahamas, Jersey and Seychelles. 

Registered Office
Similar to the Bahamas and Seychelles, Labuan Foundations are required to have its registered office in Labuan where the address of the secretary is the registered address in which correspondence, notices and etc will be delivered.

Charter
Most jurisdictions require every registered foundation to have a charter where it will set out the parameters within which the foundation is to be managed and governed. In terms of legislative provisions, different jurisdictions will have its own requirements in relation to the content of the charter provided in the relevant legislation. Labuan Foundations are no different where the LFA mandate specific provisions (such as the name of the foundation, name and address of the founder, purpose or object of the foundation, identity of the beneficiary, duration, and address of the registered office of the foundation) to be included in the charter under the First Schedule.

Key Management
The Labuan Foundation key management model is separated into the council, the officers and a secretary. The council plays a supervisory role where it exercises reasonable care and skill in supervising the management of the foundation in accordance to the charter to ensure the purpose of the foundation is achieved. 

This is similar across various offshore jurisdictions. An officer's duty is to administer the foundation and there are express provisions in the LFA that require the officer to exercise reasonable care and skill in the conduct of affairs, management and investment of property. This duty is similar to the provisions in the Bahamas. A secretary to a Labuan Foundation provides secretarial functions such as filing and lodging documents to the LFSA. Furthermore, the LFA requires the secretary to be a licensed Labuan trust company.

Assets
In general, foundations across various offshore jurisdictions are separate legal entities that can hold assets on its own. The Labuan Foundation is different from some other jurisdictions such as Bahamas and Seychelles where initial asset values are not a mandatory requirement for registration. In order to set up a foundation in Bahamas, such foundation must hold value assets of not less than $10,000.00 Bahamian, US$ 10,000.00 or its equivalent in any other currency.19 Failing such requirements the Registrar is not allowed to register the Foundation.20 Similarly, Registrar in Seychelles is not allowed to register Foundations with initial assets value of less than US$1 or its equivalent in any other currency.21

Beneficiaries
Unless provided in charters and articles, beneficiaries have no right to foundation assets. However, beneficiaries to Labuan Foundations are provided with the right to information and right to confidentiality under the LFA. Under the LFA, a beneficiary who has vested interest in the Foundation property has a right to request for documents pertaining to his interest. This is a common right in Bahamas and Seychelles but not in Jersey where the foundation is not obliged to provide information and St. Kitts where no provision to this effect is provided. 

Furthermore, the LFA ensures that the management of the Foundation shall take reasonable steps to secure the rights to confidentiality of other beneficiaries while enabling a beneficiary's own entitlement and interest be determined. This is to ensure that while information is disclosed to the beneficiaries who request for information, the management will determine the confidentiality to be in the best interest of the other beneficiaries. Amongst other jurisdictions, Labuan and Bahamas are the only two jurisdictions where express provisions to these rights are provided in the LFA and the Bahamas Foundations Act 2004 respectively.

Dissolution
In relation to the dissolution of a Foundation, the grounds for dissolution in Labuan reflect the common grounds across Bahamas, Seychelles, Panama and St. Kitts through passing resolution. The grounds are such as the definite period on which the foundation was set up has expired, the purpose of the foundation is fulfilled or becomes incapable of fulfillment, or required under the charter.

Entry Requirement
Foundations are required to register with authorities with respective offshore jurisdictions. However different jurisdictions require different persons to submit the registration documents. It is common for these persons to be licensed and regulated by local authorities in the respective jurisdiction such as Labuan, Bahamas, Jersey and Seychelles. 

Setting up foundations in Labuan shows to be more convenient as compared to other jurisdictions. Apart from the initial asset value requirement by some jurisdictions, Panama has special requirements in the charter for its foundation where it must be written in a language with Latin letters and must comply with the regulation for registration in Public Registry, for which purpose of it must be previously protocolised by the notary public of the Republic (of Panama). Furthermore, a charter that is not in Spanish must be protocolised together with a Spanish translation by an authorised public translator.22

Clear Asset Protection Rules
The Labuan Foundation has the same statutory asset protection as the Labuan Trust and the Labuan Special Trust. Where a Labuan Foundation is validly established in accordance with its charter and articles, the Malaysian courts shall not vary it or set it aside or recognise the validity of any claim against the property of the Labuan Foundation pursuant to the law of another jurisdiction or the order of a court of another jurisdiction in respect of claims arising from, amongst others, marriage or its dissolution, succession and creditors23.

Conclusion

The wide range of wealth management tools offered in Labuan IBFC, together with the attractive tax rates applicable to a Labuan entity and the sophisticated set of legislations designed to regulate the Labuan IBFC gives Labuan a competitive edge as an midshore financial centre. Taking these together with the Labuan FSA's commitment to ensure compliance with international standards and best practices, Labuan IBFC has indeed developed to be a reputable international business and financial centre in the region.

Footnotes

1 Formerly known as the Labuan International Offshore Financial Centre, and renamed in 2008.

2 Labuan Financial Services Authority Annual Report 2014.

3 'Key Statistical Data for 2015' published at Labuan Financial Services Authority website at www.labuanibfc.com.

4 The law we reviewed is the Trusts (Jersey) Law 1984, revised as of 1 January 2014.

5 The law we reviewed is the Trusts (Guernsey) Law, 2007.

6 The law we reviewed is the Trustees Act, Chapter 337 of Singapore.

7 The law we reviewed is the DIFC Law No. 11 of 2005, revised as of 15 February 2007.

8 Section 89 of the Trustees Act (Chapter 337), read with section 32, 33 and 34 of the Civil Law Act (Chapter 43) of Singapore.

9 Article 15 of the Trusts (Jersey) Law 1984 (Revised Edition 2014).

10 Article 26 of the Trust Law, DIFC Law No. 11 of 2005 as amended via the DIFC Law No. 2 of 2007.

11 Section 16(1) of the Trusts (Guernsey) Law, 2007. This is unless it is a trust created before 17 March 2008, in which case it shall terminate on the expiration of 100 years from the date of its creation, unless it is a trust for charitable purposes or it is terminated sooner.

12 Section 41, Labuan Trusts Act 1996.

13 Section 10(1), Labuan Trusts Act 1996.

14 Established under the Virgin Islands Special Trusts Act, 2003.

15 Section 46C, Labuan Trusts Act 1996.

16 Section 46E(2), Labuan Trusts Act 1996.

17 Section 46F(2), Labuan Trusts Act 1996.

18 Established under Part VIII of the Trusts Law (2009 Revision).

19 Section 3(3) of the Bahamas Foundations Act, 2004.

20 Section 8(1) of the Bahamas Foundations Act, 2004.

21 Section 8 of the Foundations Act (Laws of Seychelles), 2009.

22 Article 6 of Panama Foundation Law 1995

23 Section 61(2), Labuan Foundations Act 2010.

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.

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