As rich families weave their way into the intricate tapestries of wealth management and asset protection, a pattern is emerging – the rise of family foundations. These private entities, established with the express purpose of distributing funds for public good, are becoming increasingly popular as a strategy for wealth management and asset protection.

In Asia, the concept of a Trust as a structure for holding assets is widely recognized. However, the understanding and awareness of a Private Foundation, also known as a ‘private interest foundation’, is not as common. These foundations are unique entities that are governed by specific laws, which are primarily found in civil law jurisdictions and have been adopted by some common law jurisdictions over the past two decades. Private Foundations serve as a valuable alternative to trusts for asset management.

While family foundations share some similarities with trusts, such as the principle of separating control and benefit of assets, they also offer several advantages that make them a preferred choice for many. Family foundations are widely recognized in civil law jurisdictions, and offer more flexibility in terms of succession planning, and provide better control over assets. Furthermore, they can offer significant tax benefits depending on the jurisdiction.

Moreover, a private foundation is a non-governmental, independent legal entity that can be used for private beneficiary or charitable purposes. It typically has no restrictions on its legal activities. The principal fund of a private foundation usually originates from a single source, making it an effective tool for managing wealth

Family foundations offer a structured way for families to make a positive impact on society while ensuring the preservation and growth of their wealth. They provide a clear governance structure, promote family unity, and ensure a lasting legacy. 

In addition, they serve as an effective tool for asset protection. By transferring assets into a foundation, families can shield these assets from business risks and potential future liabilities.

In our separate articles, we have extensively written about setting up family foundations/ trusts in top jurisdictions such as Australia and New Zealand as well as Hongkong and Singapore. 

In this article, we will focus on Malaysia and Indonesia as two key jurisdictions in Asia where family foundations are gaining prominence. We will examine the pros and cons of establishing foundations in these jurisdictions and discuss the legal and tax aspects specific to each country.

Top Jurisdictions for Family Foundations

The Emergence of Family Foundations as a Wealth Management and Asset Protection Strategy in Asia

In recent years, there has been a growing trend towards the establishment of family foundations by wealthy families in Asia. This is due to a number of factors, including the need to preserve wealth across generations, protect assets from creditors and lawsuits, and achieve philanthropic goals.

Family foundations are legal entities that are typically established by individuals or families to manage their wealth and assets. They are often structured as non-profit organizations, which gives them a number of advantages, such as tax exemption and asset protection.

In addition to wealth management and asset protection, family foundations can also be used to achieve philanthropic goals. Many families use their foundations to support charitable causes that are important to them.

The Advantages and Disadvantages of Establishing a Family Foundation in Top Jurisdictions for Asian Families

Top jurisdictions offer numerous advantages for Asian families looking to establish a family foundation. These jurisdictions typically have favorable laws and regulations, such as tax exemptions, asset protection, and recognition of family foundation agreements. They also boast well-developed financial infrastructures and a pool of experienced financial professionals who can assist families in managing their foundations.

Several factors draw wealthy families to these jurisdictions. These include the type of foundation allowed, the required minimum and maximum assets, the tax structure, wealth management strategies, and the legal framework. For example, jurisdictions like the Bahamas, Gibraltar, and Isle of Man allow for the establishment of foundations with a minimum asset requirement ranging from USD 10,000 to GBP 10,000. They also offer a blend of common law and civil law, providing flexibility and security to families.

These top jurisdictions provide a robust legal framework that ensures asset protection. The tax benefits are also significant. Some jurisdictions, such as Barbados,  Mauritius, Jersey, Panama, Nevis and the Isle of Man among others offer tax exemptions for family foundations which can lead to substantial savings.

Moreover, these jurisdictions often have well-established wealth management sectors. This means that families can access a range of professional services, from legal advice to financial planning, which can help in the effective management of their wealth.

However, establishing a family foundation in a top jurisdiction also has its disadvantages. These jurisdictions can be expensive and complex. While they may provide tax exemptions for income derived from foreign sources, they may tax local corporate income at rates as high as 25%. Bureaucracy can also pose challenges. Additionally, some laws, culture and regulations in these jurisdictions may be unfamiliar to Asian families.

In addition, the cost of establishing a foundation can be high in some jurisdictions due to the minimum asset requirements and administrative fees. Some jurisdictions may also have stringent regulations and compliance requirements that can make the process of setting up a foundation complex and time-consuming.

While top jurisdictions offer numerous advantages for family foundations, it’s important for families to carefully consider their specific needs and circumstances before deciding on a jurisdiction. In our upcoming sections, we will explore alternative jurisdictions like Malaysia and Indonesia. We will explore jurisdictions like Malaysia and Indonesia in our upcoming sections.

The colorful threads of Malaysia and Indonesia

The colorful threads of Malaysia and Indonesia weave a tapestry of viable alternative jurisdictions for family foundations. These two Southeast Asian nations offer a unique blend of favorable laws and regulations, well-developed financial infrastructures, and cost-effectiveness, making them attractive destinations for wealthy families seeking to establish and manage their family foundations.

Likewise, the cultural similarities prevalent in Asian nations can be beneficial for Asian families considering establishing a family foundation in either country. By operating in a familiar cultural environment, families can more easily connect with their communities and achieve their philanthropic goals.

Malaysia’s Labuan Foundations Act of 2010 provides a simple and efficient framework for the establishment and administration of foundations, with a number of tax benefits, including exemption from income tax, capital gains tax, and estate duty.

Disclaimer: This article primarily focuses on the laws and regulations governing foundations in Labuan, Malaysia, as established by the Labuan Foundations Act 2010. The information provided herein is based on the specific legal framework of Labuan and may not be applicable to foundations in other regions of Malaysia or other countries. It’s important to note that a Labuan Foundation can hold properties located within or outside of Malaysia. If the income derived from a property of a Labuan Foundation located in Malaysia, it  is subject to taxation under the Income Tax Act 1967. For foundations located outside of Labuan, it is recommended to consult with a legal expert or refer to the specific laws and regulations governing foundations in those regions. While every effort has been made to ensure the accuracy of this information, it should not be used as a substitute for legal advice or opinion.

Indonesia’s nonprofit law (UU Ormas) also provides a legal framework for the establishment and operation of non-profit organizations, including foundations, with tax benefits such as exemption from income tax and value added tax (VAT).

In addition to their favorable legal and tax regimes, Malaysia and Indonesia also boast well-developed financial infrastructures, with a wide range of investment opportunities and experienced and knowledgeable financial professionals who can help families manage their family foundations. Moreover, establishing and maintaining a family foundation in either country is typically more cost-effective than doing so in a top jurisdiction such as the United States or Switzerland.

While Malaysia and Indonesia are still developing jurisdictions, they offer a number of advantages for family foundations, making them viable alternative jurisdictions for wealthy Asian families.

The Legal and Tax Aspects Governing Family Foundations in Malaysia vs. Indonesia

Legalities

Definition & Governing laws

A family foundation is a non-profit organization established by a family to manage and distribute its wealth to charitable and philanthropic causes. Family foundations can be established for a variety of purposes, such as to support the family’s religious or cultural heritage, to promote education or research, or to provide assistance to charitable organizations.

In Malaysia, family foundations are governed by the Labuan Foundations Act of 2010. Under the Act, a family foundation is defined as a “foundation established for the purpose of managing and distributing the assets of a family to charitable or philanthropic causes.”

In Indonesia, family foundations are governed by the Law on Foundations (UU Ormas). Under the Law, a foundation is defined as a “non-profit organization established with the aim of carrying out social, educational, religious, cultural, or environmental activities.”

A Labuan foundation is a legal entity separate from its founders that can be used for either charitable or non-charitable purposes. It is established under the Labuan Foundations Act 2010 and is a flexible structure that can evolve over time. Labuan foundations are often used to achieve certain objectives in the social, religious, or humanitarian fields, such as funding scholarships, supporting religious institutions, or providing aid to those in need.

On the other hand, in Indonesia, a foundation, as defined by the Law on Foundations, is a non-membership legal entity. It is established based on the separation of assets, meaning that the assets of the foundation are legally separate from the personal assets of the individuals who establish it. This structure is designed to serve certain purposes in social, religious, or humanitarian fields.

The foundation, also known as a Yayasan can be established for either public benefit or for the benefit of its members. If it’s established for public benefit, it might support activities like public health initiatives or environmental conservation. On the other hand, if it’s for the benefit of its members, the foundation might support activities that are of interest to its members. This flexibility allows foundations to adapt to a wide range of needs and objectives.

Incorporation

Malaysia (Labuan)

Both Malaysian citizens and foreign nationals, including foreigners, have the opportunity to establish a foundation in Labuan, Malaysia. This is made possible by the Labuan Foundations Act 2010, which permits foreign individuals and entities to establish and own Labuan foundations.

Labuan foundations are also a type of corporate foundation that is established in the Labuan International Business and Financial Centre (Labuan IBFC), an offshore financial center located on the island of Labuan in Malaysia.

The assets and capital of the foundation must be distinct from the personal assets of its founder. The initial endowment can take various forms, including money, property, and equipment that are utilized for the foundation’s operations.

For foundations established in Labuan, there is no specific capital requirement as it does not have share capital. However, a minimum endowment of USD 1.00 is required at the time of establishment. These funds, though minimal, are used to support the foundation’s activities and ensure its sustainability. This makes Labuan a flexible and attractive jurisdiction for establishing a foundation.

To incorporate a family foundation in Malaysia (Labuan), the following steps must be taken:

1. Name Selection: Decide on a unique name for the foundation and register it with the Labuan Financial Services Authority (LFSA).
2. Drafting of Foundation Charter and Rules: Draft the foundation charter and rules, which will detail the foundation’s purpose, its management structure, and its operational procedures.
3. Formation of a Foundation Council: Form a foundation council that will be tasked with managing the foundation’s assets and executing its purpose.
4. Property Endowment: The Labuan Islamic foundation requires a legal transfer of property ownership from the founder to the foundation.
5. Submission of Incorporation Documents: Submit the necessary incorporation documents, which include the foundation charter and rules, details of directors, and incorporation fees, to the LFSA for approval.
6. Adherence to Compliance and Governance: After incorporation, adhere to ongoing compliance and governance requirements such as appointing auditors and company secretary, maintaining statutory records, filing annual returns and financial statements, and complying with Labuan Financial Services Authority (Labuan FSA).

Upon approval of the incorporation documents by the LFSA, a certificate of incorporation will be issued to the foundation. 

Indonesia

Both Indonesian citizens and foreign nationals also have the opportunity to establish a foundation in Indonesia, provided they meet certain criteria. The assets and capital of the foundation must be distinct from the personal assets of its founder.

The initial assets and capital can take various forms, including money, property, and equipment that are utilized for the foundation’s operations. For foundations established by Indonesian nationals, the initial assets and capital must amount to IDR 10,000,000.

In contrast, for foundations established by foreigners, the total initial assets and capital must be IDR 100,000,000. These funds are used to support the foundation’s activities and ensure its sustainability.

The steps to incorporate a family foundation in Indonesia are as follows:

1. Register a unique name for the foundation with the Ministry of Justice and Human Rights (MoJHR).
2. Draft a foundation charter and rules for approval by the MoJHR.
3. Appoint a board for the foundation consisting of at least three individuals.
4. Deposit the required initial capital in an Indonesian bank.
5. Submit all incorporation documents to the MoJHR for approval. This should be done no later than 10 days from the signing date of the deed.
6. Obtain a certificate of incorporation from the MoJHR upon approval of the documents.

Key Players

Key players legally required for foundations in Malaysia (Labuan) and Indonesia in 2023

Of course, generally-speaking, foundations are composed of the following key players:

Founder: The founder is the person or entity that establishes the foundation. They may also be the person or entity that provides the initial endowment for the foundation.

Beneficiaries: The beneficiaries are the people or entities that benefit from the foundation’s activities. They may be individuals, families, communities, or organizations.

Deeds: The deeds are the legal documents that establish the foundation and define its purpose, structure, and management.

The specific roles and responsibilities of the founder, beneficiaries, and deeds will vary depending on the specific foundation and the jurisdiction in which it is established. It is important to consult with a qualified professional advisor to ensure that the foundation is structured and managed in a compliant and efficient manner.

In addition to the key players listed above, foundations in Indonesia and Malaysia are also legally required to have the following:

Malaysia (Labuan)

Foundation council: The foundation council is the governing body of a Labuan foundation. It must be composed of at least three individuals, who can be of any nationality and residence.

Secretary: The secretary is responsible for the day-to-day administration of the foundation. They can be a member of the foundation council, or an external person.

Auditor: The auditor is responsible for auditing the foundation’s financial statements. They must be a qualified auditor who is registered with the Labuan Financial Services Authority (LFSA).

Indonesia

Foundation board: The foundation board is the governing body of an Indonesian foundation. It must be composed of at least three individuals, who can be of any nationality and residence.

Protector: The protector is responsible for overseeing the activities of the foundation board and ensuring that the foundation complies with all applicable laws and regulations. They can be a member of the foundation board, or an external person.

Auditor: The auditor is responsible for auditing the foundation’s financial statements. They must be a qualified auditor who is registered with the Indonesian Institute of Public Accountants (IAPI).

Public Benefit Status

Malaysia (Labuan)

Family foundations in Malaysia (Labuan) are not required to have a public benefit status.

Indonesia

Family foundations in Indonesia are required to have a public benefit status. This means that the foundation’s activities must benefit the general public, rather than the founder(s) or their family members.

Inurement and Proprietary Interest

“Inurement” is a term that denotes the prohibition of providing undue benefits to individuals who hold influence over the operations of an organization, such as its directors or officers. Let’s examine how this concept is applied to family foundations in Labuan, Malaysia and Indonesia.

Malaysia (Labuan)

Family foundations in Malaysia (Labuan) are not subject to inurement and proprietary interest restrictions. This means that the foundation’s assets can be used for the personal benefit of the founder(s) or their family members.

Indonesia

Family foundations in Indonesia are subject to inurement and proprietary interest restrictions. This means that the foundation’s assets cannot be used for the personal benefit of the founder(s) or their family members.

Foundations are legal entities that are established for charitable or philanthropic purposes. They can be used to support a wide range of activities, such as education, healthcare, environmental protection, and social welfare.

Dissolution

Both Malaysia and Indonesia have similar dissolution laws for foundations. Foundations can be dissolved by the following means:

Voluntary dissolution: This is when the foundation’s board of directors decides to dissolve the foundation.

Compulsory dissolution: This is when the foundation is dissolved by a court order. Moreover, the following rules apply:

In Indonesia, the Law on Societal Organizations empowers the Minister of Law and Human Rights to dissolve a foundation if it persistently violates its obligations under the Law, even after a temporary ban. The Minister can revoke a foundation’s legal status, which leads to its immediate dissolution. Foreign foundations are subject to additional sanctions, including freezing and revoking operational and principle permits, and imposing immigration sanctions. After dissolution, any remaining assets are transferred to other foundations with similar objectives or to the state if no such foundations exist.

Associations have the option to voluntarily dissolve if they reach their expiration date, accomplish their objectives, or if members agree to dissolve them. However, the government can also involuntarily dissolve an association by revoking its legal entity status if it continues to violate its obligations under the Law on Societal Organizations after a temporary ban. Members can reclaim their contributions from remaining assets after the State Receiver completes the liquidation process.

Meanwhile, in Malaysia, specifically in Labuan, a foundation can be dissolved in several ways:

• Upon the passing of a resolution by the officer on the basis that the foundation is established for a definite period and that period has expired.
• When the purpose of the foundation is fulfilled or becomes incapable of fulfilment.
• When the charter requires such dissolution.

Moreover, the dissolution of foundations in Malaysia and Indonesia is governed by the following laws:

Malaysia

Companies Act 2016

Societies Act 1966

Indonesia

Law on Foundations (Law No. 28 of 2004)

Both Malaysia and Indonesia have similar dissolution laws for foundations. Foundations can be dissolved by the following means:

Activities in General

Foundations in Malaysia and Indonesia can carry out a wide range of activities, including:

Education

Healthcare

Environmental protection

Social welfare

Arts and culture

Research and development

Foundations are also allowed to engage in business activities, but these activities must be related to the foundation’s charitable or philanthropic mission.

Political Activities

Foundations in Malaysia and Indonesia are generally prohibited from engaging in political activities. However, there are some exceptions to this rule. For example, foundations in Malaysia are allowed to engage in political activities if they are registered as political parties.

Foundation Governance and Self-Dealing in Malaysia and Indonesia

Malaysia (Labuan Foundations)

Asset transfer: No member of the foundation board, the secretary, or other interested party may directly or indirectly receive any transfer or distribution of assets from the foundation.

Income distribution: No member of the foundation board, the secretary, or other interested party may receive any salary, wages, or honoraria from the foundation, except for reimbursement of reasonable expenses incurred in the performance of their duties.

Compensation: Members of the foundation board may be compensated for their services if they work directly and full-time for the foundation, and if the compensation is reasonable and approved by the foundation board.

Self-dealing: The Executive Board is prohibited from entering into “self-dealing” transactions. This means that they cannot enter into any agreement or transaction with the foundation that would benefit them personally, unless the transaction is in the best interests of the foundation and is approved by the foundation board.

Indonesia

Asset transfer: A foundation’s assets (cash, goods, or other types of assets) must not be transferred or distributed directly or indirectly among the members of the Governing Board, Supervisory Board, Executive Board, the foundation’s employees, or any other parties having an interest in the foundation.

Income distribution: A foundation must not distribute the income of its commercial enterprises among the members of the Governing Board, Supervisory Board, or Executive Board.

Compensation: Members of the Governing Board, Supervisory Board, or Executive Board must be volunteers who do not receive a salary, wages, or honoraria (beyond reimbursement for expenses). However, members of the Executive Board may be compensated if they: (i) work directly and full-time for the foundation, (ii) are not the founders of the foundation, and (iii) are not affiliated with the founders, the Governing Board, or the Supervisory Board.

Self-dealing: The Executive Board is prohibited from entering into “self-dealing” transactions. It may not enter into agreements with any organization affiliated with the foundation, the members of the Governing Board, Supervisory Board, or Executive Board of the foundation, or an employee of the foundation. However, this prohibition is not applicable when the agreement seeks to help the foundation to attain its objectives.

Benefits and Advantages of setting up a foundation in Malaysia and Indonesia

There are a number of benefits and advantages to establishing a foundation in Indonesia or Malaysia. Both countries offer a number of attractive features for foundations, including:

Tax exemption: Foundations in both Indonesia and Malaysia are exempt from income tax, capital gains tax, and inheritance tax. This can make foundations a very tax-efficient way to support charitable and philanthropic causes.

Asset protection: Foundations in both Indonesia and Malaysia offer strong asset protection features. This means that the assets of the foundation are protected from the personal creditors of the founder, beneficiaries, and board members.

Confidentiality: Foundations in both Indonesia and Malaysia offer a high degree of confidentiality. This can be important for foundations that are supporting sensitive or controversial causes.

Flexibility: Foundations in both Indonesia and Malaysia offer a great deal of flexibility in terms of their structure and management. This allows foundations to be tailored to the specific needs of the founder and the beneficiaries.

In addition to these general benefits, there are a number of specific advantages to establishing a foundation in Indonesia or Malaysia.

Malaysia

No minimum capital requirement: There is no minimum endowment required to establish a foundation in Labuan.

Privacy: The founder of a Labuan foundation has extensive control over the foundation. The articles of the foundation are registered with the authorities, but the beneficiaries are anonymous.

Confidentiality: The officer, council member, supervisory person, and secretary of a Labuan foundation are restricted from disclosing any information relating to the foundation unless otherwise required or provided for by law, the court, or the charter.

Nationality: There are no specific nationality requirements for the founder or council members of a Labuan foundation.

No minimum capital requirement: There is no minimum endowment required to establish a foundation in Labuan.

Privacy: The founder of a Labuan foundation has extensive control over the foundation. The articles of the foundation are registered with the authorities, but the beneficiaries are anonymous.

Confidentiality: The officer, council member, supervisory person, and secretary of a Labuan foundation are restricted from disclosing any information relating to the foundation unless otherwise required or provided for by law, the court, or the charter.

Nationality: There are no specific nationality requirements for the founder or council members of a Labuan foundation.

Capital transfer: The capital transfer can take place once the foundation has been registered with the regulator.

Language: Any language is accepted for the documents of a Labuan foundation, provided that an English translation is included.

Other advantages: Labuan foundations can be Sharia-law compliant and there is no requirement for an independent council member.

Additional advantages:

Separate legal entity: A Labuan foundation is a separate legal entity from its founder and beneficiaries. This means that the foundation’s assets are protected from the personal liabilities of the founder and beneficiaries.

Asset protection: Labuan foundations are protected from foreign claims and cannot be forcefully liquidated to satisfy other obligations, such as claims arising from a divorce, lawsuit, or creditors.

Long life span: Labuan foundations can exist in perpetuity, which means that they can continue to operate for as long as the founder desires.

Redomiciliation: Foundations established in other jurisdictions can be legally redomiciled to Labuan, and vice versa.

Indonesia:

Meanwhile setting up a foundation in Indonesia has also its own sets of unique advantage’s, which include: 

Large population: Indonesia has the fourth largest population in the world, with over 270 million people. This provides a large pool of potential beneficiaries for foundations in Indonesia.

Growing economy: Indonesia has one of the fastest-growing economies in the world. This is creating new opportunities for foundations to support social and economic development.

Government support: The Indonesian government is supportive of foundations and has put in place a number of policies to encourage their establishment and growth.

Tax benefits: Foundations in Indonesia are exempt from income tax, capital gains tax, and inheritance tax. This can make foundations a very tax-efficient way to support charitable and philanthropic causes.

Asset protection: Foundations in Indonesia offer strong asset protection features. This means that the assets of the foundation are protected from the personal creditors of the founder, beneficiaries, and board members.

Flexibility: Foundations in Indonesia offer a great deal of flexibility in terms of their structure and management. This allows foundations to be tailored to the specific needs of the founder and the beneficiaries.

In addition to these general advantages, there are a number of specific advantages to setting up a foundation in Indonesia.

For example, Indonesia has a strong tradition of philanthropy and there is a growing interest in supporting social and economic development through foundations. This means that there is a lot of support for foundations in Indonesia from the government, businesses, and the public.

Another advantage of setting up a foundation in Indonesia is that the cost of living is relatively low. This means that foundations can operate on a lower budget than they would be able to in many other jurisdictions.

Tax treatment

Family foundations play a crucial role in societal development and are governed by specific tax laws in each country. In this article, we’ll explore the tax treatments for family foundations in Malaysia and Indonesia.

Malaysia (Labuan)

In Malaysia, specifically in Labuan, family foundations enjoy a favorable tax regime. Here are some key points:

Income Tax: If the Labuan foundation is carrying on trading activities (i.e., activities other than investment holding), it is taxed at a preferential rate of 3%, subject to meeting the substantive requirements. However, income received by a Labuan foundation from investment holding activities (with the exception of income derived from Malaysian real estate situated outside of Labuan) is exempt from tax, provided that substantive requirements in Labuan are met.

Value Added Tax (VAT): No sales tax is applied in Labuan.

Withholding Tax: No withholding tax is imposed on capital gains, interests, dividends, and royalties.

Customs Duties: Goods and services tax does not apply if there is a registered income of over RM 500,000.

Exemptions: In addition, stamp duty exemption is accorded to instruments executed in connection with a Labuan business activity.

The manner in which a Malaysian foundation can apply for a tax exemption status with the Inland Revenue of Malaysia is prescribed by the Income Tax Act, Section 44(6). One of the main requirements is to have a foundation registered in Malaysia that offers charitable activities.

Indonesia

In Indonesia, non-profit organizations (NPOs), including foundations, are generally subject to income tax. However, there are certain exceptions:

Income Tax: Income that an NPO uses to provide scholarship funds or income (sisa lebih) of an NPO working in the area of education or research and development that is re-invested in its work as per the timing requirements of the income tax law (Law No.36 of 2008 on Income Tax, Article 4 Section 3) are tax-exempt.

Value Added Tax (VAT): Indonesia applies a Value Added Tax (VAT) to the sale of most goods and services, with some exemptions relevant to NPOs.

Customs Duties: Certain goods are exempt from customs duties.

Table 1. Tax Treatment of Family Foundations in Malaysia (Labuan) vs Indonesia

These regulations provide a comprehensive framework for the tax treatment of family foundations in Malaysia and Indonesia. It’s important for those involved in these organizations to understand these laws to ensure compliance and effective operation. Please note that these details are subject to change and it’s always a good idea to consult with a tax professional or refer to official government resources for the most accurate and up-to-date information.

Legalities and Tax Treatments of Foreign Foundations in Malaysia and IndonesiaLegalities

Malaysia (Labuan)

Foreign foundations in Labuan are regulated by the Labuan Financial Services Authority (LFSA).

To establish a foreign foundation in Labuan, the following requirements must be met:

• The foundation must have a minimum paid-up capital of RM 1 million.
• The foundation must have a physical presence in Labuan.
• The foundation must have a board of directors consisting of at least two individuals, one of whom must be a resident of Labuan.
• The foundation must have a secretary who is a resident of Labuan.
• The foundation must have a registered agent in Labuan.
• Once the foundation has been established, it must register with the LFSA.

Indonesia

Foreign foundations in Indonesia are regulated by the Ministry of Law and Human Rights.

To establish a foreign foundation in Indonesia, the following requirements must be met:

• The foundation must have a minimum initial capital of over IDR 100 million.
• The foundation must appoint a local individual to become the chairperson, secretary, or treasurer within the Board of Executives.
• The foundation must hold a business license to operate the Foreign Entity Foundation and KITAS for the foreigner(s) appointed as managers of the foundation.
• The foundation must collaborate with a local foundation that has similar purposes.
• Once the foundation has been established, it must register with the Ministry of Law and Human Rights.

Tax treatments

Malaysia (Labuan)

• Foreign foundations in Labuan are exempt from income tax on investment holding activities.
• Foreign foundations in Labuan are subject to a preferential rate of 3% on trading activities.
• Foreign foundations in Labuan are exempt from withholding tax on capital gains, interests, dividends, and royalties.
• There is no sales tax in Labuan.
• Labuan foundations are also accorded a stamp duty exemption on instruments executed in connection with a Labuan business activity.

Indonesia

Foreign foundations in Indonesia are generally exempt from income tax on donations and grants received from abroad.

However, income generated from business activities or investments may be subject to income tax.

Considerations for non-resident beneficiaries or founders

Both Malaysia and Indonesia have double taxation treaties (DTTs) with a number of countries. These treaties can help to reduce or eliminate double taxation on income and gains earned by non-resident beneficiaries and founders of foreign foundations.

It is important to note that the specific tax treatment of foreign foundations and their beneficiaries and founders will vary depending on the specific circumstances of each case. It is therefore advisable to consult with a qualified tax advisor to obtain personalized advice.

Tax treaties

While neither Malaysia nor Indonesia has ratified the Hague Convention on Trusts, Indonesia has taken a significant step towards international legal cooperation by ratifying the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents, also known as the Apostille Convention.

In terms of Double Taxation Agreements (DTAs), both Indonesia and Malaysia have extensive networks with other countries. They have also established a tax treaty between themselves. This treaty is designed to prevent double taxation and fiscal evasion, covering various forms of income tax. In Indonesia, it encompasses the income tax (pajak penghasilan 1984), the company tax (pajak perseroan 1925), and the tax on interest dividends, and royalties (pajak atas bunga, dividen dan royalty 1970). The treaty also applies to any identical or substantially similar taxes that are subsequently imposed in addition to or in place of the existing taxes.

Indonesia has further extended its international tax cooperation by signing a tax treaty with the United States. This treaty aims to avoid double taxation and prevent fiscal evasion. It covers income tax in both countries. In the case of the United States, it applies to the income taxes imposed by the Internal Revenue Code, excluding the accumulated earnings tax, the personal holding company tax, and social security taxes.

On the other hand, Malaysia does not currently have a comprehensive tax treaty with the United States. This absence of a treaty could potentially expose US citizens to double taxation. However, there is an agreement between the Government of the United States of America and the Government of Malaysia to improve international tax compliance and implement the Foreign Account Tax Compliance Act (FATCA). This agreement is designed to address legal impediments and reduce burdens for Malaysian financial institutions.

In this intricate weave of Asia’s wealth, the thread of private-benefit family foundations in Malaysia and Indonesia stands out. These jurisdictions, each with their unique hues and patterns, offer viable solutions for asset management. However, it’s crucial to remember that not all threads in this weave carry the same weight.

The decision to establish a family foundation in either country is influenced by a multitude of factors, tailored to the specific needs and circumstances of the family. Both jurisdictions offer several advantages, including tax benefits, asset protection, and flexibility. Yet, potential challenges such as the costs associated with setting up and maintaining a foundation, as well as compliance with complex laws and regulations, should also be considered.

Consultation with qualified professionals who can provide guidance based on your specific needs is crucial. Remember, there’s no one-size-fits-all solution in this wealth weave of Asia. While we strive to provide comprehensive and current information, circumstances can change rapidly. The information presented here is a broad overview and should not be interpreted as advice.

Your situation is unique, and therefore, your plan should be uniquely tailored to fit your needs. As you navigate through this weave, remember that each thread contributes to the overall pattern – your chosen path should align with your goals and aspirations.