The foundation is a very attractive vehicle for dynastic structuring of international wealth. It is known especially to families from civil-law jurisdictions. During the last 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.
The yayasan
The Indonesian foundation (yayasan) finds its origins in the Dutch foundation or Stichting‘’ (dating back to early Roman law in Europe). The yayasan was widely used in Indonesia but also abused by some people. Consequently, Indonesia introduced a new foundation law in to avoid the problems with the old system.
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’.[1] 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.
The Indonesian foundation has three organs: trustees, a board and a supervisor (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.
The Indonesian foundation must be created by notarial deed and it must be approved by the Ministry of Justice and Human Right there after. The yayasan must have an 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 criteria 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,
The Labuan foundation
Labuan has been developed by Malaysia as a separate jurisdiction within Malaysia, but 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 the writer’s 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 Labuan foundation is regulated by the foundations law. Its assets are well protected. Creditors cannot claim against the foundation after two years of its establishment. The foundation is managed by a council and one or more officers. It 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, basically, can keep all its assets firmly under his control. The foundation must involve a local-licensed trust company that will maintain the contacts 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 yayasan and the 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.
In my opinion, the Labuan foundation seems to be much more flexible and easier to create and manage. Obviously 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 they are not final.
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. Hiding behind it is much more difficult if the founder retains management and control. Naturally the protection prima facie is there and the creditor (tax inspector) must prove that the structure is a mere charade. However, the possibility of investigation exists and it weakens the strength of protection offered by the yayasan.
The Indonesian yayasan does not allow the founder to reverse his investment and he loses management and control.
The Indonesian yayasan is stronger from an asset protection point of view. The Labuan foundation is much more flexible and therefore more attractive for many investors who would like to place their assets in a structure but do not want to lose 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.
[1] Statutory reference required
Nico J.C. Francken 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 the 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.
