Forest City, Malaysia

MALAYSIA: The tax incentives in the Forest City Special Financial Zone (FCSFZ) could turn Johor into a financial hub, attracting investments from family offices and high-net-worth individuals.

However, turning this potential into reality will require a solid and reliable ecosystem with proper regulations and infrastructure.

According to The Star, commentators have pointed out that a well-established FCSFZ could not only help Forest City shake off its “ghost town” reputation but also serve as a model for other parts of the country and even overseas, depending on its success.

Last week, the government announced lower corporate tax rates, ranging from 0% to 5%, alongside a 0% tax rate for family offices. There’s also a 15% personal income tax for knowledge workers and returning Malaysians.

Putrajaya announced that financial companies can also benefit from special deductions for relocation costs, improved allowances for industrial buildings, and withholding tax exemptions.

Samuel Tan, CEO of Olive Tree Property Consultants, described the tax incentives as a “good initiative”, especially with the 0% starting rate. However, he noted that they are still waiting for details on the grounds for qualification.

Family offices, financial technology (fintech), shared services and digitalisation are the way forward,” he said.

He also emphasised the importance of a solid legal framework to ensure the system operates efficiently and transparently. He warned that issues seen in other countries where such incentives were misused must be avoided in Malaysia.

He stressed that the right ecosystem must be in place to draw skilled professionals to FCSFZ and added the need to upskill and reskill local workers as part of a broader effort to retain talent within the zone.

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Mr Tan also pointed out that merely lowering taxes will not be enough. Improving the quality of life in Johor is essential for retaining talent. A safe and efficient working environment ensures that FCSFZ becomes a “safe, convenient and efficient” place for skilled workers.

He said that authorities should look into expanding the scope of investments allowed in the special economic zone (SEZ), enabling more investors to participate. He noted that this would make Forest City more vibrant with diverse industries and services.

However, tax consultant S.M. Thanneermalai cautioned that the new incentives could potentially cannibalise investments from other economic zones in Malaysia. “It could come at the expense of other economic zones,” he said.

He pointed out that while the incentives will benefit FCSFZ, it could pressure other states to offer similar or better incentives. Kenanga Research noted that the tax incentives were highly competitive, especially compared to Singapore’s corporate tax rate of 17%.

This could foster a more dynamic fintech ecosystem in the FCSFZ, where there are currently over 300 local fintech firms, compared to around 1,580 in Singapore as of 2022.

The research firm also pointed out that multinational corporations facing a global minimum tax rate of at least 15% from 2025 may find the tax benefits in the FCSFZ appealing.

High-net-worth investor Ian Yoong Kar Yin believes that the tax incentives appeal to family offices, especially those from ultra-high-net-worth families in Northeast Asia, excluding Japan. 

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He said, “The proximity of FCSFZ to Singapore will be a major draw, given the much-improved logistics and knowledge pool.”

However, he stressed that the legal and regulatory frameworks must be refined to meet international standards, particularly those established in countries like Singapore and Switzerland.

He said that Bank Negara could encourage local banks to set up multi-family offices in the FCSFZ, noting that many banks in Malaysia already have private banking divisions, which could serve as a foundation for these offices.

Like Mr Tan, Mr Yoong emphasised that while the tax rates are enticing for fintech companies, security, quality of life, and amenities must also be addressed.

The Securities Commission (SC) oversees the single-family office incentive scheme. The SC announced that family offices must set up a registered office in Pulau 1 of the FCSFZ to qualify for tax incentives.

These incentives are available for 20 years, with the first 10 years being the initial period.

To be eligible for the first 10 years, the single-family office vehicle (SFOV) must be a newly incorporated investment holding company in Malaysia and should seek pre-registration with the SC.

The management company, linked to the SFOV, must have at least one investment professional who earns a minimum of RM10,000 monthly.

The SFOV must maintain assets under management (AUM) of at least RM30 million and invest a minimum of 10% of AUM or RM10 million, whichever is lower, in designated local investments.

It must spend at least RM500,000 annually on operating expenses (OPEX) in Malaysia and employ at least two full-time staff members, one of whom must be an investment professional earning at least RM10,000 monthly.

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The management company may not require specific licenses under the Capital Markets and Services Act 2007 (CMSA) if it only provides services for its SFOV.

SC Chairman Dato’ Mohammad Faiz Azmi noted that this scheme aims to attract regional and Malaysian families to manage their wealth locally, projecting an economic impact between RM3.9 billion and RM10.7 billion, including skilled employment and increased demand for services.

To qualify for the remaining 10 years, the SFOV must have an AUM of at least RM50 million, employ four full-time staff, and spend at least of RM650,000 annually on local operating expenses.

These incentives come as Malaysia and Singapore are nearing an agreement to establish a Johor-Singapore Special Economic Zone (SEZ).

Maybank IB Research expects that heightened economic activity in the FCSFZ will lead to increased property demand, benefiting companies such as Eco World Development Group Bhd, SP Setia Bhd, UEM Sunrise Bhd, and Sunway Bhd, which have projects in the region.

HLIB Research added that with the designation of the special financial zone, future developments in Forest City are expected to involve greater government participation and local companies, unlike the previous reliance on Chinese firms.

This shift could benefit local contractors like Ekovest Bhd, Kimlun Corp Bhd, and Sunway Construction Group Bhd. /TISG

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