The Forest City Special Financial Zone (Forest City SFZ), which was recently launched by the Government of Malaysia, is a mixed-development project built on four man-made islands in the Straits of Johor situated between Malaysia and Singapore.
The Forest City SFZ is also designated as a duty-free zone. This recent initiative marks a pivotal moment in Malaysia’s economic landscape, driving foreign investment and boosting the Johor region’s appeal to international investors.
Following the recent announcement made by the Ministry of Finance on 20 September 2024, a series of incentives which includes the Single Family Office Scheme were introduced within Forest City to attract investment and promote economic growth in the region.
This alert summarises the key points of the incentives in the said announcement.
Key Incentives
The key components of the incentives are summarised as follows:
· Concessionary Corporate Tax Rates
An attractive corporate tax rate ranging from 0% to 5%.
· Special Individual Income Tax Rate of 15% for Skilled Workers
A fixed rate of 15% for knowledge workers and Malaysians working in the zone.
· Special Incentives for Local Financial Institutions
These benefits include special deductions on relocation costs, enhanced industrial building allowances and withholding tax exemptions. Banking institutions, insurance companies, capital market intermediaries and other eligible financial sector entities will benefit from these incentives.
· Regulatory Flexibilities for Foreign Banks
Locally incorporated foreign banks will have the flexibility to open additional branches within Forest City. Supported by Bank Negara Malaysia, they will also benefit from foreign exchange arrangements that allow for offshore borrowing in foreign currency and investment in foreign currency assets.
· 0% Tax Rate for Family Offices
The introduction of the Single-Family Office Scheme (SFOs), coordinated by the Securities Commission Malaysia (SC), aims to promote the management of wealth in Malaysia. This incentive offers a 0% concessionary tax rate on income generated from eligible investments through the Single-Family Office Vehicle (SFOV).
Essentially, a SFO is a corporate vehicle, wholly owned or controlled by members of a single wealthy family, established to exclusively manage the assets, investments and long-term interests across multiple generations and branches of the family.
A SFOV is a corporate vehicle, wholly owned or controlled by members of a single family and is established solely for the purposes of holding the assets, investments and long-term interest of members of the single family.
A single-family is taken to mean individuals who are lineal descendants from a single ancestor, including the close relative of the individual.
The diagram below illustrates the relationship between the SFO and SFOV[1].
The SFO is required to obtain a fund management license under the Capital Markets and Services Act 2007 (CMSA). However, the SFO may be exempted from licensing requirements if they exclusively provide management services to SFOV which is essentially the related corporation.
According to the FAQ[2] issued by the Securities Commission (SC), a SFOV must fulfil the following conditions to qualify for the tax incentive during the Initial Period and the Additional Period:
Criteria
| Details | |
Incentive Period |
20 years (initial period of 10 years + additional/subsequent 10 years).
| |
A. To qualify for the incentive for the Initial Period of 10 years
| ||
Company Requirements |
· New investment holding company (SFOV) incorporated in Malaysia. · Seek pre-registration with the SC for tax incentives.
| |
Management Company |
· Related company (SFO2) to operate out of Pulau 1, Forest City Special Financial Zone. · At least one investment professional with a minimum monthly salary of RM10,000.
| |
Assets Under Management (AUM) |
Hold AUM of at least RM30 million.
| |
Investment Requirements |
Minimum local investment in eligible and promoted investments of at least 10% of AUM or RM10 million (whichever is lower).
| |
Operating Expenditure (OPEX) |
A minimum of RM500,000 annually is spent locally.
| |
Employment Requirements |
Employ at least 2 full-time employees, including 1 investment professional, with a minimum monthly salary of RM10,000.
| |
B. To qualify for the incentive for the Additional Period of 10 years
| ||
Assets Under Management (AUM) | Hold AUM of at least RM50 million. | |
Investment Requirements |
Minimum local investment of at least 10% of AUM or RM10 million (whichever is higher).
| |
Operating Expenditure (OPEX) | Minimum of RM650,000 annually spent locally (30% higher than Initial Period). | |
Employment Requirements | Employ a minimum of 4 full-time employees. | |
In relation to the SFOs, it must be noted that the conditions outlined in the FAQs are not exhaustive. More detailed requirements are expected to be provided by the SC in the first quarter of 2025.
The establishment of the Forest City injects new vitality into Malaysia's economic development. By offering a range of attractive tax incentives and flexible regulatory policies, the zone aims not only to attract international investment but also to create an ideal environment for the flourishing of financial technology and global business services. The vision for Forest City is to transform Malaysia into an innovation-driven financial services hub, promoting sustainable economic growth.
[1] Link to editable version of chart: https://www.canva.com/design/DAGSYsXBTN4/0xnOV11kAAJcY1mdvHYzug/edit?utm_content=DAGSYsXBTN4&utm_campaign=designshare&utm_medium=link2&utm_source=sharebutton
[2] Securities Commission Malaysia. (2024, September 23). Frequently asked questions single family office scheme. https://www.sc.com.my/api/documentms/download.ashx?id=f327fb87-91eb-4947-8ef4-786226d2e3e6\
11 October 2024