Forest City Special Financial Zone : Everything You Need to Know

Forest City Special Financial Zone : Everything You Need to Know

Introduction

Once an ambitious real estate venture, Forest City is now the cornerstone of a revitalisation plan. On 20 September 2024, via the Keynote Address at the Forest City Special Financial Zone Tax Incentive Announcement Ceremony, YB Senator Datuk Seri Amir Hamzah Azizan, the Malaysian Finance Minister II has announced that the Malaysian government has officially launched Forest City as a Special Financial Zone (“SFZ”) to breathe new life into the area.[1] Situated in Iskandar Puteri, Johor, and comprising four man-made islands covering 30 square kilometres, Forest City is positioned near Singapore. It aims to bolster Johor’s economy and enhance its regional competitiveness.

MADANI Economic Framework

The Forest City SFZ embodies the aspirations of the MADANI Economic Framework, which focuses on sustainable economic growth and development. Key initiatives in this SFZ are designed to attract global businesses, financial institutions, and high-net-worth individuals.

Incentives Package Offered in SFZ

1. Concessionary Corporate Tax from 0 to 5%

Although the qualification for the corporate tax has yet to be announced, one of the core initiatives offered by the Malaysian government to attract businesses and financial institutions to position themselves in Forest City is a favourable corporate tax ranging from 0 to 5%, aimed at enticing businesses and financial institutions to set up operations in the zone.

2. Special Individual Income Tax Rate of 15%

To attract skilled professionals and high-net-worth individuals, the Malaysian government offers a 15% individual income tax rate for knowledge workers and Malaysians opting to work in Forest City. This preferential tax rate is expected to make the area a hub for professionals seeking opportunities in sectors like finance, technology, and management.

3. 0% Tax Rate for Family Wealth Offices

Forest City is the first location in Malaysia to offer a 0% tax rate for family offices. The Single Family Office Scheme, which will be coordinated by the Securities Commission Malaysia, allows regional and Malaysian families with significant wealth to manage their assets from Malaysia. This tax exemption is available for 10 years, with the option to extend it for another 10 years, provided that the family office expands its investments and assets under management in Malaysia. A minimum of RM30 million in assets under management is required to qualify.

Based on the FAQ for the Single Family Office Scheme issued by the Securities Commission, the following would be the requirements/incentives for SFO:-

License Fund Management License under the Capital Markets and Services Act 2007

 
License Exemption If SFO can demonstrate that its management services are provided solely for a Single Family Office Vehicle (“SFOV”), which is its related corporation.

 
Tax Incentive 0% tax rate on income generated by eligible investment

 
Incentive Period 10 years (which may be extended to another 10 years)

 
Tax Incentive Requirements (a)         SFOV must be a new investment holding company incorporated in Malaysia and has sought pre-registration with SC on the eligibility of tax incentives;

 

(b)         SFO must be operating and established in Pulai 1, Forest City SFZ, with one investment professional with a minimum monthly salary of RM10,000

 

(c)         SFOV must hold assets under management (“AUM”) of at least RM30 million and meet local investment in eligible and promoted investment of at least 10% of AUM or RM10 million, whichever is lower;

 

(d)         SFOV must incur annual operating expenditures (“OPEX”) of RM500,000 locally; and

 

(e)         SFOV must employ at least two (2) full-time employees, each receiving a minimum monthly salary of RM10,000, with one of the employees being an investment professional.

 
Tax Incentive Requirements (for an additional 10 years) (a)         SFOV must hold AUM of at least RM50 million and meet minimum local investment in eligible and promoted investments of at least 10% AUM or RM10 million, whichever is higher;

 

(b)          SFOV must incur annual OPEX of a minimum RM650,000 locally; and

 

(c)         SFOV must employ a minimum of four full-time employees.

 

4. Special Incentives for Local Banking Institutions and Other Financial Sector Entities

Local banking institutions, insurance companies, capital market intermediaries, and other financial sector entities operating within Forest City will also benefit from several incentives. These include special deductions on relocation costs, enhanced industrial building allowances, and exemptions from withholding taxes. The aim is to create a financial ecosystem conducive to growth and innovation within the region.

5. Flexible Regulatory and Foreign Exchange Arrangements for Locally Incorporated Foreign Banks

Foreign banks incorporated locally will enjoy greater regulatory flexibility in the Forest City SFZ. They can open additional branches within the zone, while also benefiting from foreign exchange flexibilities. These include offshore borrowing in foreign currency and investment in foreign currency assets, making Forest City an attractive option for international banks looking to expand in Southeast Asia.

Other Major Expectations

While the incentives are concentrated within Forest City, the ripple effects are expected to extend beyond it. More job opportunities and increased economic activity will likely stimulate nearby areas such as Nusajaya and Medini, boosting retail, entertainment, and F&B sectors.[2] Additionally, the growing demand for infrastructure and business expansion will create further opportunities for the construction industry, contributing to the overall economic development of the region.

Also, the potential revival of the Kuala Lumpur-Singapore High-Speed Rail project which, currently under discussion could act as a significant catalyst for the property market within the area. With improved connectivity between the two cities, Forest City could become an attractive destination for businesses and residents, driving further growth in the region.[3]

Conclusion

While Forest City’s growth was initially stunted, it is far from the end for this ambitious project. The government’s proactive approach to turning it around by establishing it as a SFZ offers a renewed sense of potential. With the range of incentives now in place, there is hope that Forest City will rise to stand tall alongside its neighbouring financial hubs, such as Singapore and Hong Kong. If successful, this initiative could mark a new era of economic prosperity for Johor and Malaysia.

Credit pic: Forest City SFZ

Authors:

  1. Fakhrullah Fadzillah
  2. Aryn Rozali
  3. Husna Shariff

[1] https://www.sc.com.my/resources/speeches/keynote-address-at-forest-city-special-financial-zone-tax-incentive-announcement-ceremony

[2] https://theedgemalaysia.com/node/727556

[3] https://www.channelnewsasia.com/asia/malaysia-hsr-singapore-proposals-anthony-loke-4490121