Tax Incentives for Malaysia’s Forest City Special Financial Zone: Benefits & Regulations

Malaysia’s Honorable Finance Minister II officially launched the Forest City Special Financial Zone (SFZ) on September 20, 2024. Located in Iskandar Puteri, Johor, this landmark initiative is designed to lure global investments and improve Malaysia’s economy. 

Spread across four duty-free, man-made islands between Malaysia and Singapore, the FCSFZ offers lucrative incentives such as a 0% tax rate under the Single-Family Office Scheme, a 15% tax rate for skilled workers, or a 5% concessional tax rate for fintech and global financial services. This guide covers FCSFZ in detail, its introduction & core principles, tax incentives, and the Single-Family Office (SFO) Scheme. 

What is the Forest City Special Financial Zone (FCSFZ)?

The Forest City Special Financial Zone (FCSFZ) is Malaysia’s first special financial zone launched to boost foreign investment and overall economic growth. This special zone is strategically located near Singapore. It covers the area of four duty-free, man-made islands in Johor. The key features include: 

• It was established in July 2024 through the passing of five amendment bills, which gave it a strong legal foundation for operation.
• It aims to encourage fintech businesses, financial global services, and foreign payment systems.
• Adding to the benefits, it offers privileges of duty-free and tax benefits to promote a competitive business environment.
• Skilled workers and firms can also benefit from special tax rates if relocated to this special financial zone.
• This Special Financial Zone Malaysia aims to become a global leader in centres for innovation and international businesses. 

Core Principles of the FCSFZ 

The Forest City Special Financial Zone (SFZ) is based on core principles that make it a sound, innovative, and investor-friendly ecosystem while fully aligning with Malaysia's long-term economic goals. The core principles include: 

• Provides an avenue for global wealth management with the introduction of the Single-Family Office (SFO) Scheme to be coordinated by the Securities Commission of Malaysia at a 0% tax rate.
• Enhances cross-border trade and financial activities, with its duty-free status and strategic location between Malaysia and Singapore.
• Provides special industrial building allowances and tax deductions on relocation costs to support infrastructure and business setup.
• Provides withholding tax exemption for financial institutions to maintain a low-cost operating environment for favoured industries.
• Incentivizes knowledge transfer and skill development by attracting specialized talent under targeted tax incentives.

Tax incentives for the Forest City Special Financial Zone 

The Forest City Special Financial Zone, FCSFZ, has introduced competitive tax incentives to position Malaysia at the forefront of the world's financial hubs and attract international business. These additional incentives have been put in place to make the framework more competitive for investors and knowledge workers.

• 0% tax rate for Family Offices established under the Single-Family Office (SFO) Scheme, to be coordinated by the Securities Commission Malaysia (SC).
• Corporate tax rates between 0% and 5% to businesses in the qualified sectors;
• A special individual income tax rate of 15% for knowledge workers and Malaysians working at Forest City.
• Tax rate of 5% for financial global business services, fintech companies, and foreign payment system operators.
• Provides special deductions of relocation expenses, additional industrial building allowance, and exemptions from withholding tax for financial institutions such as banks and insurance.
• Support by Bank Negara Malaysia to locally incorporated foreign banks including regulatory flexibilities in opening additional branches. This also includes foreign exchange flexibilities in offshore borrowing and investment in foreign currency assets.

What is a Single-Family Office (SFO) Scheme?

The Single-Family Office Scheme is one of the biggest attractions in the Forest City Special Financial Zone, given its unique structure and tax benefit. The SC coordinated the announcement on 20 September 2024 to attract high-net-worth individuals and families to set up an SFO in FCSFZ. The key features and requirements of an SFO scheme are as follows:

What is a Single-Family Office (SFO) and a Single-Family Office Vehicle (SFOV)?

• Single-Family Office (SFO): A corporate entity owned by a single family to take care of the family's investments, administration, and similar activities.
• Single-Family Office Vehicle (SFOV): An investment vehicle exclusively handling investments made by a member, or members, of the same family.

Tax Incentives under the SFO Scheme

The SFO Scheme provides for a 0% tax rate on income arising from eligible investments held by the SFOV for an initial period of 10 years, which may be further extended by another 10 years, provided that the conditions mentioned below are satisfied.

Key Conditions to Qualify

Under the SFO Scheme for FCSFZ, Single-Family Office Vehicle (SFOV) mandatorily need to comply with the following conditions: 

• SFOV shall be incorporated in Malaysia and have a registered office in Pulau Satu, FCSFZ.
• SFO must physically operate out of Pulau Satu.
• SFOV shall be a new investment holding vehicle pre-registered with the SC.
• SFO may be exempt from licensing under CMSA 2007 but may still be subject to conditions imposed by SC. SFOVs have to apply to the SC for certification to prove that all the conditions are met.

Conclusion

The Forest City Special Financial Zone is a revolutionary initiative by the Malaysian government, offering a wide range of tax incentives designed to promote global business and attract investors from across the world. Key Forest City's special financial zone incentives include a 0% tax rate for the SFO scheme, a 5% tax rate for corporations offering financial services, and a reduced tax rate for skilled workers. 

Apart from the tax incentives, this special financial zone forest city also provides key deductions for relocation costs and industry-specific exemptions for the banking, financial, and insurance sectors. With its strategic location, regulatory flexibility, and tax advantages, FCSFZ is all set to position Malaysia at the forefront of global businesses and a prime destination for foreign investment.