Malaysia’s Forest City Special Financial Zone (FCSFZ) in Johor is setting a new benchmark for family offices in Asia. Strategically located on Pulau 1, which neighbours Singapore, this initiative offers a competitive suite of tax and operational incentives to attract Single-Family Offices (SFOs), high-net-worth individuals, and financial institutions. Recent legislative amendments with further clarification of AUM and substance requirements have enhanced its appeal as a cost-effective and tax-efficient alternative to hubs like Singapore and Hong Kong.
Forest City Special Financial Zone: Overview
Designated as a Special Financial Zone in 2023, Forest City provides a unique opportunity to manage wealth while fostering economic development locally.
In September 2024, Malaysia announced the Single Family Office (SFO) Incentive Scheme to attract global, regional and Malaysian families to manage their family wealth from Forest City.
Key highlights include:
• Zero Percent Tax for SFOs: A flat 0% tax rate on eligible investment income for an initial 10 years, extendable by another 10 years, based on qualifying conditions.
• 15% Income Tax for Knowledge Workers: A flat income tax rate for full time employees (FTEs) employed in Forest City, significantly lower than standard rates. (subject to FCSFZ terms)
• Reduced Corporate Tax Rates: Between 0% and 5% for qualified businesses in financial services.
• Regulatory Flexibilities: Banking institutions benefit from eased foreign exchange rules and incentives for relocation.
The SFO Scheme, overseen by the Securities Commission Malaysia (SC), is central to Forest City’s value proposition and is expected to be operational by the first quarter of 2025.
Single-Family Office (SFO) Scheme: Details on Key Requirements
Minimum AUM requirement
RM 30 million (c. SGD 9.2 million) for the initial 10-year period, increasing to RM 50 million (c. SGD 15.3 million) for an additional 10-year period.
The composition of the AUM can include investments in Malaysia or abroad, such as:
• Shares listed on exchanges, bonds, notes, and commercial papers regulated by capital market authorities.
• Private companies in Malaysia, excluding property and property development companies.
• Real estate holdings limited to Forest City.
• Bank deposits in foreign or local currencies.
• Forex instruments.
• Local and global collective investment schemes.
• Local funds.
Additionally, for the initial 10 years, the lower of at least RM 10 million or 10% of AUM, must meet minimum local investment in eligible and promoted investments, such as:
• Malaysian capital market products regulated by the SC.
• Promoted sectors endorsed by the government, including startups, VC funds, impact funds, and Islamic capital markets.
This minimum local investment requirement increases to the greater of RM 10 million or 10% of AUM for the subsequent 10 years.
Note: Business operations and certain non-qualifying assets (e.g., general money market funds) cannot be included in the AUM composition. Lists above are non-exhaustive and remains subject to finalisation by the SC
Substance Requirements
To qualify for the tax incentives, the SFO and SFOV must meet stringent substance requirements, which include:
1. Office Presence:
• The SFOV must be a new investment holding company incorporated in Malaysia and seek pre-registration with the SC on the eligibility of tax incentives.
• The SFO Management Company must be established and operating its office in Pulau 1, Forest City, with a minimum office space of 500 square feet.
2.Employment Requirements for SFOV and SFO Management Company:
Employee Requirements for SFOV (Singapore Family Office Vehicle):
• A minimum of two full-time employees (FTEs) for the initial period, increasing to four FTEs during the extension period.
• Employees must include at least one Investment Professional (IP) with:
• Relevant qualifications in capital markets, banking, or finance.
• A minimum monthly salary of RM 10,000 (c. SGD 3,050).
• Continuous employment throughout the certification period.
• At least 1 IP must be for the SFOV and at least 1 IP must be a director
Employee Requirements for SFO Management Company:
• At least 1 Investment Professional (IP) must be for the SFO Management Company
In summary, a total of 3 employees, including at least 2 Investment Professionals, are required during the initial period.
3.Operational Expenditures:
A minimum local operating expenditure of RM 500,000 annually (approximately SGD 153,000) during the initial period, rising to RM 650,000 (approximately SGD 199,000) for the extension.
Flexibility on Foreign Exchange Policy
Bank Negara Malaysia is expected to allow entities in Forest City, including family offices, to freely invest in foreign currency assets without restrictions, regardless of whether the funds are sourced locally or internationally. This flexibility provides family offices with the freedom to diversify their portfolios globally, aligning Forest City with the practices of other major financial hubs.
How Forest City Compares to Singapore
While Forest City and Singapore offer tax and operational incentives for family offices, the two jurisdictions cater to different profiles:
• Entry Thresholds:
Forest City’s minimum RM 30 million (SGD 9.2 million) requirement offers a more accessible entry point compared to Singapore’s minimum AUM of SGD 20 million (RM 69 million). As such Forest City aims to target a different market segment by offering lower threshold requirements for family offices.
• Tax Benefits:
Forest City offers a flat 0% tax rate on all eligible investment income earned by the Single-Family Office Vehicle (SFOV), simplifying compliance and providing long-term certainty.
In contrast, Singapore’s 13O and 13U schemes provide tax exemptions only on qualifying income, such as dividends, interest, and gains from designated investments. These exemptions require strict compliance with conditions, such as investing in approved assets and regular reporting to the Monetary Authority of Singapore (MAS), making Forest City’s tax structure more straightforward and predictable.
• Operational Costs:
Malaysia’s lower cost structure would be attractive to families and investors looking to set up shop in Forest City.
• Local Investment Focus
Both Forest City and Singapore emphasize reinvestment into their economies through local investment mandates, but their requirements differ in structure and scale:
– Forest City: Requires a minimum local investment of 10% of AUM or RM 10 million (c. SGD 3.05 million), whichever is lower, for the initial 10 years. This increases to 10% of AUM or RM 10 million, whichever is higher, for the subsequent 10 years, ensuring larger family offices contribute more as their assets grow.
– Singapore: Under the 13O and 13U schemes, family offices must allocate 10% of AUM or SGD 10 million (c. RM 34.5 million), whichever is lower, to local investments. This creates a capped local reinvestment requirement for larger family offices with AUM exceeding SGD 100 million.
While Singapore’s fixed cap provides predictability for larger family offices, Forest City’s progressive structure ensures a proportional reinvestment aligned with AUM growth.
Portcullis: Your Partner in Wealth Structuring
At Portcullis, supported by Baxian (Malaysia), we offer a comprehensive suite of specialised services to help families navigate the complexities of establishing SFOs in Forest City. Our expertise includes:
• Assistance with tax incentive applications and SC pre-registration.
• Structuring and administering compliant SFOs and SFOVs for long-term estate planning.
• Advisory services for aligning investments with both local and international regulations.
Conclusion
The Forest City Special Financial Zone represents Malaysia’s ambition to establish itself as a premier wealth management hub. With its robust tax incentives, clarified AUM composition, and flexible substance requirements, Forest City offers an attractive, cost-effective alternative to established financial centres.
At Portcullis Group, we are here to guide you every step of the way. Contact us today at [email protected] to explore how we can help you unlock the full potential of Forest City’s incentives while ensuring long-term compliance and operational efficiency.
Disclaimer
This Memorandum is prepared based on public information available as of the date of the post. The single family office (“SFO”) scheme announced on 20 September 2024 for SFOs set-up in Pulau Satu may still be subject to further fine-tuning prior to 1 January 2025 and readers should look out for updates. This Memorandum is not meant to be comprehensive and does not constitute and is not to be construed as the provision of legal or tax advice. Readers should not act in reliance on any statement contained in this publication without first obtaining appropriate professional advice.
