PETALING JAYA: The tax incentives offered in the Forest City Special Financial Zone (FCSFZ) have the potential to turn Johor into a financial centre in the south and attract investments into the state, especially from family offices and high-net-worth individuals.
Turning the potential into reality, however, will require a well established and reliable ecosystem, including regulations and infrastructure, upon which a successful FCSFZ can not only help the metropolis shed its “ghost town” image, but also be adopted elsewhere in the country and even abroad depending on its success, said commentators.
Last week, the government announced a few tax incentives to revive the struggling mega-project, among which was a corporate tax rate of 0% to 5%, 0% tax rate for family offices and a 15% personal income tax rate for knowledge workers and returning Malaysians who choose to work there.
Putrajaya also announced financial companies will enjoy incentives such as special deductions on relocation costs, enhanced industrial building allowances and withholding tax exemptions.
“This is a good initiative, especially with a tax regime starting from 0%. However, we await the details on grounds of qualification. Family offices, financial technology (fintech), shared services and digitalisation are the way forward.
“What is needed is the legal framework to ensure efficiency and transparency. What happened to some countries where it was abused must not happen here. And the ecosystem must be right to attract knowledge workers to FCSFZ,” said Olive Tree Property Consultants chief executive officer Samuel Tan.
He added that apart from attracting knowledge workers from abroad, upskilling and reskilling of the existing pool of local talent is an important part of the talent retention initiative.
Lower tax itself is insufficient if the quality of living is not up to expectations, Tan added. In this regard, the stakeholders must ensure FCSFZ offers an environment where people find it safe, convenient and efficient to work.
Tan said the authorities should consider widening the scope of investments to the special economic zone (SEZ) whereby more players can invest. This would make Forest City more vibrant with diverse supporting industries and services.
Tax consultant S M Thanneermalai of Thannees Tax Consulting Services, however, warned the incentives could be trouble for other economic zones in Malaysia as it leads FCSFZ to cannibalise on investments which could, in turn, lead the other state governments to push for similar or even better incentives for themselves from the federal government.
“The incentives will be good for FCSFZ as they could help utilise its existing infrastructure and attract various new economy investments, which will help to improve its occupancy rates, but it could come at the expense of other economic zones in the country,” he told StarBiz.
Kenanga Research noted the tax benefits were very competitive compared to the corporate income tax rate of 17% in Singapore for example. As a result, it may help create a more vibrant fintech ecosystem in the FCSFZ as there are an estimated 1,580 fintech firms in Singapore as at 2022, compared to over 300 companies locally.
Furthermore, the research house noted multinational corporations, which will be subject to the global minimum tax rule of at least 15% effective tax rate from 2025, could view the tax incentives at FCSFZ as offering some potential benefit to them.
Is the offer made attractive enough to attract family offices to consider? High-net-worth investor Ian Yoong Kar Yin believes the zero tax incentive is very competitive.
“These are undoubtedly very attractive incentives for family offices to relocate to FCSFZ. It will nevertheless take a few years.
“It is highly likely that many family offices will be from ultra-high-net-worth families from North-East Asian countries ex-Japan. The proximity of FCSFZ to Singapore will be a major draw, given the much improved logistics and knowledge pool,” he said.
He added the legal and regulatory framework for family offices required fine tuning to bring them in line with Singapore, Switzerland and other counties.
He said Bank Negara could encourage domestic banks to establish multi-family offices in FCSFZ as many banks in Malaysia had private banking arms which were precursor of multi-family offices.
Much like Tan of Olive Tree, Yoong said the concessionary corporate tax rate and individual tax rate were major draws for fintech companies in South-East Asia to relocate to FCSFZ but must be complemented with issues like security, quality of life and amenities.
He, however, believes it’s very likely that FCSFZ will be the sole special financial zone in Malaysia with such incentives for the next few years.
Meanwhile, the Securities Commission (SC) has been tasked with coordinating the single family office incentive scheme.
The regulator yesterday announced the incentive for the family office require such setups to establish and operate a registered office in Pulau 1 of the FCSFZ.
The tax incentive is for a 20-year period covering the initial period of 10 years and additional/subsequent 10 years.
To qualify for the initial 10-year period, the single family office vehicle (SFOV) must be a new investment holding company incorporated in Malaysia and seek pre-registration with the SC on the eligibility of the tax incentives.
The management company or SFO which is a related company of SFOV to be set up and operate out of Pulau 1, should have at least one investment professional with minimum monthly salary of RM10,000.
The SPOV must also hold assets under management (AUM) of at least RM30mil and meet minimum local investment in eligible and promoted investments of at least 10% of AUM or RM10mil whichever is lower. The SFOV must also spend a minimum of RM500,000 annually in operating expenditure (OPEX) locally.
The SFOV must also employ a minimum of two full-time employees of whom at least one is an investment professional, with minimum monthly salary of RM10,000, the SC stated.
The SFO or management company may not need to get certain licenses under the Capital Markets and Services Act 2007 (CMSA) as long as it only provides services for its SFOV.
“Establishing the SFO scheme positions Malaysia to enhance its investor base by attracting regional and Malaysian families to manage their wealth from Malaysia,” SC Chairman Dato’ Mohammad Faiz Azmi stated in a release.
“The projected economic multiplier of this initiative from the local substance requirements is estimated to range from RM3.9bil to RM10.7bil, which also includes the positive effects on creation of skilled employment and the demand for other ancillary services,” he added.
To qualify for the additional 10 years, the SFOV must hold AUM of at least RM50mil, employ four full-time employees and spend a minimum RM650,000 annually in opex locally.
The incentives come at a time when Malaysia and Singapore are close to finalising an agreement over a proposed Johor-Singapore SEZ to be set up in Johor.
Maybank IB Research believes the boost in economic activity in FCSFZ will drive higher property demand there and its surrounding area which would benefit property companies like SP Setia Bhd
, UEM Sunrise Bhd, Eco World Development Group Bhd and Sunway Bhd which have projects in the state.
Forest City, which is located in Tanjung Kupang, comprises four man-made islands and is a joint venture between Country Garden and Esplanade Danga 88 Sdn Bhd, which is a Johor state government subsidiary.
HLIB Research added with the special financial zone designation, future developments in the Forest City will likely see more government involvement and by local companies.
“It is possible that more local contractors will be involved in building Forest City, unlike in the past where it was largely undertaken by the Chinese. Broadly, we feel that Johor based contractors such as Kimlun Corp Bhd and Ekovest Bhd as well as Sunway Construction Group Bhd could stand to benefit from this,” it said.
