Malaysia: Forest City SFZ Incentives Update

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Macro Note
Malaysia: Forest City Special Financial Zone (SFZ) update on incentives

Malaysia’s Second Finance Minister Datuk Seri Amir Hamzah announced a package of incentives to launch Johor’s Forest City as a Special Financial Zone (SFZ). These include conditional incentives that target specific sectors.Incentives for the Island – Pulau Satu focuses on financial services while Mainland will focus on logistics, global services hubs, and relocation services.

Key incentives announced include special tax rates for corporates between 0%- 5%, individual income tax rate of 15%, tax rate of 0% for Family Offices, special tax rate of 5% for financial global business services and allowing foreign banks to expand more branches within the SFZ with foreign exchange flexibilities.

The move is supportive of a wider scope of incentives and initiatives for the Johor Singapore Special Economic Zone (JS-SEZ) and to realise Johor’s goal to become a developed state by 2030. These complement the country’s national masterplans to transform the economy and GEAR-uP initiative alongside the GLICs. Next to watch will be Budget 2025 that will be tabled next month (18Oct) and the final JS-SEZ agreement that will cover broader incentives for other non-financial sectors (by Nov).

New incentives announced for Forest City SFZ

On 20 September, Malaysia’s Second Finance Minister Datuk Seri Amir Hamzah announced a package of incentives to launch Johor’s Forest City as a Special Financial Zone (SFZ), a move widely anticipated ahead of the final Johor-Singapore Special Economic Zone (JS-SEZ) agreement.

Forest City offers a unique advantage as a duty-free island located within a Special Financial Zone (SFZ). This zone encompasses both Pulau Satu and the Mainland, each with targeted conditional incentives designed for specific sectors. The incentives for Pulau Satu are primarily aimed at attracting financial services, while the Mainland focuses on logistics, global services hubs, and relocation services. Furthermore, the proposed KL-Singapore High-Speed Rail, which is currently under discussion, is expected to pass through Forest City, enhancing its connectivity and appeal.

Key incentives announced for the Forest City Special Financial Zone (SFZ) include:

Concessionary Corporate Tax Rate: A reduced tax rate ranging from 0% to 5%, significantly lower than the current rate of 24%.
Family Office Tax Rate: A 0% tax rate for Family Offices for 20 years, contingent on a minimum Assets Under Management (AUM) of MYR 30 million, with a target operational date of Q1 2025.
Tax Rate for Financial Global Business Services: A tax rate of 5% for up to 20 years for sectors such as financial global business services, fintechs, and foreign payment system operators, including mid-office and back-office operations.
Special Individual Income Tax Rate: A preferential income tax rate of 15% for knowledge workers and Malaysians employed in the Forest City SFZ, compared to the current maximum rate of 30%.
Regulatory Flexibilities for Foreign Banks: Locally incorporated foreign banks can benefit from regulatory flexibilities to open additional branches within the SFZ and enjoy foreign exchange flexibilities for offshore borrowing and investments in foreign currency assets.
Special Deductions and Allowances: Special deductions on relocation costs (up to MYR 500,000), enhanced industrial building allowances of 10%, and a 10-year withholding tax exemption for services.
Stamp Duty Exemptions: Stamp duty exemptions ranging from 50% to 100% on applicable transactions.

Outcome-Focused Incentives That Reward Growth and Talent

The Forest City Special Financial Zone (SFZ) offers key incentives spanning 20 years (10 + 10 years) that are contingent upon operational growth of at least 30%. These incentives encompass various factors, including operating expenses, the number of key personnel and knowledge workers, as well as environmental, social, and governance (ESG) elements. Designed to attract new investments, these outcome-driven incentives reward expansion activities that foster a skilled workforce and enhance sustainability efforts. They are particularly appealing compared to typical incentives that last 5 to 10 years.

For specific sectors, such as logistics, a 100% investment tax allowance is available to offset statutory income, surpassing the general allowance of 60%. Additional incentives include withholding tax and stamp duty exemptions, along with special deductions for relocation.

Family Offices and Financial Institutions

Forest City SFZ will be the first location in Malaysia to offer a 0% tax rate for Family Offices (FO). The incentives provided are comprehensive, addressing corporate and personal tax rates, stamp duty exemptions on property transfers, local operating expenditure requirements, and mandates for employing local staff with minimum monthly salaries.

For financial institutions, insurance and Takaful companies, and other qualifying institutions, foreign exchange flexibilities are available without limits on investments in foreign currency assets sourced from non-residents or abroad. There are also no restrictions on offshore borrowing to finance activities outside or within the zone. These flexibilities are initially valid for five years, with the possibility of a five-year renewal subject to Bank Negara Malaysia’s (BNM) approval.

Talent Retention and Broader Goals

Talent retention incentives for individuals working in the Forest City SFZ include 50% stamp duty exemptions on property transfers and property loans for Sale and Purchase Agreements (SPAs) until 2034, along with a 0% Real Property Gain Tax (RPGT) for foreigners after five years (compared to the current 10%). The 15% individual tax rate for knowledge workers aligns with the incentives offered under the Returning Expert program in Iskandar Malaysia (IM).

These measures aim to spark initial interest and develop the potential of Forest City SFZ as a global financial hub, supporting broader incentives and initiatives for the Johor Special Economic Zone (JS-SEZ). They contribute to Johor’s aspiration to become a developed state by 2030, aligning with national masterplans for economic transformation. The promotion of financial global business services, including financial technology, enhances incentives under the Malaysia Digital (MD) initiative. The Forest City SFZ will also broaden the investment landscape, complementing the Ministry of Finance’s GEAR-uP initiative, which encourages partnerships between foreign funds and government-linked investment corporations for high-growth, higher-value projects.

Next on the agenda is the Budget 2025, which will be tabled on October 18, alongside the finalization of the Johor Special Economic Zone (JS-SEZ) agreement expected by November. As noted by Johor Chief Minister Onn Hafiz Ghazi at the ASEAN Conference 2024, the fiscal incentives for the JS-SEZ will build upon the existing offerings from the Iskandar Regional Development Authority (IRDA). Current incentives include a 10-year Pioneer Status and a 100% tax exemption on statutory income for selected economic sectors and activities.

To recap, the Unity Government announced plans for a Special Financial Zone (SFZ) in Iskandar Malaysia (IM) during the retabling of Budget 2023 on February 24, 2023. Forest City was officially granted SFZ status on August 25, 2023, which included several incentives and the extension of these incentives in IM to Forest City, such as a special income tax rate of 15% for skilled workers, as well as multiple-entry visas and expedited entry for workers from Singapore.

The JS-SEZ will be closely integrated with the Forest City SFZ to enhance investment opportunities, job creation, and development projects in Johor. The tailored incentives and regulations associated with Forest City’s SFZ status are designed to promote financial innovation and entrepreneurship, positioning it as a global hub for finance and trade. The SFZ aims to establish a new financial ecosystem that collaborates with Singapore, drawing parallels to the development models of Shenzhen and Hong Kong. This cooperative approach will create a financial “dual-core engine,” with the potential to drive growth across the ASEAN region. Meanwhile, the JS-SEZ will prioritize high-technology manufacturing industries.

Next to watch will be Budget 2025 that will be tabled next month (18 Oct) and final JS-SEZ agreement that will cover broader incentives for other non-financial sectors (by Nov). As highlighted by Johor Chief Minister Onn Hafiz Ghazi at the ASEAN Conference 2024, the fiscal incentives for JS-SEZ will leverage on existing Iskandar Regional Development Authority’s (IRDA) offerings (link). Some of the existing incentives include 10 years Pioneer Status and tax exemption at 100% of statutory income for selected economic sectors and activities.

To recap, the Unity Government announced its plan to create a Special Financial Zone (SFZ) in Iskandar Malaysia (IM) during the retabling of Budget 2023 on February 24, 2023, while Forest City was officially granted SFZ status on August 25, 2023. This included several incentives, along with the expansion of existing incentives from IM to Forest City, such as a special income tax rate of 15% for skilled workers, as well as multiple entry visas and fast-track entry for workers from Singapore.

The JS-SEZ would be closely linked with the Forest City SFZ to bring more investment opportunities, job creation, and development projects to Johor. Forest City’s SFZ status, with its tailored incentives and regulations, will foster financial innovation and entrepreneurship, making it a global hub for finance and trade. The SFZ is expected to create a new financial ecosystem that is complementary and cooperative with Singapore, similar to the development models of Shenzhen and Hong Kong. This complementary cooperation will form a financial “dual-core engine” with the potential to drive growth into the rest of ASEAN. Meanwhile, the JS-SEZ will focus on high-technology manufacturing industries.

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