Malaysia: Economic development and growth in Johor — insights into the Forest City SFZ and Johor-Singapore SEZ

29 Jul 2024    3 minute read

In brief

Johor, a key economic state in Malaysia, is poised for significant growth, driven by the announcement of the Johor-Singapore Special Economic Zone (SEZ) and the Forest City Special Financial Zone (SFZ). These initiatives are designed to accelerate economic growth, positioning Johor ahead of other Malaysian states. The passage of five amendment Bills in the Dewan Rakyat (lower house of Parliament) on 17 July 2024 and Dewan Negara (upper house of Parliament) on 25 July 2024 signifies the government's commitment to developing the SFZ. While there are additional legislative stages before the amendment Bills are passed into legal effect, businesses may take into account the proposed incentives in Johor when considering their investments in the Southeast Asian region.

Contents

The Forest City SFZ

Distinct from the SEZ, which is a collaboration with Singapore, the Forest City SFZ, announced by Prime Minister Datuk Seri Anwar Ibrahim, aims to reduce business costs through various initiatives. In recent times, Johor Menteri Besar Datuk Onn Hafiz Ghazi has expressed hope that the special incentives for the Forest City SFZ will be finalised by August 2024.

Although the full details of the incentives are pending, five amendments Bills — the Customs (Amendment) Bill 2024, the Excise (Amendment) Bill 2024, the Free Zones (Amendment) Bill 2024, the Sales Tax (Amendment) Bill 2024, the Service Tax (Amendment) Bill 2024 — have been passed by the Dewan Rakyat and Dewan Negara to legislate special tax, customs and duties provisions for Pulau 1, Forest City.

The proposed amendments aim to promote economic growth within Pulau 1, Forest City, by excluding it from the principal customs area, aligning matters on customs duties, sales tax and service tax with its status as a place outside the principal customs area. Other places in Malaysia that are already outside the principal customs area include the islands of Labuan, Langkawi, Tioman and Pangkor.

Amongst others, the amendments would allow the Minister of Finance to exempt particular goods imported into Pulau 1, Forest City, from import duties and sales tax. These special provisions for Pulau 1 differ from those for locations outside the principal customs area such as Labuan, Langkawi, Tioman and Pangkor, where typically no duties are payable on all goods imported into or exported from these islands unless declared otherwise by the Minister. This distinct approach for Pulau 1 could be part of the government's plan to allow flexibility in tailoring tax and customs treatments based on the targeted industries for future development in the SFZ.

Regarding service tax, service tax will not be charged or levied on any taxable services provided within Pulau 1 or between Pulau 1 and other designated areas and/or special areas, unless the Minister of Finance declares otherwise.

Developments on Johor-Singapore SEZ

In our client alert from 19 January 2024, we explored what businesses can expect following the signing of the memorandum of understanding between Malaysia and Singapore. Since then, there has been a notable increase in interest from businesses considering investing in Johor.

The SEZ, under finalisation, is proposed to target the electrical and electronics sector, the medical and healthcare sector, and the aviation and other manufacturing sectors. Further, Malaysia's focus on becoming a major player in the data centre and semiconductor industries, combined with Singapore's efforts to attract investments from semiconductor giants leveraging on the AI wave, underscores the strategic importance of this collaboration that can tap into both Singapore's international financial centre and Johor's larger land mass, power, water, IT infrastructure and trained workforce.

In relation to the economic and non-economic incentives for the SEZ, Malaysia has expressed that it intends to finalise plans and sign a comprehensive agreement with Singapore by September 2024 and that there are incentives to be announced in the Budget 2025, which is scheduled to be tabled on 18 October 2024.

What's next?

The establishment of the SEZ and the SFZ present significant opportunities for businesses seeking to expand in Southeast Asia. With robust government support and the upcoming Budget 2025, we anticipate further announcements and legislative developments in the second half of 2024, which may further spur investments in Johor. With Johor's strategic location being of close proximity to Singapore, it can be a good location for companies looking to expand in this region or as part of their China Plus One strategy.

For more detailed information or to discuss specific opportunities, please do not hesitate to contact our team.

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Contact Information
Adeline Wong
Partner
Kuala Lumpur
Read my Bio
adeline.wong@wongpartners.com
Yvonne Beh
Partner
Kuala Lumpur
Read my Bio
yvonne.beh@wongpartners.com
Anlynn Ng
Senior Associate
Kuala Lumpur
anlynn.ng@wongpartners.com

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