Malaysia: Forest City Special Financial Zone - New family office incentive scheme

30 Sept 2024    3 minute read

In brief

On 20 September 2024, the Minister of Finance II announced a new single family office incentive scheme (“FO Scheme”) as part of the broader incentive packages aimed at boosting the economic activities in the Forest City Special Financial Zone (“SFZ”). Forest City SFZ is the first location in Malaysia to offer the FO Scheme. The FO Scheme is designed to attract family offices to the Forest City SFZ, positioning the area as a significant financial and economic hub in Southeast Asia.

In essence, the FO Scheme allows a fund vehicle (“FundCo”) managed by a single family office (“SFO”) to enjoy a 0% concessionary tax rate on income generated from eligible investments. The incentive enjoyed by FundCo is valid for an initial period of 10 years and can be extended for another 10 years, if certain conditions are met.

The FO Scheme will be coordinated by the Securities Commission Malaysia (“SC”) and aims to be operational by the first quarter of 2025.

Contents

Conditions for the FO Scheme

In a media release and FAQ published on 23 September 2024, the SC has outlined the following conditions to be satisfied by FundCo in order to qualify for the FO Scheme.

Criteria for the initial period of 10 years

  • Location: Establish and operate a registered office in Pulau 1, Forest City SFZ.
  • Form of legal entity: New investment holding company incorporated in Malaysia, and seek pre-registration with the SC on the eligibility of the tax incentive.
  • Management company or SFO: Must be a related company of FundCo which is set up and operated out of Pulau 1, Forest City SFZ with at least one (1) investment professional with a minimum salary of RM 10,000. Note that the management company or SFO may not need to get certain licenses under the Capital Markets and Services Act 2007, such as for fund management, as long as it only provides services for its related corporation (i.e., FundCo).
  • Assets under management (“AUM”): Hold AUM of at least RM 30 million.
  • Investment criteria: Invest at least 10% of the AUM or RM 10 million (whichever is lower) locally in eligible and promoted investments.
  • Operating expenditure (“OPEX”): Minimum annual OPEX of RM 500,000 incurred locally.
  • Employees: Minimum two (2) full time employees with a minimum monthly salary of RM 10,000, and of whom at least one (1) is an investment professional.

Criteria for the additional period of 10 years

To extend the incentive period for another 10 years, FundCo is required to fulfill the higher substance and financial requirements, which include the following:

  • AUM: Holding an AUM of at least RM 50 million.
  • Investment criteria: Invest at least 10% of the AUM or RM 10 million (whichever is higher) locally in eligible and promoted investments.
  • OPEX: At least 30% higher than the annual OPEX locally spent during the initial period (subject to a minimum of RM 650,000).
  • Employees: Minimum four (4) full-time employees.

Please note that the FO Scheme is still developing and the SC has indicated that the detailed conditions for the FO Scheme will be made available by the first quarter of 2025. Although the procedure to apply for the FO Scheme has not yet been announced, interested applicants are welcomed to consult SC to confirm their eligibility for the incentive.

Closing Remarks

It is anticipated that the introduction of the FO Scheme will have a spillover effect on the country’s economy. By attracting family offices into the country, there could be an increase in capital inflows, which can be channeled into domestic investments across various sectors. The scheme could potentially stimulate the demand for financial services and lead to creation of high-skill job opportunities for local professionals.

It remains to be seen if the FO Scheme at Forest City SFZ will be a solid alternative to other established jurisdictions, such as Singapore and Hong Kong, for high-net-worth families looking to set up a family office in the region. While the initiative is welcomed as a step to boost investment and economic growth, further clarifications from the SC is required, particularly on the scope of the tax incentive and detailed conditions, to assess its attractiveness amongst high-net-worth individuals. Apart from the concessionary tax rate, other factors such as the rule of law, economic and political stability, and migration opportunities to Malaysia would also have an impact on the attractiveness of the FO Scheme.

The FO Scheme is susceptible to abuse if not properly regulated. There should be a proper screening procedure to ensure that family offices are not used as vehicles for tax evasion or money laundering activities. A robust framework with stringent compliance measures and transparent reporting requirements is required to mitigate such risks and maintain the integrity of the tax incentive scheme.

*Edmund Yee, Associate, has contributed to this legal update. 

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