Malaysia has unveiled several tax incentives representing a pivotal development in its economic landscape, enhancing its position as a desirable hub for wealth management, particularly for affluent families across the region. On 20 September 2024, Malaysia’s Minister of Finance II announced a suite of incentive packages aimed at boosting economic growth in the Forest City Special Financial Zone (SFZ) in a bid to augment Forest City’s position as a preferred investment destination. (1)

 The suite of tax incentives consists of a new single family office scheme (SFO Scheme), concessionary corporate tax rates, special income tax rates for skilled workers, incentives for financial companies and multiple entry visas. (2)

These incentives are expected to attract businesses, financial institutions and high net worth individuals. (3)

It is natural for affluent families with significant wealth to seek to manage their financial affairs in a way that aligns with the family’s interests, goals and values. As such, it has become increasingly more common for these families to establish an SFO. (4)

To be specific, an SFO is a corporate vehicle, wholly-owned or controlled by members of a single wealthy family, created to exclusively manage the assets, investments and long-term interests of that family. (5)

Malaysia is now seeking a slice of the market of SFOs in a likely attempt to follow the SFO boom in Singapore, which managed $1.3 trillion in offshore assets in 2023. To put things into perspective, the estimated number of SFOs globally is projected to grow to more than 10,720 by 2030, giving rise to an estimated total of $5.4 trillion in managed assets. (6)

The SFO Scheme is designed to attract SFOs to the Forest City SFZ, positioning the area as a significant financial and economic hub. It is anticipated that the introduction of the SFO Scheme will have a spillover effect on Malaysia’s economy, and will enhance its investor base by attracting regional and Malaysian families to manage their wealth from Forest City. (7)

Attracting these high net worth families into the country will trigger an increase in capital inflows, which can be channelled into domestic investments across various sectors. (8) According to Malaysia’s Securities Commission chairman, Dato’ Mohammad Faiz Azmi, the projected economic multiplier from these capital inflows is estimated to range from RM3.9 billion ($879.1 million) to RM10.7 billion, which also includes the positive effects on creation of skilled employment and the demand for other ancillary services. (9)

The incentive provides for a zero per cent concessionary tax rate on income generated by eligible investments from the Single Family Office Vehicle (SFOV). An SFOV is typically a corporate vehicle which is wholly-owned, directly or indirectly, by one or more individuals from a single family and established solely for the purpose of holding the investments of the family members. (10)

This scheme will offer benefits for an initial period of 10 years (Initial Period), with the option for a 10-year extension (Additional Period), contingent upon specific conditions. In this regard, to qualify for the incentive for the Initial Period:

-- The SFOV must be a new investment holding company incorporated in Malaysia and seek pre-registration with the Securities Commission on the eligibility of the tax incentives; 
-- The management company or SFO which is a related company of the SFOV must be established and operating in Pulau 1, Forest City Special Financial Zone with at least one investment professional with a minimum monthly salary of RM10,000; 
-- The SFOV must hold assets under management (AuM) of at least RM30 million, and meet minimum local investment in eligible and promoted investments of at least 10 per cent of AuM or RM10 million, whichever is lower; 
-- The SFOV must incur an annual operating expenditure (OPEX) of a minimum of RM500,000 locally; and
-- The SFOV must employ a minimum of two full-time employees with each employee receiving a minimum monthly salary of RM10,000, and of whom at least one is an investment professional. 

On the other hand, to qualify for the Additional Period, the SFOV must fulfill higher substance and financial requirements as follows:

--The SFOV must hold AuM of at least RM50 million, and meet minimum local investment in eligible and promoted investments of at least 10 per cent of AuM or RM10 million whichever is higher; 
--The SFOV must incur an annual OPEX (30 per cent higher than during the Initial Period) of a minimum of RM650,000 locally; and 
-- The SFOV must employ a minimum of four full-time employees. 

The nature of an SFO generally involves carrying out certain regulated activities, such as fund management or financial planning, which are typically subject to licensing requirements under the Capital Markets and Services Act 2007. Notwithstanding, the Securities Commission Malaysia (Securities Commission) has clarified that an SFO may be exempt from such licensing requirements if they exclusively provide services to a related SFOV. (11)

The SFO Scheme will be coordinated by the Securities Commission and aims to be operational by the first quarter of 2025. In this regard, the Securities Commission is currently in discussion with relevant stakeholders and will provide detailed conditions for the scheme in the coming months. 

Additional tax breaks and incentives
As noted above, Malaysia is offering additional tax breaks as part of the incentive packages aimed at positioning Forest City as a magnet for international capital. Beyond the SFO Scheme, the Malaysian government has announced corporate tax rates ranging from zero to 5 per cent for businesses, particularly those in sectors such as global business services and financial technology. (12)

A reduced income tax rate of 15 per cent for skilled professionals is also on offer, which will encourage talent attraction and retention within the region. (13)

Furthermore, financial firms operating within the Forest City SFZ will benefit from various incentives, including deductions for relocation costs and enhanced industrial building allowances. (14)

Will Malaysia’s competitive incentives be enough?
While the tax incentives are considered positive developments for attracting family offices, financial technology, shared services and digitalisation to Malaysia, commentators are concerned that they may not be enough for business to thrive within the SFZ. (15)

Economists acknowledge that the tax breaks and incentives for Forest City’s SFZ are competitive, but remain sceptical about whether they will be enough to entice family offices to relocate, particularly those situated in Singapore. (16) In this regard, Mr Chee Hong Tat, Singapore’s Minister for Transport and Second Minister for Finance, noted that wealth owners tend to choose Singapore for many reasons, including its strong rule of law, robust and predictable regulatory regime, as well as its vast range of wealth managers and professional service providers, the safe and family-friendly environment and its world class education and healthcare systems. (17)

It appears that Forest City’s competitive advantage may hinge on the Securities Commission issuing detailed conditions of the SFO Scheme, which are expected to clarify its scope and investment eligibility. These clarifications will be crucial in shaping Malaysia’s competitiveness in the family office landscape. (18)

As we track closer towards the start of the SFO Scheme, it will be interesting to observe whether the incentive will entice high net worth families to consider Malaysia as a viable alternative for their family office needs.

We will continue to watch this space.

Footnotes
1, Datuk Seri Amir Hamzah Azizan, “Keynote Address at Forest City Special Financial Zone Tax Incentive Announcement Ceremony” (Speech, Securities Commission Malaysia, 20 September 2024).
2, Ibid; see also Bin Hau Lee, “Malaysia: Launch of the Forest City Special Financial Zone and Securities Commission FAQs on Family Office” (DFDL, 26 September 2024).
3, Datuk Seri Amir Hamzah Azizan, “Keynote Address at Forest City Special Financial Zone Tax Incentive Announcement Ceremony” (Speech, Securities Commission Malaysia, 20 September 2024).
4, KhaiLing Yau Chambers, “Malaysia’s New Single Family Office Incentive Scheme’” (14 October 2024).
5, Securities Commission Malaysia, “Frequently Asked Questions – Single Family Office Scheme” (issued 23 September 2024).
6, Datuk Seri Amir Hamzah Azizan, “Keynote Address at Forest City Special Financial Zone Tax Incentive Announcement Ceremony” (Speech, Securities Commission Malaysia, 20 September 2024).
7, Securities Commission Malaysia, “SC Outlines Family Office Incentive Scheme” (Media Release, 23 September 2024).
8, Datuk Seri Amir Hamzah Azizan, “Keynote Address at Forest City Special Financial Zone Tax Incentive Announcement Ceremony” (Speech, Securities Commission Malaysia, 20 September 2024).
9, Securities Commission Malaysia, “SC Outlines Family Office Incentive Scheme” (Media Release, 23 September 2024).
10, Ibid.
11, Ibid; see also KhaiLing Yau Chambers, “Malaysia’s New Single Family Office Incentive Scheme” (14 October 2024); Bin Hau Lee, "Launch of the Forest City Special Financial Zone and Securities Commission FAQs on Family Office” (DFDL, 26 September 2024).
12, Datuk Seri Amir Hamzah Azizan, “Keynote Address at Forest City Special Financial Zone Tax Incentive Announcement Ceremony” (Speech, Securities Commission Malaysia, 20 September 2024).
13, Ibid.
14, Ibid.
15, Zunaira Saieed, “Malaysia unveils zero tax for family offices in Forest City, in bid to revive Johor project” The Straits Times (online, 20 September 2024) "Malaysia unveils zero tax for family offices in Forest City, in bid to revive Johor project" The Straits Times.
16, KhaiLing Yau Chambers, “Malaysia’s New Single Family Office Incentive Scheme” (14 October 2024)
17, Chee Hong Tat, “Chee Hong Tat: Building a stronger tomorrow – family offices in our flourishing wealth management landscape” (Speech, Global-Asia Family Office Summit, 16 September 2024).
18, KhaiLing Yau Chambers, “Malaysia’s New Single Family Office Incentive Scheme” (14 October 2024); see also Wong & Partners, “Malaysia: Forest City Special Financial Zone – New family office incentive scheme” (Media Release, 30 September 2024).