Malaysia to launch special financial zone in Forest City to woo investments, stimulate economic growth

[KUALA LUMPUR] Forest City in Johor is set for a revival as the Malaysian government prepares to launch a special financial zone (SFZ) aimed at revitalising the area with an array of fiscal and non-fiscal incentives.

The launch, taking place on Friday (Sep 20), will introduce a slew of incentives designed to attract investment and stimulate economic growth, and promises to create vibrancy in Forest City. The launch event will be attended by Malaysia’s Second Finance Minister Amir Hamzah Azizan.

Analysts anticipate that the forthcoming incentives will include corporate tax exemptions and special rates tailored to approved economic activities, alongside preferential income tax rates for high-skilled labour. Additionally, they expect stamp duty waivers, as well as a reduced rate for instruments of transfer for properties and shares.

An analyst, who requested to stay anonymous, said there may be incentives to promote the establishment of operations offering a range of financial services, including back offices and family offices.

He noted that Forest City could capitalise on its advantages – such as its proximity to Singapore, the lower cost of living in Malaysia and favourable currency exchange rates – to attract investors.

“This influx of service providers is expected to draw more residents and workers to Forest City, enhancing the vibrancy of a development often perceived as a ‘ghost city’,” he added.

Forest City, a US$100 billion development encompassing four artificial islands in the Strait of Johor, aims to house 700,000 people by 2035. It was developed through a partnership between China’s Country Garden Group and Esplanade Danga 88, a private firm backed by the Johor government and the Sultan of Johor.

Despite its ambitious design, the project has faced challenges in attracting both residents and businesses, with only 1 per cent of the total development currently occupied.

Non-fiscal incentives

Neoh Jia Man, portfolio manager at Tradeview Capital, believes that attractive tax incentives, such as a tax rate lower than Singapore’s or the elimination of capital gains tax on foreign-sourced income, will be pivotal for the success of the SFZ.

Beyond fiscal policies, he anticipates some announcements on relaxed licensing requirements for financial firms and streamlined visa processes for skilled financial professionals.

“It would be challenging for Forest City to position (itself) as a regional financial hub, especially with Singapore’s dominance. However, it could instead aim to serve as a complementary financial centre, acting as a satellite to Singapore and Kuala Lumpur,” he told The Business Times.

On the potential of family offices, he noted that Forest City has the potential to become a hub for these entities, but this requires the government to establish a dedicated regulatory framework tailored specifically for family offices.

“Unlike back offices that prioritise large workforces and lower operating costs, family offices focus on favourable tax structures and minimal compliance obligations,” he added.

The plan for an SFZ in Forest City was announced by Malaysian Prime Minister Anwar Ibrahim on Aug 25, 2023, when proposing various incentives to boost investment in Johor, including multiple-entry visas, fast-track entry for workers commuting from Singapore and a flat income tax rate of 15 per cent for knowledge workers.

SFZ expected to double Johor’s GDP

Lee Ting Han, Johor’s investment, trade, consumer affairs, and human resources committee chairman, on Monday indicated that additional incentives would be extended to financial institutions, including insurance companies and fund management firms.

Johor Chief Minister Onn Hafiz Ghazi previously stated that the Forest City SFZ should encompass the banking and finance sectors, along with domestic and international business services.

He expects the SFZ’s establishment in Forest City to double the state’s gross domestic product and generate thousands of job opportunities.

Johor is the third-largest economy in Malaysia, accounting for about 9.5 per cent of Malaysia’s GDP, which was valued at RM148.2 billion (S$45.5 billion) in 2023. The services sector, which includes finance, has rapidly grown, contributing 84 per cent to Johor’s GDP, according to RHB Research.

In August, Country Garden Pacificview signed a memorandum of agreement with South Korean entertainment company GG56 Korea, for the development of Malaysia’s first Korean Culture Town in Forest City.

The project aims to transform the area into a vibrant hub celebrating Korean culture, including K-content production studios and an international cultural district.