Forest City’s family office gambit

WILL “ghost town” Forest City and its quest to be the wealth management centre for super-rich families live up to the high expectations?

With a 0% tax rate for family offices as announced recently, the expectation is that the Forest City Special Financial Zone (SFZ) will be a magnet for international capital.

Indirectly, this is an open challenge to Singapore that has been the preferred destination in South-East Asia to set up family offices.

Among the world’s top billionaires that have reportedly set up a family office in Singapore are Indian tycoon Mukesh Ambani and Google co-founder Sergey Brin.

However, in recent years, Singapore and even Hong Kong, another Asian destination for family offices, have become expensive to do business.

It is for this very reason that Portcullis Group, which provides family office services, moved its back office for Singapore and Hong Kong to Kuala Lumpur.

Its president David Chong is also keen to establish his own family office in Forest City.

While the SFZ idea looks neat on paper, the real challenge is the execution and the creation of an ideal environment for family offices to thrive.

More importantly, Forest City SFZ should not be allowed to become another Labuan, a classic case of how an international offshore financial centre (IOFC) designed in the 1990s failed to live up to expectations.

Labuan IOFC is a great example of why tax incentives alone cannot guarantee the success of a financial centre.

Also, as much as the government wants to breathe life into Forest City, why should it be the only location in Malaysia to enjoy incentives for family offices?

Why can’t family offices be set up in Kota Baru or Kota Kinabalu and still be eligible for the zero-tax rate?

Tradeview Capital chief invesment officer Nixon Wong says the zero-tax rate benefit for family offices must be extended to the entire nation in stages.

Wong, who is positive on the new development, tells StarBiz 7 that Forest City should learn from the mistakes of Labuan IOFC.

“Unlike Labuan IOFC, Forest City should not only focus on finance and the tax incentives to thrive. It must promote overall economic activities, including on the residential front.”

Forest City, which is located in Tanjung Kupang, comprises four man-made islands and is a joint venture between Country Garden and Esplanade Danga 88 Sdn Bhd, which is a Johor state government subsidiary.

Family offices setting up its presence in Pulau 1 of Forest City will be eligible for the 0% tax rate for up to 20 years.

A key attraction of the SFZ is its proximity to Singapore. The journey from Forest City to the CIQ Second Link takes approximately 20 to 30 minutes.

Another factor that appeals to wealthy individuals is the fact that Forest City SFZ requires family offices to have a minimum asset under management (AUM) of RM30mil to enjoy the tax incentive.

In comparison, Singapore requires family offices to have a minimum AUM of S$10mil (approximately RM34mil) under the Onshore Fund Tax Incentive Scheme (Section 13O), and S$50mil under the Enhanced-Tier Fund Tax Incentive Scheme (Section 13U).

Quoting official figures, venture capitalist Raja Hamzah Abidin Raja Nong Chik says the number of single family offices in Singapore increased from 400 in 2020 to 1,650 in August 2024.

“The potential of some of these family offices, even the smaller ones, to set up a base in Malaysia is a golden opportunity indeed,” notes the RHL Ventures Sdn Bhd chief executive officer.

Meanwhile, RDS Partnership head of tax, sales and service ta and customs S. Saravana Kumar says his law firm’s wealthy clients – especially those from mainland China – have shown great interest in the SFZ.

He believes that some of the high-net worth individuals who have parked their monies in Singapore for years including tycoons from Malaysia, China and Indonesia, may consider moving the family office into Forest City.

“But, a key concern is the policy flip-flop in Malaysia as seen in the Malaysia My Second Home programme.

“The government’s previous use of the Inland Revenue Board to raid certain wealthy individuals just based on suspicions may also deter some interest in the SFZ, fearing punitive measures in the future.

“The very reason why Singapore is successful with family offices is because of its ability to uphold the rule of law, avoid policy flip-flops and no multiple guidelines that create unnecessary bureaucracy,” he adds.

For the Forest City SFZ to thrive and maintain its credibility, Saravana says the element of money laundering must be removed.

Both Saravana and Nixon called for stringent enforcement of the Anti-Money Laundering Act.

Despite the positive initial response to the SFZ, Raja Hamzah recommends the government to subsidise some of the set-up costs, in order to incentivise at least the first batch of family offices to move in.

He also argues that the minimum operating expenditure requirement of RM500,000 annually for family offices seems to be “on the high side”.

Wong of Tradeview Capital, however, disagrees.

According to him, the salaries incurred by the family offices alone will at least be RM240,000, not including other operational costs.In order to enjoy the zero-tax rate, a family office vehicle 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.

“The RM500,000 requirement is reasonable,” says Wong.

However, he points out that the requirement did not specify whether the two employees must be physically present in Forest City.

“If this is not clarified, the super-rich families may just set up a satellite office in the SFZ to enjoy the tax benefit, but operate from their headquarters elsewhere.

“This will not benefit SFZ’s overall development.”

He further highlights the insufficient details on how the government defines “investment professionals” for the family offices.

Wong also advocates for local fund managers to play a role in this initiative.

“This will make the whole initiative more conducive, not just improving Forest City per se, but also benefiting the entire capital market.”

Meanwhile, Raja Hamzah states the requirement of the Forest City SEZ to hire investment professionals ensures a positive effect on human capital and jobs to the Johor ecosystem.

In addition, he also urges both the public and private sectors to make the SFZ more livable.

“If you look at Labuan now, the funds who set up there generally just look to meet substance requirements, rather than to build a proper business in Labuan.”

Saravana, on the other hand, urges the government to share a consultation paper with all stakeholders before more details on the family office scheme is announced.

“This should have been done before the tax incentive was announced,” he says.