Unpacking wealth with SFO

THERE has undeniably been a boom of sorts in Johor, catalysed by the economic zoning activity with Singapore.

Topping that now must be the gazetting of the tax rules related to the single family office (SFO) scheme anchored in Forest City – the reclaimed island in the southern state, owned and developed by China’s Country Garden in partnership with the Johor state government.

To the uninitiated, family office schemes are tax-friendly programmes that some countries create to attract rich families to manage their wealth from. Countries do this as it creates demand for a plethora of services ranging from legal, financial, and administrative, with other multiplier effects.

The criteria also usually requires the family offices to sink some of that capital into domestic businesses, thus boosting the local economy. Singapore and Hong Kong are the leading players in this part of the world.

Malaysia is not new to the game, having established the Labuan offshore financial centre since 1990. But the Labuan International Business and Financial Centre is designed to support foreign currency transactions and businesses.

The new SFO incentive scheme in Johor is ringgit-based and is an onshore facility.

“The two can work together nicely, for Malaysia to gain more traction as a family office centre,” notes one industry observer.

So far, the Securities Commission (SC), which is regulating the SFO scheme, has given conditional approvals to six families, mostly Malaysians, who plan to bring in a total of around RM400mil in assets under management (AUM) into the scheme.

To recap, one key draw of the scheme is that it promises zero taxes. But to participate, families must allocate a minimum of RM30mil, and spend a minimum of RM500,000 a year in operational costs.

They will need to rent office space in a dedicated building in Pulau 1 in Forest City.

The will also need to hire two full-time and suitably qualified professionals who will need to be physically present at that location, at least half the number of working days of the year.

The operational costs can include management fees paid to a company of the family that manages that AUM they are allocating into the scheme.

That RM500,000 per year sum goes up to RM650,000 for the subsequent 10 years. Another requirement is that 10% of that AUM has to be invested in prescribed assets in Malaysia.

With so many requirements, why would someone bother with this scheme? One driver is tax related.

Consider the case of a family office that actively invests in the stock market. Do note that there is no capital gains tax imposed on gains made from trading activity on Bursa Malaysia.

However, there is always the possibility that the tax man could make a case that a family office’s active trading activity be deemed a business activity and hence be subject to income tax or corporate tax.

Another situation relates to dividend tax. Malaysia has proposed to impose a new 2% dividend tax starting from the year of assessment 2025.

The 2% may not apply to the average investor but to a major company owner, it will translate into a lot of money.

Just use the example of a good dividend-paying company, United Plantations Bhd.

The Bek-Nielsen founding family owns around 50% of the company. United Plantations paid out RM709mil in dividends in financial year 2024, which means the Bek-Nielsen family would have received around RM355mil in dividends.

By next year, around RM7mil of that could go to the taxman, going by the 2% dividend tax.

Family offices also facilitate the setting up of family trusts for future generations to reap the benefits. Such trusts will do well to enjoy the tax benefits that the SFO scheme offers.

Unlocking private capital

But if the wealthy get to benefit from the SFO structures, what’s in it for the rest of the country?

One benefit is the unlocking of private capital. Remember, 10% of the AUM needs to be invested locally, and the prescribed assets include shares, bonds and investment funds.

Additionally, if the family office invests into companies taking part in the Johor-Singapore Special Economic Zone (JS-SEZ) or those aligned with Malaysia’s New Industrial Master Plan 2030, then the investment is counted with a 1.5 times multiplier when calculating the 10% requirement.

Linked to that is the fact that the SFO structure fills a gap in relation to foreign direct investment. When foreign companies invest in Malaysia, say, by running successful manufacturing plants here, the tendency is to repatriate those profits back to their home country or to Singapore.

Now, they will have the option of the new SFO scheme. The same will apply to companies investing into the JS-SEZ, which is close to Forest City.

One individual very familiar with the concept of family offices is David Chong Kok Kong of the Portcullis Group, who has been described by the Singapore Academy of Law as “the guru of Asian family offices”.

In April, Chong’s own family office, and that of billionaire investor Tan Sri Chua Ma Yu, were the first two to receive conditional approvals from the SC for the new SFO scheme.

Chong says he is so bullish about the Malaysian SFO plan that he has taken up a few units at the designated building in Forest City where a team is ready to serve potential clients of the SFO programme.

He has also set up a new office in Kuala Lumpur, shifting a fair bit of his operations there from abroad.

“Setting up trusts requires a fair bit of expertise and knowledge and we plan to play a significant role in guiding families through this process here,” he tells StarBiz 7.

According to Ramesh Manimekalanandan, who heads the products and investments unit in Maybank’s wealth management division, the bank saw strong early interest and is happy to have facilitated the very first SFO approval.

“Since then interest has remained strong and exceeded our expectations as clients are attracted by the scheme’s unique propositions and incentives, which offer a structured legacy and investment solution,” he adds.