Tech startups, factories may benefit most from Johor-Singapore ecozone

These companies will enjoy a much lower 5% corporate income tax.

Companies with revenues of less than $1.1b such as tech startups and small manufacturers are expected to benefit the most through lower taxes from a plan to boost business ties between Singapore and Johor, Malaysia through a special economic zone (ecozone), analysts said.

These so-called growth-phase companies poised to locate in the Johor-Singapore Special Economic Zone are not subject to the global minimum tax on multinational enterprises, Kirsty McMillan, a tax expert at Forvis Mazars in Singapore, told Singapore Business Review.

The tax rules, approved in December 2021 by 141 territories, require big companies with sales of at least $1.1b to pay a minimum 15% global tax rate, regardless of their operating location.

Big companies that are taxed 5% in Johor must pay the 10% difference under the rules, which could affect about 1,800 multinational companies in Singapore, according to KPMG. Johor's special tax rate is significantly lower than 24% in Malaysia and 17% in Singapore.

Tech startups focused on software development, artificial intelligence and blockchain solutions, as well as small and medium-sized manufacturers of specialised components for the electronics and automotive industries would benefit from the tax incentives under the Johor-Singapore Special Economic Zone deal signed on 7 January, McMillan said.

The ecozone is expected to transform the border region between Malaysia’s Johor state and Singapore into a premier economic hub. It is poised to play a pivotal role in boosting trade, investment, and innovation across Southeast Asia, with a focus on sectors such as electronics, financial services, business-related services and healthcare, according to law firm Rajah & Tann Singapore LLP.

Companies like SP Manufacturing Pte Ltd., a Singapore-based manufacturer that has expanded into Johor with the opening of a new facility in Senai in October, are expected to gain from improved cross-border links through passport-free clearance and the upcoming Rapid Transit Link System between Singapore and Johor.

“A single transshipment permit and the upcoming digital clearance processes significantly simplify cross-border logistics, reducing delays and costs associated with Customs procedures,” McMillan said.

Manufacturers and logistic companies are likely to see the earliest gains from the agreement, she added.

“Manufacturing will thrive due to Johor’s lower costs and ample land, supporting growth in  electronics, automotive, and precision engineering,” Alvin Lee, country CEO at Maybank Singapore, told Singapore Business Review.

The manufacturing sector is a key focus in six of the nine flagship zones of the Johor-Singapore Special Economic Zone.

More FDI

Lee said Johor is emerging as an alternative hub for manufacturing, warehousing, and distribution, particularly for Chinese companies seeking to diversify supply chains amidst tensions with the US. Chinese firms are actively exploring opportunities in the ecozone, he added. 

US and European companies are also likely to consider the special ecozone to expand their manufacturing footprint in Asia, McMillan said. She expects labor-intensive and capital-heavy operations to move to Johor.

The renewable energy and digital economy sectors also stand to gain from the economic zone.

Lee said the ecozone is likely to draw investments in solar and sustainable energy projects, along with initiatives for green building solutions and energy-efficient technologies.

He noted that Johor is experiencing a boom in data centres, having attracted about $5.4b (US$4b) of  investments in 2024. “Some of these global multinational companies are demanding that the electricity be generated by renewable energy, which is catalysing more investments in green power projects.”

Lee also expects Singapore's technological strengths and Johor's resources to drive progress in information technology services, data centers, fintech, and cybersecurity through the ecozone’s infrastructure.

Singapore as a whole is expected to benefit from the economic zone by giving it access to cost-effective resources, land, and labor, allowing its industries to expand, Lee said.

McMillan expects Singapore and Johor to capture more foreign direct investments (FDI) through the ecozone.

“With the special economic zone, Singapore can leverage Johor’s lower-cost environment to attract investments while maintaining its edge in high-end manufacturing, research, and development,” she said.

“In the long run, this collaboration could help Singapore attract businesses that value regional efficiency and integration, reinforcing its position as a hub for advanced industries,” she added.