(TAX UPDATE) New ESG Tax Deduction in Malaysia … Finally Gazetted.

During the 2024 Malaysian Budget announcement back in October last year, the Government introduced a new tax incentive aimed at encouraging companies to step up their Environmental, Social, and Governance (ESG) initiatives.

Fast forward to 23 June 2025, the much-awaited Income Tax (Deduction for Expenditure in relation to Environmental Preservation, Social and Governance) Rules 2025, known as the Rules, have finally been gazetted.

What does this mean for businesses, especially SMEs? Here’s a simple breakdown.

What Is This New ESG Tax Deduction About

The Rules provide a tax deduction of up to RM50,000 per year, covering qualifying ESG-related expenses incurred from the year of assessment 2024 to 2027.

The ESG criteria here are broad, focusing on sustainability, ethical business conduct, environmental preservation, social responsibility, and good governance practices.

Who Can Claim

The deduction applies to a wide range of taxpayers, including :

Financial Institutions such as banks, insurers, takaful operators, and others regulated by Bank Negara Malaysia or under relevant Acts
Companies and Labuan Companies
Micro Enterprises and SMEs as defined by the National SME Development Council

Importantly, only Malaysian tax residents can enjoy this benefit, and the expense must be incurred in generating business income in Malaysia.

What Expenses Qualify

The allowable deductions fall into three main categories:

First, ESG Reporting for Financial Institutions and Listed Companies
For banks and Bursa-listed entities, the following expenses qualify:

Validation, verification, and certification of ESG practices, greenhouse gas emissions, and ESG exposure
Subscription to ESG data tracking software or technology
Capacity-building for employees such as training and upskilling
Engaging consultants for ESG reporting

Second, Tax Governance and Transfer Pricing Compliance for Companies and Labuan Entities
Companies and Labuan companies can claim :

Costs to prepare Tax Corporate Governance Framework reports and appoint independent reviewers
Expenses for preparing contemporaneous transfer pricing documentation under the 2023 Transfer Pricing Rules

Third, E-Invoicing for Micro Enterprises and SMEs
Eligible expenses include:

Fees for developing customised e-invoicing software
Charges from external service providers for e-invoice implementation

But expenses at the planning stage or fees to issue e-invoices via the MyInvois Portal are excluded.

Key Limitations

The deduction is capped at RM50,000 per year
You cannot double claim. Expenses already deducted under Section 33 of the Income Tax Act 1967, exemptions under Section 127, or other specific tax rules cannot also enjoy this ESG deduction

Our Observations and Practical Takeaways

Let’s be honest, many taxpayers had already finalised or even submitted their 2024 tax filings when the Rules were gazetted on 23 June 2025.

If you fall into this group, good news, you can still revise your tax return to claim this deduction. But act fast the application to revise must be made within five years from the gazette date, based on the ITA provisions.

Also, this ESG incentive runs from YA 2024 to YA 2027 … only three years of assessment. Why such a short window? Commonly, these trial periods allow the Government to assess effectiveness before deciding to extend or modify the rules.

Lastly, we can’t help but highlight the irony. we often struggled to explain to clients why preparing transfer pricing documents is not tax-deductible. Now, under these Rules, TP documentation qualifies for deduction but only within this narrow ESG framework and subject to the RM50,000 limit.

Final Thoughts

This ESG tax incentive is a positive move to promote better sustainability, governance, and tax compliance, especially among SMEs.

But it comes with strict conditions, paperwork, and limitations. As always, tax incentives are never automatic … review your eligibility, compile your supporting documents, and consult your tax advisor early.

At KTP, we can assist with ESG reporting, e-invoice compliance, and understanding how this incentive fits into your broader tax planning.

If you need further clarification, feel free to reach out.

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