(TAX UPDATE) Budget 2026 Malaysia : Tax Incentives Edition

(TAX UPDATE) Budget 2026 Malaysia : Tax Incentives Edition

By KTP Tax Team | 23 October 2025
Your trusted audit and tax advisors in Johor Bahru

www.ktp.com.my

Introduction

Malaysia’s Budget 2026, tabled on 10 October 2025, represents the fourth instalment of the “Ekonomi MADANI” framework, a roadmap balancing fiscal discipline with national growth.

While the total federal expenditure increases to RM470 billion, the fiscal deficit narrows to 3.5% of GDP, proving that the government is serious about sustainable development.

This year’s theme focuses on raising the ceiling by moving businesses up the value chain through technology, innovation, and sustainability, while raising the floor by improving rakyat welfare, inclusivity, and resilience.

For SMEs, the message is clear: transform or be left behind. Budget 2026 rewards those who adopt AI, automation, ESG, and inclusive hiring practices, aligning business growth with national priorities.

2. Foreign-Sourced Income (FSI) Exemption Extended to 2030

One of the most welcomed moves in Budget 2026 is the extension of the foreign-sourced income exemption.

Previously, companies, LLPs, trust bodies, and cooperatives enjoyed tax exemption on dividend income and gains from disposal of foreign assets received in Malaysia until 31 December 2026.

This exemption has now been extended to 31 December 2030, and the scope expanded to include trust bodies and cooperative societies.

This four-year extension provides certainty and stability for multinational businesses and investors who manage overseas investments. It encourages repatriation of profits to Malaysia, strengthening the Ringgit and supporting domestic reinvestment.

For SMEs with overseas ventures, especially those operating via Labuan, Singapore, or Indonesia, this is a chance to plan ahead for long-term tax efficiency.

3. Artificial Intelligence (AI) Training Deduction

AI is no longer just a buzzword. Budget 2026 introduces a special 50% additional tax deduction for MSMEs that invest in AI training recognised by the MyMahir National AI Council for Industry (NAICI).

Applications are open via TalentCorp between 1 January 2026 and 31 December 2027.

This incentive, given once every two years, directly supports SMEs in upskilling their workforce and embracing automation.

If your team learns to use AI in your operations, whether for accounting, logistics, HR, or customer service, you get a tax break.

For KTP clients in professional services, manufacturing, and logistics, this is a golden opportunity to offset training costs while future-proofing your team.

4. Venture Capital and Innovation Boost

The Budget provides a complete refresh of Malaysia’s Venture Capital (VC) ecosystem.

Venture Capital Companies (VCCs) will enjoy a 5% corporate tax rate on all income (except interest or profit income). They must invest at least 20% of their funds in local venture companies.
The incentive lasts for 10 years, or until the end of the fund’s life.
Venture Capital Management Companies (VCMCs) will be taxed at 10% on profit and management fees.
Individual shareholders of VCCs will enjoy full dividend exemption at the first level of distribution from YA 2025 to YA 2035.

The scope is widened to include Limited Liability Partnerships (LLPs) under the Labuan LLP Act 2010.

This structure puts Malaysia on par with regional VC hubs like Singapore, enabling startups and tech firms to access more funding locally.

For SMEs, this means easier access to venture money, provided your company has innovation or technology-based potential.

5. Tourism Incentives for Visit Malaysia 2026

The upcoming Visit Malaysia 2026 campaign receives a major boost through several new incentives.

  1. 100% tax exemption on incremental income from inbound tourism packages, provided operators bring in at least 1,000 foreign tourists per year.

  2. 100% tax exemption for organisers of international conferences, trade exhibitions, or incentive trips verified by MOTAC (Ministry of Tourism, Arts and Culture).

  3. 50% tax exemption for organisers of arts, cultural, or sports events involving foreign participants.

  4. Tax deduction up to RM500,000 for qualifying renovation and refurbishment costs by tourism project operators registered with MOTAC.

For tourism-related SMEs such as hotels, tour companies, and event organisers, this is the best time to upgrade, renovate, and go global.

This combination of tax relief and marketing support underlines how the government is banking on tourism as a key short-term GDP driver in 2026.

6. Sustainable and Responsible Investment (SRI) and Carbon Transition

Green financing remains a national focus. The SRI Sukuk and Bond Grant Scheme is enhanced and extended until 31 December 2028.

Key updates include:
100% grant (up to RM300,000) for external review costs (previously 90%).
Expanded to cover sukuk and bonds aligned with the ASEAN Taxonomy for Sustainable Finance.

This reinforces Malaysia’s green finance leadership in ASEAN.

Additionally, the government confirms that Carbon Tax will be introduced in 2026, starting with iron, steel, and energy sectors. This aligns with the National Energy Transition Roadmap (NETR) and the upcoming Climate Change Bill.

For manufacturers and energy-intensive businesses, this means carbon accountability is no longer optional. Early investment in energy efficiency, solar, or emission tracking can lead to significant future savings.

7. Accelerated Capital Allowance (ACA) and Infrastructure Incentives

The ACA is back and it’s generous.

Businesses can now claim:
20% initial and 40% annual allowance on heavy machinery, plant, or general machinery acquired from local manufacturers.
The same allowance applies to ICT equipment, software, and development-related fees.
Qualifying period: 11 October 2025 to 31 December 2026.

Additionally, for transport operators, installing Speed Limitation Devices (SLD) in heavy vehicles qualifies for 20% plus 80% ACA, up to RM4,000 per unit.

The government also proposes a 10% special deduction (capped at RM10 million) on renovation and conversion costs for turning commercial buildings into residential premises.

Together, these measures aim to stimulate construction, logistics, and local manufacturing, while encouraging businesses to buy Malaysian-made assets.

8. Education, Training and Inclusion Incentives

(a) Scholarship Incentives
Companies providing scholarships to Malaysian students can now include those pursuing professional certifications such as ACCA, CPA, and engineering qualifications.

The household income threshold for parents or guardians rises from RM10,000 to RM15,000 per month, and the incentive is extended until 2030.

(b) Hiring Senior Citizens and Vulnerable Groups
The double deduction for hiring senior citizens (aged 60 and above) and vulnerable individuals such as ex-convicts, parolees, and rehabilitated drug dependants is extended for another five years (YA 2026–2030).

(c) Training for Care Workers and OKU
Companies sponsoring training for care workers or persons with disabilities (OKU) can claim double tax deduction for YA 2026–2027.

These inclusivity measures highlight that Budget 2026 is not only about technology but also about building a compassionate economy.

9. Hospital Welfare and University Endowment Funds

Healthcare gets a tax facelift too.

Private hospitals are now allowed to set up Hospital Welfare Funds, managed by a company limited by guarantee. Income received by these funds will be tax-exempt, and donors can claim tax deductions on contributions.

Public university teaching hospitals can establish endowment funds, with tax deductions for cash contributions under Section 44(11D) of the Income Tax Act.

This marks a major step in bridging public-private collaboration in healthcare and higher education.

10. Agriculture and Food Security Incentives

Malaysia’s dependence on food imports is worrying and Budget 2026 aims to fix that.

Key incentives include:
100% income tax exemption for 10 years for companies undertaking new food production projects.
5-year exemption for expansion projects.
Automation and closed-house poultry systems qualify for 100% ACA and income tax exemption on the first RM10 million of qualifying cost.

These apply for applications submitted to the Ministry of Agriculture and Food Security (MAFS) between 2026 and 2030.

This is a significant incentive for agribusiness players, as it covers both domestic sales and export-oriented projects.

11. Anti-Corruption and Social Responsibility

The Government is serious about corporate integrity.

Under the National Anti-Corruption Strategy (NACS) 2024–2028, cash donations to approved anti-corruption education programmes organised by Civil Society Organisations (CSOs) are now eligible for tax deductions up to 10% of aggregate income.

Additionally, contributions to the Department of Museums Malaysia and MADANI programmes such as Kampung Angkat MADANI and Sekolah Angkat MADANI will also qualify for deductions.

This encourages private sector participation in community-building, cultural preservation, and transparency efforts.

12. Social Enterprises and Corporate Goodness

Social enterprises accredited by the Ministry of Entrepreneur and Cooperatives Development will continue to enjoy full tax exemption for three consecutive years, with the application window extended until 31 December 2028.

This helps NGOs, youth-driven businesses, and community-led organisations stay financially sustainable while contributing to the MADANI value system of compassion and social impact.

13. Key Takeaways for SME Business Owners

Budget 2026 sends a powerful message: the era of easy profits is over, and the new economy rewards purpose-driven, future-ready businesses.

Here’s what matters most for SME clients of KTP:

  1. Invest in people and skills. Use the AI training deduction, scholarship expansion, and care worker programmes to build talent within your firm.

  2. Embrace sustainability. Carbon tax is coming; explore solar panels, energy audits, and green certifications.

  3. Support social inclusion. Hiring seniors, ex-convicts, or OKU is not only moral but financially rewarding.

  4. Leverage government funding. Whether through MIDA, MAFS, or TalentCorp, timing is key. Incentives often require pre-approval, so plan early.

  5. Think regional. With the FSI exemption extended, expanding abroad and bringing profits home now makes more tax sense than ever.

14. Final Words from KTP

If your company plans to invest, expand, or transform in 2026, our tax advisory team can help you identify applicable incentives, prepare applications for approval, and structure your investment for maximum tax efficiency.

For assistance, reach out to:
info@ktp.com.my
www.ktp.com.my

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