Deduction for Expenditure in Relation to Esg In Malaysia
The Government of Malaysia has taken a significant step to advance sustainable business practices, corporate accountability, and tax transparency through the issuance of the Income Tax (Deduction for Expenditure in relation to Environmental Preservation, Social and Governance) Rules 2025 [P.U.(A) 193/2025] which is gazetted on 23 June 2025. These rules, effective from year of assessment (“YA”) 2024 to YA 2027, allow a deduction up to RM50,000 per YA for qualifying Environmental, Social and Governance (“ESG”)-related expenditure.
This targeted incentive supports both large institutions and smaller enterprises in aligning their operational practices with Malaysia’s ESG and digital transformation goals.
-
Qualifying Entities
The deduction is available to the following qualifying entities:
-
Financial institutions which is licensed under Financial Service Act 2013, Islamic Financial Service Act 2013 and Development Financial Institution Act 2002;
-
Companies (including listed company on Bursa Malaysia);
-
Labuan companies;
-
Micro enterprises as determined by the National Small and Medium Enterprises Development Council; and
-
Small and medium enterprises as determined by the National Small and Medium Enterprises Development Council.
|
-
Overview of Qualifying Expenditure
Only qualifying ESG related expenses incurred by qualifying entities is tax deductible.
A.
|
Financial Institutions and Listed Companies
The qualifying ESG related expenses incurred by the above-mentioned qualifying entities include:
|
Type of Expenditure
|
Examples
|
|
Validation, verification and certification on the use of ESG practices, calculation and tracking of the
greenhouse gas emissions, and ESG exposure
|
- Independent
ESG assurance reports
- Verification
of greenhouse gas emissions (e.g. Scope 1 & 2)
- ESG ratings
or risk certifications
|
|
Subscription of technology or
software systems for data collection, tracking the use of ESG metrics, risk
management, scenario analysis and calculation of greenhouse gas emissions.
|
- ESG or
climate data platforms
- Carbon
accounting, ESG metrics tracking, or risk modelling software
|
|
Capacity building including
training, education and skills development for employees
|
- ESG training
modules for staff
- Certification
programmes (e.g. ISO 14001, GRI Standards)
|
|
Services of consultant expert or
subject matter expert to perform activities as specified above.
|
- Engagement
of experts for ESG integration, scenario analysis, and reporting
|
(Note: The example provided is for illustrative purposes only and may be subject to revision in accordance with future changes to applicable laws and guidelines.)
|
B.
|
Companies and Labuan companies
The qualifying ESG related expenses incurred by the above-mentioned qualifying entities include:
|
Type of Expenditure
|
Example
|
|
Preparation of Tax Corporate
Governance (“TCG”) Report
|
Expenditure incurred on
preparing of report as per TCG Framework
(Note: Deduction allowed only
if a certificate of compliance has been obtained.)
|
|
Appointment of independent reviewer
|
|
Preparation of Contemporaneous
Transfer Pricing Documentation (“CTPD”)
|
Expenditure incurred on
preparation of transfer pricing document as per Income Tax (Transfer Pricing)
Rules 2023 and Malaysia Transfer Pricing Guidelines 2024
|
(Note: The example provided is for illustrative purposes only and may be subject to revision in accordance with future changes to applicable laws and guidelines.)
|
C.
|
Micro, Small and Medium Enterprises (MSMEs)
The qualifying ESG related expenses incurred by the above-mentioned qualifying entities include:
|
Type of Expenditure
|
Example
|
|
Customised e-Invoice software
development
|
Expenditure incurred on
software development for implementation of electronic invoice specifically
tailored to the business’s operation
|
|
External e-Invoicing service
providers fees
|
Expenditure incurred on hiring
external service provider for matter dealing with implementation of
electronic invoice
|
|
Exclusions (Non-Deductible)
|
|
- Preliminary
planning or feasibility studies for the customised software
- Fees
relating to issuance of an electronic invoice through MyInvois Portal (free
government platform for e-Invoice)
|
(Note: The example provided is for illustrative purposes only and may be subject to revision in accordance with future changes to applicable laws and guidelines.)
|
-
Deduction Limit and Exclusions
The total deduction is capped at RM50,000 per YA. However, no deduction is allowed under these Rules if the expenditure has:
-
Been claimed under section 33 of the Income Tax Act, 1967 (“ITA”);
-
Been exempted under paragraph 127(3)(b) or subsection 127(3A) of the ITA;
-
Been deducted under any other rules issued under section 154 of the ITA.
|
This prevents double deduction or exemption for the same expense incurred by the qualifying entities.
The above rules contained only general information published by attorney general’s chambers via
https://lom.agc.gov.my/index.php
KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.
KNOWLEDGE
