As part of Malaysia’s continued push toward sustainable economic growth, the Federal Government has gazetted the Income Tax (Deduction for Expenditure in Relation to Environmental Preservation, Social and Governance) Rules 2025 [P.U. (A) 193]. These newly introduced regulations provide targeted income tax deductions to incentivize ESG (Environmental, Social, and Governance) initiatives undertaken by Malaysian businesses.

This policy move underscores Malaysia’s national commitment to ESG, as outlined in Budget 2024 and reaffirmed in Budget 2025. It positions ESG not only as a regulatory requirement but as a key driver of long-term economic competitiveness, investor confidence, and climate ambition.

Overview: ESG Tax Deduction Rules 2025

The new rules offer tax relief for specific ESG-related expenditures incurred by Malaysian-resident businesses, effective from Year of Assessment (YA) 2024 to 2027.

Eligible Entities

· Licensed financial institutions

· Public listed companies

· Companies and Labuan entities

· Micro, Small and Medium Enterprises (MSMEs)

Annual Deduction Cap

· Up to RM50,000 per year of assessment

What Qualifies for ESG Tax Relief?

1. Financial Institutions & Public Listed Companies

Eligible expenses include:

· Verification and certification of ESG practices

· Measurement and monitoring of GHG emissions

· Subscription to ESG software/data platforms

· ESG-related training and upskilling

· Engagement of ESG consultants or experts

Note: This applies only to institutions regulated by Bank Negara Malaysia and companies listed on Bursa Malaysia.

2. Companies & Labuan Entities

Deductions are allowed for:

· Preparation of reports under the Tax Corporate Governance Framework (TCGF)

· Independent review of TCGF compliance

· Preparation of contemporaneous transfer pricing documentation

Requirement: Must obtain a Certificate of Compliance under TCGF.

3. Micro, Small and Medium Enterprises (MSMEs)

Deductions may be claimed for:

· Consultancy fees for e-invoicing software development

· Integration services for e-invoicing systems (excluding early planning costs or services related to the MyInvois portal)

Exclusions: When Deductions Are Not Applicable

Deductions under the ESG Rules 2025 cannot be claimed if the business:

· Has already claimed a deduction under Section 33 of the Income Tax Act 1967

· Received an exemption under Section 127(3)(b) or 127(3A)

· Claimed deductions under any other rules made pursuant to Section 154 of the Act

 

Policy Impact: Mainstreaming ESG in Corporate Governance

The ESG Tax Deduction Rules 2025 represent a strategic policy move to integrate ESG into the core of corporate decision-making. Key implications include:

· Promoting ESG disclosures aligned with global standards

· Driving GHG emissions accountability via measurable systems

· Institutionalising tax governance through the TCGF framework

· Enabling SME digital transformation in line with sustainability goals

This approach reinforces Malaysia’s ambition to shift ESG from being a compliance issue to a core business strategy.

What Should Businesses Do Now?

1. Map ESG Activities to Deductible Categories

Assess your current and planned ESG initiatives—like carbon tracking, sustainability reporting, or ESG training—and ensure they align with deductible expenditure to maximise relief.

2. Prepare for TCGF Compliance

Companies and Labuan entities should prioritise TCGF readiness by developing internal tax governance controls and securing a Certificate of Compliance.

3. Consult ESG Experts

Engage qualified ESG professionals to assist with emissions tracking, reporting standards, and verification processes. This ensures both quality and compliance in documentation.

Conclusion

The ESG Rules 2025 mark a milestone in Malaysia’s sustainability journey, sending a clear message to businesses: ESG investment is no longer optional—it’s a strategic lever for resilience, profitability, and long-term value.

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