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Deduction for Expenditure in Relation to Esg In Malaysia

2026-01-21
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.

  1. 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.

  2. 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.)

  3. 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.

Disclaimer

All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

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