In line with Malaysia’s continued efforts to drive sustainable economic development, 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]. This regulatory development provides targeted tax deductions to incentivise ESG (Environmental, Social and Governance) initiatives undertaken by businesses.
The introduction of these rules reflects the government’s broader ESG agenda as outlined in Budget 2024 and reaffirmed in Budget 2025—highlighting ESG as a key pillar of long-term economic competitiveness, stakeholder trust, and national climate ambition.
Table of Contents
Overview of the ESG Tax Deduction Rules
The ESG Rules 2025 offer income tax relief for specific categories of ESG-related expenditure incurred by Malaysian-resident businesses. The rules are applicable from the Year of Assessment 2024 until 2027.
Eligible Entities
- Licensed financial institutions
- Companies and Labuan entities
- Micro, small and medium enterprises (MSMEs)
Maximum Deductible Amount
- Up to RM50,000 per year of assessment
Scope of Qualifying ESG Expenditure
Maximum Deductible Amount
1. Financial Institutions & Public Listed Companies
Tax deductions are available for expenditure related to:
- Verification and certification of ESG practices
- Calculation and monitoring of greenhouse gas (GHG) emissions
- Subscription to ESG software or data systems for tracking, risk management, and reporting
- Capacity building, such as staff training, ESG education, and upskilling
- Engagement of ESG consultants or technical experts
These incentives apply specifically to institutions regulated by Bank Negara Malaysia or companies listed on Bursa Malaysia.
2. Companies & Labuan Entities
Qualifying ESG-related expenditure includes:
- Preparation of reports under the Tax Corporate Governance Framework (TCGF) issued by the Director General of Inland Revenue
- Appointment of independent reviewers to assess compliance with TCGF
- Preparation of contemporaneous transfer pricing documentation
To be eligible, the company must secure a Certificate of Compliance with the Tax Corporate Governance Framework.
3. MSMEs
Micro, small and medium enterprises may claim deductions for:
- Consultation fees for developing bespoke software solutions to implement e-invoicing
- Fees for external service providers related to e-invoice integration (excluding those linked to the MyInvois portal or early-stage planning costs)
Exclusions: When the Deduction Does Not Apply
Businesses may not claim the ESG tax deduction if they have:
- 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 other rules made pursuant to Section 154 of the same Act
Policy Significance: Institutionalising ESG Compliance
The ESG Rules 2025 represent a strategic move to embed sustainability, transparency and governance at the core of Malaysia’s business and tax policy landscape. Key takeaways include:
- Reinforcing ESG reporting through fiscal incentives aligned with global disclosure standards
- Encouraging carbon accountability, including systems for GHG measurement and mitigation
- Strengthening corporate tax governance through the formalisation of internal risk management frameworks
- Empowering SMEs with tools and support to transition towards digital and sustainable operations
As noted in our Budget 2024 ESG analysis, these developments form part of Malaysia’s larger vision to elevate ESG from a compliance obligation to a central business priority.
Recommendations for Businesses
1. Map Existing ESG Initiatives Against Deductible Categories
Review current and planned ESG-related activities—such as sustainability reporting, carbon tracking, staff training, or software implementation—and assess how they align with the deductible categories outlined in the rules. This helps ensure that relevant efforts are captured and optimised for tax relief.
2. Align with the Tax Corporate Governance Framework (TCGF)
For companies and Labuan entities, alignment with the TCGF is essential. This includes establishing tax risk controls, appointing an independent reviewer, and securing a Certificate of Compliance to qualify for deductions related to tax governance reporting.
3. Engage ESG Experts for Quality and Compliance
Involving ESG consultants or verifiers can help ensure technical accuracy, adherence to recognised standards, and proper documentation—particularly in complex areas like GHG emission tracking or ESG disclosures.
The introduction of ESG-related tax deductions marks a turning point in Malaysia’s sustainability journey. These rules provide both clarity and financial incentives for businesses to prioritise environmental stewardship, social responsibility, and sound governance.
For Malaysian enterprises, the message is clear: now is the time to invest in ESG, not only for compliance or reputation, but as a strategic lever for resilience, profitability and long-term value creation.
BBC comprises a team of dedicated sustainability practitioners committed to driving real impact. Our consultants bring deep expertise in ESG strategy, reporting, and regulatory compliance—including readiness for tax incentives and rebates such as those under the ESG Rules 2025. With our end-to-end solutions in ESG monitoring, reporting, and decarbonisation, we help businesses enhance profitability while advancing Malaysia’s sustainable development goals.
Contact us today to explore tailored solutions that align your business with both regulatory expectations and long-term value creation.
