Income Tax Rules for Deduction of ESG Expenditure Gazetted
24 June 2025
During the tabling of 2024 Malaysian Budget on 13 October 2023, a new tax incentive was proposed to encourage corporate participation in Environmental, Social and Governance (“
ESG”) compliance initiatives. Following that announcement, the
Income Tax (Deduction for Expenditure in relation to Environmental Preservation, Social and Governance) Rules 20251 (“
Rules”) were gazetted on 23 June 2025. These Rules, which take effect from the year of assessment 2024 to the year of assessment 2027, provide for a deduction of up to RM50,000 per annum for ESG-related expenditure incurred by eligible taxpayers.
For the purposes of the Rules, the term “ESG” means a set of criteria to assess the sustainability practice and ethics of an eligible taxpayer, which encompasses environmental impact, social responsibility and governance effectiveness.
Scope of Application
The deduction is available to the following categories of taxpayers:
- Licensed banks, licensed investment banks, licensed insurer, licensed professional reinsurer and financial holding companies under the Financial Services Act 2013, licensed Islamic banks, licensed international Islamic banks, licensed takaful operators, licensed international takaful operators, professional retakaful operators and financial holding companies under the Islamic Financial Services Act 2013, and prescribed institutions under the Development Financial Institutions Act 2002 (collectively “financial institutions”);
- Companies;
- 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 Council2 (“SMEs”).
The eligible taxpayer must be resident in Malaysia and must have incurred the expenditure in the course of deriving business income in Malaysia.
Categories of Deductible Expenditure
A deduction is allowed under Rule 3(1) for expenditure incurred in the basis period for a year of assessment in respect of the following:
a) ESG Reporting by Financial Institutions and Listed Companies
For financial institutions supervised by Bank Negara Malaysia and companies listed on Bursa Malaysia:
- validation, verification and certification relating to the use of ESG practices and calculation and tracking of greenhouse gas (“GHG”) emissions and ESG exposure;
- subscription to technology or software systems for ESG data collection, tracking the use of ESG metrics, risk management, scenario analysis and calculation of GHG emissions;
- capacity-building initiatives, including training, education, skills development for employees; and
- engagement of consultants or subject-matter experts to perform the above functions.
b) Tax Governance and Transfer Pricing Compliance for Companies and Labuan Companies
For Companies and Labuan Companies:
- preparing the reporting as required under the guidelines for the Tax Corporate Governance Framework and appointing an independent reviewer to assess compliance with the said guidelines3; or
- preparing contemporaneous transfer pricing documentation, as defined under the Income Tax (Transfer Pricing) Rules 20234.
c) E-Invoicing Implementation for Micro Enterprises and SMEs
For Micro Enterprises and SMEs:
- consultation fees for developing customised software for the implementation of electronic invoicing; and
- fees paid to external service providers.
However, this excludes:
- expenditure incurred at the planning or preliminary stage; and
- fees related to issuing e-invoices through the MyInvois Portal.
Deduction Limit
Under Rule 3(3), the total amount of deduction allowed under Rule 3(1) shall not exceed RM50,000 for each year of assessment.
In addition, pursuant to Rule 4, these Rules do not apply where the expenditure:
- has been claimed under section 33 of the Income Tax Act 1967 (“ITA”);
- is subject to exemption under paragraph 127(3)(b) or subsection 127(3A) of the ITA; or
- has been claimed under any other rules made under section 154 of the ITA.
Comments
Although the ESG tax deduction was announced in the 2024 Malaysian Budget, the Rules were only gazetted on 23 June 2025, by which time some taxpayers may have already filed their returns for year of assessment 2024, while others may be in the advanced stages of finalising the same.
For taxpayers who have already filed their returns for year of assessment 2024 without claiming the ESG deduction, a revision may still be made in accordance with the statutory provisions under the ITA
5. The relevant application must be made within five years from the end of the year in which the Rules were gazetted.
Taxpayers intending to claim the deduction are advised to review their eligibility under the Rules and, where necessary, take the appropriate steps to revise their tax filings.
Alert by Victoria Low (Associate) of the Tax Practice of Skrine.
2 This determination is made by the council under the Small and Medium Enterprises Corporation Malaysia Act 1995.
3 Deduction under this subparagraph is only allowed if a certificate of compliance with the Tax Corporate Governance Framework is obtained.
5 Section 131A of the Income Tax Act 1967.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.