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InsightSpotlight

ESG Tax Deduction: What Malaysian Employers Need to Know (2025–2027)

June 24, 20254 min read

Malaysia’s business landscape is shifting — and so are the tax incentives that support it.

To promote responsible business practices, the Malaysian government has introduced a new ESG-linked tax rule: the Income Tax (Deduction for Expenditure in Relation to Environmental Preservation, Social and Governance) Rules 2025, gazetted as P.U. (A) 193/2025.

This allows eligible businesses to claim up to RM50,000 per year in tax deductions for specific ESG-related expenditures — from Year of Assessment (YA) 2024 to 2027.

What Is ESG and Why Does It Matter?

ESG stands for Environmental, Social, and Governance, a framework that measures how responsibly a company operates.

In Malaysia, ESG is no longer just a buzzword. Public-listed companies are under pressure to report sustainability efforts, while MSMEs are being encouraged to digitalise, manage risk transparently, and adopt good governance practices.

These tax deductions are part of that bigger policy push encouraging businesses of all sizes to build better foundations.

Who Can Claim the ESG Tax Deduction?

This deduction is available to businesses resident in Malaysia and operating within the country. Eligible entities include:

  • Financial institutions
  • Public-listed companies (on Bursa Malaysia)
  • Labuan companies
  • Micro, Small, and Medium Enterprises (MSMEs)

What Kinds of Expenses Are Eligible?

Under P.U. (A) 193/2025, qualifying expenses differ slightly depending on your business category.

For Financial Institutions and Listed Companies:
  • Validation, verification, or certification of ESG practices
  • GHG emissions tracking and ESG disclosures
  • Subscription to ESG data management or analysis software
  • ESG training or capacity building for employees
  • Engagement of external ESG consultants or subject matter experts
For Other Companies and Labuan Entities:
  • Preparing documentation required under the Tax Corporate Governance Framework
  • Appointing independent reviewers to assess governance practices
  • Preparing contemporaneous transfer pricing documentation
For MSMEs:
  • Development of custom software to implement electronic invoicing (e-Invoicing)
  • Engaging external providers to support e-Invoicing system rollout

What’s Not Covered

Not all ESG-related or digital investments qualify. These are excluded from the deduction:

  • Software development costs during the planning stage
  • Any consulting fees related to issuing e-Invoices via the MyInvois portal
  • Any expenses already claimed under:
    • Section 33 (standard business expense deductions)
    • Section 127 tax exemptions
    • Other tax rules made under Section 154

To qualify for deductions related to tax governance, companies must also obtain a certificate of compliance from the Director General of Inland Revenue.

Key Conditions to Remember

Requirement Details
Deduction limit per year RM50,000
Years of Assessment covered 2024 to 2027
Claim basis Actual business expenses (not projected/planned)
Supporting documentation Invoices, contracts, ESG reports, training records, certificates, etc.

Example Scenarios

  • A manufacturing SME engages a software firm to build a custom e-Invoicing system — eligible for deduction.
  • A public-listed company sends its HR team for ESG and GHG disclosure training — deductible.
  • A mid-sized business hires an independent reviewer to assess its tax governance policies — eligible if certified.
  • A startup pays a consultant to explain how to issue invoices via MyInvois — not eligible.

How This Links to Workforce Practices

While these rules focus on tax deductions, the underlying message is clear: Malaysian businesses are expected to build more transparent, ethical, and accountable systems — including for workforce management.

How Osadi Supports ESG-Aligned Workforce Systems

At Osadi, we help employers lay the operational groundwork that supports ESG values — even if you’re not a public-listed company.

  • Structured and compliant worker onboarding
  • Transparent employment documentation and housing systems
  • Digitally traceable contract and record management
  • Workforce operations that reflect ethical practices and proper governance

Build Smarter, More Responsible Workforce Systems

If you’re strengthening governance, improving workforce documentation, or ensuring your HR practices align with compliance expectations — Osadi is here to support you.

Talk to us today to learn how Osadi can help your business stay ESG-ready and operationally strong.