Impact of Malaysia’s Budget 2025 on Businesses: Key Reforms, Incentives & Strategic Shifts

Malaysia’s Budget 2025, unveiled on October 18, 2024, marks a pivotal moment in the nation’s economic trajectory. With a record allocation of RM421 billion (approximately USD 96 billion), the budget aims to bolster competitiveness, attract high-value investments, and implement structural reforms to enhance fiscal sustainability. For businesses operating in or considering entry into the Malaysian market, understanding the implications of this budget is crucial.Crowe+3ASEAN Briefing+3AP News+3

📊 Fiscal Overview: A Record-Breaking Budget

The 2025 budget represents a 6.4% increase from the previous year, with RM335 billion allocated for operating expenditures and RM86 billion for development projects. The government targets a fiscal deficit reduction to 3.8% of GDP, down from 4.3% in 2024, signaling a commitment to fiscal prudence. ASEAN BriefingASEAN Briefing+2AP News+2Reuters+2

🏭 New Investment Incentive Framework (NIIF)

A cornerstone of Budget 2025 is the introduction of the New Investment Incentive Framework (NIIF), designed to attract foreign investments in high-value sectors:ASEAN Briefing

• Export Incentives for Integrated Circuits: Companies exporting integrated circuits can avail a 70% income tax exemption on increased export income, enhancing the competitiveness of Malaysia’s electrical and electronics sector.Grant Thornton Malaysia+2ASEAN Briefing+2Baker McKenzie InsightPlus+2

• Supply Chain Resilience Incentives:

  • Double tax deductions for Multinational Enterprises (MNEs) on eligible supply chain resilience expenses, capped at RM2 million per year for three consecutive years.

  • Tax deductions on investments for MNEs and their suppliers engaging in joint ventures with local vendors.

  • A RM100 million matching investment fund to support local suppliers, particularly in electronics, specialty chemicals, and medical devices.

  • Special income tax incentives for investments in 21 designated economic sectors across specific states. ASEAN Briefing+1BDO+1

💻 Digitalization and E-Invoicing Incentives

To promote digital transformation, the government offers accelerated capital allowances for the purchase of ICT equipment, software packages, and consultation fees related to e-invoicing, effective from the year of assessment 2024 to 2025. EY+2ASEAN Briefing+2GGI Global Alliance+2

💰 Taxation Reforms: Broadening the Tax Base

1. Dividend Tax Introduction

A 2% tax will be imposed on dividend income exceeding RM100,000 received by individual shareholders, effective from the year of assessment 2025. Exemptions apply to foreign-sourced dividends and dividends from companies with certain tax incentives. Baker McKenzie InsightPlus+3BDO Global+3KPMG+3EY+1KPMG+1

2. Sales and Service Tax (SST) Adjustments

From May 1, 2025, the scope of the SST will expand to include certain commercial services, such as fee-based financial services, and the tax rate on non-essential items will increase. ASEAN Briefing

3. Carbon Tax Implementation

A carbon tax targeting the steel, iron, and energy industries is slated for introduction in 2026, aligning with global sustainability trends and encouraging greener industrial practices. ASEAN Briefing

🌿 Environmental and Social Governance (ESG) Incentives

To support ESG initiatives, the budget introduces:KPMG

• Carbon Capture, Utilization, and Storage (CCUS) Incentives: Tax incentives, such as investment tax allowances or income tax exemptions, will be provided for CCUS activities to encourage investments that comply with ESG standards. Baker McKenzie InsightPlus+3BDO+3EY+3

• Support for Women Returning to Work: Extended tax deductions are offered for employers hiring women re-entering the workforce, promoting gender diversity and inclusion. GGI Global Alliance

📈 Implications for Businesses

The 2025 budget presents both opportunities and challenges for businesses:

• Opportunities:

  • Enhanced tax incentives for high-value sectors and digital transformation.

  • Support for ESG initiatives aligns with global investment trends.

  • Infrastructure and development spending may stimulate economic activity.ASEAN Briefing+1InCorp Global+1

• Challenges:

  • Increased tax obligations through the new dividend tax and expanded SST.

  • Compliance requirements associated with new incentives and ESG standards.AP News+4KPMG+4BDO Global+4

🧭 Strategic Recommendations

Businesses should consider the following actions:

• Assess Eligibility for Incentives: Review operations to identify opportunities to leverage new tax incentives, particularly under the NIIF.ASEAN Briefing

• Enhance ESG Compliance: Align business practices with ESG standards to benefit from related incentives and meet investor expectations.

• Prepare for Tax Changes: Update financial models to account for the new dividend tax and expanded SST, ensuring compliance and accurate forecasting Malaysia-Agent.com .

🔗 Useful Resources

• Malaysia External Trade Development Corporation (MATRADE)

• Inland Revenue Board of Malaysia (LHDN)

• Malaysia Digital Economy Corporation (MDEC)

• Malaysian Investment Development Authority (MIDA)