Malaysia’s Budget 2025: Impact for Businesses

On October 18, Malaysia’s government introduced its 2025 national budget – the largest in its history – to bolster the economy’s competitiveness by introducing new tax incentives, slashing subsidies, and developing new economic clusters.

With an unprecedented 421 billion ringgit (US$96 billion) allocated for 2025, marking a 6.4 percent increase from 2024. From this total, the government has allocated 335 billion ringgit (US$76.4 billion) for operating expenditure and 86 billion ringgit (US$19.6 billion) for development projects.

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What will impact businesses?

The New Investment Incentive Framework

Malaysia’s government has introduced the New Investment Incentive Framework (NIIF) under budget 2025 and allocated 1 billion ringgit (US$228 million) for the initiative. The framework is a set of incentives aimed at attracting foreign investment in high-value activities. This is expected to be implemented in the third quarter of 2025.

Tax incentives for increasing exports of integrated circuits

Under the NIIF, the Malaysian government will extend the export incentive afforded to businesses that export integrated circuits. This is an income tax exemption amounting to 70 percent of statutory income arising from increased exports. Further, this initiative also supports efforts to enhance the economic complexity of Malaysia’s electrical and electronics sector.

Supply chain resilience incentive

To enhance the resilience of the local supply chain and strengthen the primary sector ecosystem, the following incentives will be offered:

• Double tax deductions for Multinational Enterprises (MNEs) on eligible supply chain resilience expenses, capped at 2 million ringgit (US$456,000) per year for three consecutive years;
• Tax deductions on investment amounts for MNEs and their suppliers engaging in joint venture projects with local vendors;
• An outcome-based tax incentive package designed for participating local suppliers;
• A 100 million ringgit (US$22.8 million) matching investment fund to support the development of local suppliers, particularly in electronics and electrical (E&E), specialty chemicals, and medical devices sectors; and
• Special income tax incentives for investments in 21 designated economic sectors across specific states within Malaysia.

Incentives for carbon capture, utilization, and storage activities

To promote investments aligned with environmental, social, and governance (ESG) standards, investment tax allowances or income tax exemptions will be offered for carbon capture, utilization, and Storage (CCUS) activities.

Johor-Singapore Special Economic Zone

The government is introducing incentives for the newly developed Johor-Singapore Special Economic Zone at the end of 2024.

Forest City Special Economic Zone

Forest City refers to a section of the larger Forest City (FCSFZ) development project, which is a massive smart city initiative located in Johor, Malaysia, near the Singapore border. Forest City is designed to be a futuristic urban development incorporating advanced technology, green spaces, and sustainable infrastructure. It is intended to attract international businesses, investors, and residents, with a focus on environmental sustainability.

The incentives include:

• Forest City will be the first location in Malaysia to offer a zero percent tax rate for family offices established under the Single-Family Office Scheme;
• The FCSFZ will implement a corporate income tax rate of between zero and five percent, particularly for businesses engaging in financial technology and global business services;
• Skilled professionals can pay a reduced income tax rate of 15 percent;
• Banking entities and financial institutions operating in the FCSFZ will enjoy incentives such as deductions for relocation costs, withholding tax exemptions, and industrial building allowances; and
• Locally incorporated foreign banks will be granted greater flexibility to open additional branches within the SFZ and take advantage of foreign exchange flexibility for offshore borrowing and investment in foreign currency assets, backed by Bank Negara Malaysia.

Tax incentives for implementing e-invoicing

The government will offer accelerated capital allowance for the purchase of ICT equipment, computer software packages, and consultation fees for e-invoicing purposes. The claim for accelerated capital allowance is effective from YA 2024 to YA2025.

Smart Logistics Complex tax incentive

To promote business utilizing advanced technologies for logistics, eligible Smart Logistics Complexes (SLCs) will be granted an investment tax allowance of 60 percent of qualifying expenditure for a period of five years.

Tax incentive for automation

Businesses in the manufacturing, services, agriculture, and commodity sectors can receive accelerated capital allowance on capital expenditures incurred for automation.

Dividend tax

Individual shareholders with annual dividend income exceeding 100,000 ringgit (US$22,800) will be subject to a two percent dividend tax on the chargeable income.

Certain dividend income is exempted from the tax, these include:

• Dividend received from abroad;
• Dividends distributed from profits of companies that have pioneer status;
• Dividends received by residents from Labuan entities; or
• Dividends are distributed, paid, or credited from the profits of shipping companies that is exempted from this tax.

Sales and service tax

Sales and service tax on non-essential items will increase from May 1, 2025. The scope of service tax will also be expanded to certain commercial services, such as fee-based financial services.

Carbon tax

Malaysia will introduce a carbon tax on the steel, iron, and energy industries 2026.

Minimum wage increase

The government is committed to increasing the minimum wage in February 2025 to 1,700 ringgit (US$388) from 1,500 ringgit (US$342), with a six-month deferred implementation for businesses with less than five employees.

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