The anti-corruption agency detained him late Thursday after they summoned him for questioning in northern Penang state, reports AP.
The project was approved during Lim’s tenure as Penang chief minister from 2008-2018, before he became Malaysia's finance minister. The 7.2km tunnel, from Penang Island to peninsular Malaysia, includes several highways and is to be funded through a land swap of reclaimed prime land.
Lim, 59, who was part of a reformist government ousted in a political coup in March, pleaded not guilty to a charge of soliciting 10 percent of potential profits in 2011 as a bribe for the contract.
If convicted, he will face up to 20 years in jail and a fine.
The anti-corruption agency said that Lim will face two other charges in a Penang court next week, one related to the tunnel project and another on a different case.
“This is political persecution. The project is implemented through open and transparent tenders. No payment has been made so far," Lim’s Democratic Action Party tweeted.
Prime Minister Muhyiddin Yassin took power in March, after he pulled his party out of the ruling coalition and then-premier Mahathir Mohamad resigned in protest.
His new Malay-centric government is supported by graft-tainted parties defeated in 2018 general election.