Japan Tax Bulletin
Update of Tax Losses under Japan Tax Law
January 2022
1.

Overview

Tax losses of a corporation that files a blue tax return can be
carried forward and will be able to offset against certain taxable
income in the future financial years. However, a restriction may beapplied in the case of a controlling interest acquisition, in a merger
or group relief system.

2.

(i)

- Commencement of business on or after the date of theacquisition of control (including the commencement ofbusiness through a merger)

Tax losses carry forward / carry back2.1. In principle
When a corporation that files a blue tax return is in a loss
position under corporate tax calculation, whose tax losses can becarried forward for 10 years and offset against up to 50% of eachfinancial year’s taxable income.
If the corporation is categorized as an SME (Small or MediumSized Enterprise1), it can offset carried forward tax losses against
100% of each financial year’s taxable income. In case the SME had
a profit in the previous year, it can carry back its tax loss one yearand can offset the current year’s tax loss against 100% of theprevious year’s taxable income. The remained tax loss can becarried forward to the next year onward.

2.2. Exception for the relief of COVID-19
As the relief of COVID-19, an exception on carrying back of tax
losses can be elected to a corporation that files a blue tax returnwith paid-in capital up to JPY 1,000million excluding thecorporation if it is owned 100% by a large company with its paid-in
capital over JPY 1,000million.

(ii)

Restriction of the utilization of tax losses where controlling interests
are acquiredIn case, all the business of the loss corporation is abolished oris expected to be abolished just before the date of theacquisition of control- Borrow funds with the amount that exceeds approx. 5 timesof scale of the former business(iii) In case, acquiring the claims of the loss corporation at a priceless than 50% of the amount of the claims- The amount of claims acquired exceeds 50% of the total
amount of liabilities of the loss corporation- Borrow funds with the amount that exceeds approx. 5 timesof scale of the former business(iv) In case, a loss corporation falls under any of the cases listedin (i) to (iii) above, and a loss corporation is merged by theother corporation as a qualified merger, or residual assets are
determined of a loss corporation(v)

When a corporation satisfies the requirements above, it can carryback the tax losses incurred during the financial years ended from
1st of February 2020 to 31st of January 2022 against 100% of theprevious year’s taxable income.

3.

In case, the loss corporation is not engaged in business justbefore the date of the acquisition of control (The mereholding of shares does not fall under the category ofbusiness)

In case, all specified board members resign and approx. 20%of employees leave the loss corporation‐The size of the business of the non-employed business(the business in which employees of a loss corporation arenot engaged) exceeds approx. 5 times the size of thebusiness of the former business just before the date of the4.

Tax losses in a merger

Where a controlling ownership acquisition (more than 50% ofshareholders capital in terms of the number of outstanding sharesor invested amount) takes place in a corporation with tax losses,
and one of the following events is triggered within 5 years from theacquisition, the tax losses incurred in the financial years before theyear when the acquisition took place are disallowed and cannot be
carried forward to the year when the events discussed below aretriggered or thereafter.

4.1. Tax-qualified merger

1 A Small or Medium-Sized Enterprise is a corporation whose paid in capitalis JPY 100million or less and the stated capital amount of the wholly
owning parent corporation is less than JPY 500million.

In a tax-qualified merger, the tax losses of the merged corporation
can be succeeded by the merging corporation and the tax losses ofthe merging corporation can be carried forward. However, todiscourage corporations from buying up loss-making corporation’s
to take advantage of their losses, there is an anti-avoidance rule.
(1) Tax losses of a merged corporation or a surviving corporation
incurred in the financial years before the financial year when acontrolling relationship (50% or more direct/indirect ownership)
was established and (2) tax losses incurred in the financial
year when a controlling relationship was established or thereafter
created out of realizing built-in losses that existed before thecontrolling relationship was established are ignored unless acontrolling relationship had existed continuously for 5 years ormore on the first day of the financial year when a tax-qualified
merger took place or deemed joint business conditions are satisfied.
Deemed joint business conditions can be satisfied where conditions(i)~(iv) are satisfied or (i) and (v) are satisfied:(i) The businesses of the merged corporation and the surviving
corporation are related.
(ii) The sales amount, the number of employees or the statedcapital of either the merged corporation or the surviving
corporation does not exceed 5 times that of the other.
(iii) The business of the merged corporation has continued fromthe time when the controlling relationship was established until thetax-qualified merger and the business scale (described in (ii) above)measured at either of those times does not exceed twice the scale atthe other time.
(iv) The business of the surviving corporation has continued fromthe time when the controlling relationship was established until thetax-qualified merger and the business scale (described in (ii) above)measured at either of those times does not exceed twice the scale atthe other time.
(v) It is expected that an executive director of each corporation willassume the same position in the surviving corporation after themerger.

4.2. Disqualified merger
In a disqualified merger, the tax losses of the merged corporation
cannot be succeeded by the surviving corporation. There is,however, no restriction about using the tax losses of the surviving
corporation.

5.

Tax losses in Tax consolidation system /Group relief system

5.1. Tax consolidation system
A domestic corporation (“consolidation parent”) and its domestic
100%-owned subsidiaries (“consolidated subsidiaries”) are allowed
to file a consolidated tax return. The tax loss of the consolidation
parent can be utilized to offset the taxable income of theconsolidated subsidiaries. The tax losses of a consolidated
subsidiary can be utilized to offset the taxable income of theconsolidated subsidiary after a consolidated tax return is elected aslong as the consolidation parent owns 100% of the consolidated
subsidiary continuously for more than 5 years before the election ismade.

Domestic corporation groups which elect Tax consolidation
system will move on to the Group relief system automaticallyunless submitting a cancellation notification of the elected Tax
consolidation system. In this case, no tax issue will arise on tax
losses.
When a domestic corporation group of 100% ownership that
newly elect Group relief system, the treatment of the tax losses of agroup parent and the tax losses group subsidiaries will be changed
as follows:-When the consolidation parent satisfies the condition a), the tax
losses of consolidation parent incurred in the financial years before
the financial year when the Group relief system is elected can beutilized to offset the taxable income of the consolidation parent
after the Group relief system is elected. SRLY (Separate-ReturnLimitation-Year) rule is applied to a group parent’s loss while there
was no restriction to a consolidation parent’s loss under the tax
consolidation.
-When group subsidiaries satisfy one of the following requirementsa) to d), the tax losses of the group subsidiary incurred in thefinancial years before the financial year when the Group relief
system is elected or the group subsidiary joins the group can beutilized to offset the taxable income of the group subsidiary after
the Group relief system is elected or after the consolidated
subsidiary joins to the corporate group. SRLY rule is applied to agroup subsidiary’s loss.
a) 100% ownership is existed by the consolidation parent and also
meets the requirement a-1) or a-2)a-1) 50% or more shares had been owned by the consolidation
parent for 5 years or longera-2) satisfies the requirements of joint business conditions in
section 4.1 aboveb) Be consolidated subsidiaries by Tax-qualified share exchange,and also meets the requirement a-1) or a-2)c) Incorporated as a 100% owned corporation of the group parent
or the group subsidiariesd) Satisfies the requirements of joint business conditions in section
4.1 above
The conditions for tax loss carry-over of a group subsidiary inGroup relief are in line with those for a merged company’s loss
carry-over in a qualified merger.
-In otherwise, the tax losses incurred the financial year before thefinancial year when a controlling relationship is established and thetax losses incurred after the controlling relationship was establisheduntil electing Group relief system which corresponds to realizing
built-in losses that existed before the controlling relationship wasestablished will be discarded

5.2. Group relief system
Group relief system has been introduced in 2020 to replace Tax
consolidation system and will apply to financial years beginning on
or after April 1, 2022.
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