Japan Tax Bulletin
The use of expired tax losses
August 2023
In some cases, after a company has been dissolved the disposal of
its assets or the discharge of its debts result in gains and so a large
gain can arise in the financial year during liquidation. The use oftax losses is therefore of key importance. If the carried forward
blue tax return losses do not cover the gain on debt forgiveness,the use of expired losses is permitted under certain requirements.
Further, where the dissolved company is a large company for tax
purposes, use of blue tax return losses is limited 50% of taxable
income. It is important to note that if residual assets remain in thelast business year, the use of expired losses is not possible.
Therefore, from the stage of dissolution, tax planning should be
carefully carried out and the timing of asset disposal and debt
forgiveness should be considered.
1.

1.2 Requirementsii
If a company is dissolved and is expected to have no remaining
assets, the “expired loss” is deductible from income in liquidation
fiscal years and the last fiscal year. This is an amount calculated ina prescribed way based of the amount of losses incurred in eachfinancial year prior to the financial year during which thecompany is being liquidated (the applicable year). In this case, theuse of the expired loss is not limited to amounts equivalent togains on debt forgiveness, gains on valuation of assets inliquidation, etc., as described below in section 4, and there are norestrictions on the use of the expired loss. The inclusion ofexpired losses in deduction is applicable as long as a detailed
statement is included in the corporate tax return (attachment ofSchedule 7(3)) and a document is attached explaining that thecompany is expected to have no residual assets.

When the use of expired losses due to dissolution is permitted

1.1 Deemed fiscal year due to dissolutioni

1.3 “Substantial Balance Sheetiii”(a)When a company is dissolved, the period from the start of
the financial year to the date of dissolution is regarded as asingle financial year (dissolution fiscal year) and a tax returnfor this period must be submitted. The deadline forsubmission is within two months from the day after the dateof dissolution, with a special exception for a one-monthextension.

(b)

Each one-year period commencing on the day following thedate of dissolution is a ‘liquidation fiscal year’. A tax return
must be filed within two months from the day after the endof each financial year in liquidation, with a special onemonth deadline extension.

(c)

When the residual assets of a company in liquidation aredetermined, a final return must be filed within one monthfrom the day after the end of the fiscal year (the last fiscalyear) that includes the date of determination of the residualassets (or, if the last distribution is made, by the day before
the date of such distribution). No special one-monthextension is granted.

In order to explain that a company is expected to have noresidual assets, the Substantial Balance Sheet must be prepared toreasonably show that net equity will be negative. When the net
equity are exactly zero, it also falls under ‘no residual assets areexpected’ and the expired loss can be used. A Substantial Balance
Sheet is prepared on the assumption that the company is to beliquidated, with assets and liabilities valued at disposal value(market value). As a rule, deferred assets and provisions are notrecorded as opposed to a company in going concern, andliabilities are recorded on the basis of legal liabilities. Under theCompanies Act, a Balance Sheet must be prepared at the date ofdissolution and in each financial year during liquidation andrequires a resolution of the general meeting of shareholders. The
Substantial Balance Sheet is substantially the same as the balance
sheet prepared at that time.
In order to be allowed to deduct the expired losses, it must beshown for each financial year during liquidation that, according to
the current status at the end of each financial year, there are‘expected to be no residual assets’.
2. How to calculate the expired loss
[Formula]
Deductible amount of expired lossesiv = {A – (△B) }– C –DA)

Total amount of losses carried forward from the previous
financial year or earlier (total amount of tax purpose

earnings & profits (rieki tumitate kin) at the beginning of
the period as per Schedule 5(1) I, absolute value if the said
amount is negative)

4. Deductible losses in the event of debt forgiveness, etc. due to corporate
reorganization, etc.

C)

Blue tax return losses carried forward (Schedule 7(1))

Notwithstanding the dissolution of a company, a reassessment
under the provisions of the Corporate Reorganisation Act or theCivil Rehabilitation Act or a decision to initiate rehabilitation
proceedings might be made during one of the ordinary fiscal
years. In such a case if any of the facts listed in (i) to (iii) below
occurs, the total of the amounts falling under (i) to (iii) may be
included in deduction if the expired loss is based on the loss
incurred in each financial year before the applicable year.

D)

Disaster losses carried forward (Schedule 7(1))(i) When debt is discharged from a creditor:B)

If the total amount of capital and capital surplus is less thanor equal to zero, add the absolute value of the amount(Schedule 5(1) II).

* This allows a negative amount of capital and capital surplus to
be included in deduction even if the company is insolvent.

Gain on debt forgiveness
3. Enterprise tax deductible in the last fiscal yearv

The amount of enterprise tax (including the amount of local
corporate special tax) for the last fiscal year that includes the dateof the determination of the residual assets of the corporation, isto be included in the amount of deductible expenses for that
fiscal year. Enterprise tax is included in deductible expenses at thetime of filing (payment) in an ordinary fiscal year, but if it is notincluded in deductible expenses in the last fiscal year, thecompany loses the opportunity to include it in deductible
expenses.

(ii) When a gift is received from a director or officer:
Gain on donation of private property(iii) When an asset is revalued:
Gain on revaluation
The amount of loss carried forward is the amount after
deducting ‘C’ blue tax return losses and ‘D’ disaster losses.
Therefore, by giving priority to the deduction of expired losses,
blue tax return lossesvi can be carried forward for further years.

In other words, the amount of the expired losses can be
deductible after deduction of ‘C’ blue losses and ‘D’ disasterlosses and, for the last fiscal year, up to the amount of income
before deducting enterprise tax losses for the last fiscal year.

* For information on deductibility of tax losses carried forward, refer JapanTax Bulletin no. 22-01.

iCorporate Tax Basic Circular 12-3-2

Article 13 and 14(1)(i)and (v ) of the Corporate Tax Law
Article 59(1)(iv) of the Corporate Tax Law
iii Corporate Tax Basic Circular 12-3-7~9iv Article 117-5, Order for Enforcement of the Corporate Tax Law,
iivvi

Article 62-5(5) of the Corporate Tax Law
Article 57(1) of the Corporate Tax Law© Grant Thornton Taiyo Tax Corporation. All rights reserved. “Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients
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