Japan Tax Bulletin
Digital Transformation (DX) Investment Promotion Taxation
October 2021

3.

In order to achieve corporatetransformation (digital transformation)using digital technology during andafter the COVID era, it is essential to
implement management and digitalstrategies in an integrated manner. The
2021 tax reform established a systemthat allows companies to receive
support measures for digital-related
investments using cloud technology
necessary to realize DX after companywide approval has been granted by thecompetent minister.

- Equipment such as machinery,equipment, furniture, and fixtures thatmeet the following criteria:(i) Are necessary for the construction or
use of the cloud system;(ii) The equipment must not be used forthe business of software business,
information processing service business,or Internet-related service business; or(iii) The equipment must not have beenused for business purposes other than thecertified business after its production.

1.

OutlineIf an applicable entity acquires or
manufactures information technology
business adaptation equipment and uses
it for the business of the entity in Japan,
or makes expenditure for business
adaptation, which is capitalized, during
the period from June 16, 2021 to March
31, 2023 (the designated period), theentity may apply one of the following
measures in the year of use orexpenditure (Special Taxation Measures
Law 42-12-7①②④⑤).
a) Special depreciation of 30% of theacquisition cost or the amount ofdeferred assetsb) A special tax credit against corporate
tax equivalent to 3% (or 5%, dependingon the factors listed in section 5) of theacquisition cost or deferred assets
2.

Applicable Business Entity

This tax measure is applicable tocorporations that file blue tax returns andare certified business adaptation entities1.

1“Certified business adaptation entities” means abusiness operator that conducts information
technology business adaptation (limited to thosethat have been confirmed by the competent minister

Applicable Assets- Hardware should be used in conjunction
with software, such as for data
integration.
- Capitalized costs are those related to theconstruction of the cloud system, and areassumed to be the initial cost ofcustomization in the implementation of
the cloud system.
4.

Applicable Conditions

In order to receive the tax benefits, anapplication for approval of a business
adaptation plan that meets both thedigital requirements (D requirements)
and the corporate transformation
requirements (X requirements) must beprepared and submitted to the ministerwith jurisdiction over the business fieldof the business adaptation for review
and approval.
D requirements are as follows:(i) Linkage of data held by othercorporations, etc. or data newly-acquiredby businesses using sensors, etc. withexisting internal data;(ii) Use of cloud technology; and(iii) Obtain DX certification, which
certifies that the business is ready toimplement DX (DX-Ready), based on
an examination conducted by the Japan
Information-technologyPromotion
Agency (IPA).
as being particularly conductive to productivity
improvement or demand development) inaccordance with a certified business adaptation plan
as prescribed in the Industrial Competitiveness

It is a two-step process to obtain DX
certification, and then certification of
the business adaptation plan.
X requirements are as follows:(i) The company must be expected to
improve productivity or develop newdemand:- 1.5% improvement in ROA 2
compared to the base period (FY20142018); and- Sales growth rate ≧ sales growthrate in the industry an applicant is in forthe past 5 fiscal years + 5%.
(ii) The planning period shall be within 5years, and the project shall fall under anyof the following;a) Production and provision of newproducts and services ⇒ The ratio of
revenue from new products, etc. to theamount of investment shall be 10 times
or more.
b) Introduction of a new production
method for products and improvementof equipment efficiency ⇒ Reductionof manufacturing (sales) cost per unit ofproducts by 8.8% or morec) Introduction of a new sales methodfor products and a new provision
method for services ⇒ Reduction ofsales cost per unit of products, etc. by
8.8% or more(iii) The business adaptation to beimplemented must be based on themanagement decision of the entirecompany, not just one business unit orone business base (the resolution
document of the Board of Directors
must be attached)
5.

Limitations

The minimum investment amount is
0.1% of domestic sales on aconsolidated accounting basis, and themaximum investment amount is JPY30
billion per company.

Enhancement Act.
2 ROA = Operating profit / book value of total
assets x 100

-Special depreciation limit

The special depreciation limit is on a
per asset basis and is calculated as:a) If the total value of the qualifying
assets is JPY30 billion or lessSpecial depreciation limit = value ofqualifying asset x 30%.
b) If the total value of the subject
assets exceeds JPY30 billion

The maximum amount of corporate
tax credit is equivalent to 20% of thecorporate tax amount before
adjustment when combined with thespecial corporate tax credit under thissystem and the "Taxation on
Investment Promotion for Carbon
Neutralization".
6.

Notes

-The DX tax measure will only apply
to assets that are acquired after theapproval of business adaptation andare used for business purposes byMarch 31, 2023.

-Generally it takes 60-90 days to get
the DX certification. However, it isunclear at this time how long it willtake to certify the business
adaptation plan.

-Due to the tax reform in 2021, thescope of R&D taxation has been
expanded to include research anddevelopment related to softwarethat provides services through thecloud. Therefore, if there is overlap
between the scope of this tax
system and that of the R&D tax
system, it is necessary to comparethe benefits.

Special depreciation limit = JPY30billion x value of qualifying asset / total
value of qualifying assets x 30%.
-Corporate tax credit limit

The tax credit limit is also on a per
asset basis and is calculated as:a) If the total value of qualifying assets
is JPY30 billion or lessTax credit limit = Amount ofqualifying assets x 3% (*)b) If the total value of the qualifying
assets exceeds JPY30 billion
Tax credit limit = JPY30 billion x
value of qualifying asset / total value ofqualifying assets x 3% (*)*In case of data linkage with othercompanies outside the group, 5%.

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