Japan Tax Bulletin
Tax reform on the sized-based business taxation
systemAugust 2024
The size-based business taxation system was introduced in 2004.
The size-based business taxation system imposes “a value-addedtax” and “a capital-based tax” on companies with stated capital ofmore than JPY100 million. The taxes are levied even where acorporation is in currently loss position. A value-added tax islevied based on the sum of the distribution of earnings(comprising remuneration and salaries, net interest paid and net
rent paid) and profit or loss for a single year, and a capital tax islevied based on the amount of stated capital, capital reserve, othercapital surplus etc. as defined by the Corporation Tax Law.
The current system has been the subject of two principal
critiques.
(i)

The number of companies subject to the sized-based
business taxation system has decreased by approximately
two-thirds compared to when the system was introduced,
primarily due to factors such as a reduction in stated capitalto less than JPY100 million.

(ii)

Corporate actions are being taken with the deliberateintention of setting the amount of stated capital in order toavoid the application of the sized-based business taxation
system. This is exemplified by the setting of the statedcapital of wholly-owned subsidiaries at JPY100 million orless.

In response to this situation, a review of the sized-based
business taxation system was conducted as part of the 2024 tax
reform.

(iii) Corporations whose amount of paid-in capital (the sumof capital and capital surplus) as at the end of the current
financial year exceeds JPY1 billion.
The above reform shall be applicable to fiscal years beginningon or after 1 April 2025.
However, for the initial financial year beginning on or after 1
April 2025 (hereafter referred to as the 'first financial year'),transitional measures are provided, and corporations that meet allof the following requirements will be subject to the sized-based
business taxation system:(a)Corporations that are subject to the sized-based businesstaxation system for any fiscal year from the fiscal year
preceding the fiscal year that includes the effective date (30March 2024) to the fiscal year preceding its first financialyear;(b)

Corporations with stated capital of JPY100 million or lessat the end of the first financial year; and(c)Corporations with paid-in capital (the sum of stated capitaland capital surplus) exceeding JPY1 billion at the end of thefirst financial year.

2. Wholly-owned subsidiaries, etc.
In addition to 1, wholly-owned subsidiaries, etc. are also subject
to the sized-based business taxation system if they meet all of thefollowing requirements:(a)

Corporations with stated capital of JPY100 million or lessas at the end of the current financial year;(b)

A corporation that has a complete control relationship witha specified corporation* or a corporation in which all of its
issued shares are held by more than one specified
corporation within a 100% group; and(c)A corporation whose paid-in capital (the sum of its capitaland capital surplus) exceeds JPY200 million as at the end of
the current financial year.

1. Addition of Eligible Corporations

Due to the 2024 Tax Reform, in addition to corporations
currently subject to the sized-based business taxation system (a),corporations that fulfil all the requirements in (b) will also be
subject to the sized-based business taxation system for corporate
enterprise taxation.
(a)Corporations with stated capital exceeding JPY100 million
as at the end of the current financial year.

(b)

Corporations that meet all of the following requirements:(i) Corporations with stated capital or investments exceeding
JPY100 million as at the end of the previous financial year;(ii) Corporations whose amount of stated capital at the endof the current financial year is JPY100 million or less; and* Specified corporations: Corporations whose paid-in capital(the total of stated capital and capital surplus) exceeds JPY5billion (excluding corporations that are not subject to thesized-based business taxation system), and mutual companies
and foreign mutual companies provided for in the Insurance
business law.

The above tax reform will apply to fiscal years beginning on orafter 1 April 2026.
However, in order to mitigate the impact of the above tax
reform on wholly-owned subsidiaries, the following mitigation
measures are provided for subsidiaries that are newly subject tothis sized-based business taxation system.
(a)

For each financial year beginning between 1 April 2026 and
31 March 2027
2/3 reduction of the tax amount in excess of the amountcalculated under this taxation system.

(b)

Each financial year beginning between 1 April 2027 and 31March 2028
1/3 reduction of the tax amount in excess of the amountcalculated under this taxation system.

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