Taxationin Japan 2023

KPMG Tax Corporation

Taxation in Japan

PrefaceThis booklet is intended to provide a general overview of the taxation
system in Japan. The contents reflect the information available up to 31
October 2023.
While the information contained in this booklet may assist in gaining abetter understanding of the tax system in Japan, it is recommended thatspecific advice be taken as to the tax implications of any proposed or actual
transactions.
Further information on matters in this booklet can be obtained from KPMG
Tax Corporation either through your normal contact at the firm or using thecontact details shown below.
KPMG Tax Corporation
Tokyo Office
Izumi Garden Tower,
1-6-1 Roppongi, Minato-ku,
Tokyo 106-6012, Japan
Tel: +81 (3) 6229 8000
Fax: +81 (3) 5575 0766
E-mail: info-tax@jp.kpmg.com
Osaka OfficeOsaka Nakanoshima Building 15F,
2-2-2 Nakanoshima, Kita-ku,
Osaka 530-0005, Japan
Tel: +81 (6) 4708 5150
Fax: +81 (6) 4706 3881

Nagoya Office
Dainagoya Building 26F,
3-28-12, Meieki, Nakamura-ku,
Nagoya 450-6426, Japan
Tel: +81 (52) 569 5420
Fax: +81 (52) 551 0580
Kyoto OfficeNihon Seimei Kyoto Yasaka Building 7F,
843-2 Higashi Shiokoji-cho,
Shiokoji-dori Nishinotoin-higashiiru,
Shimogyo-ku,
Kyoto 600-8216, Japan
Tel: +81 (75) 353 1270
Fax: +81 (75) 353 1271
Hiroshima Office
Hiroshima Kogin Building 7F,
2-1-22 Kamiya-cho, Naka-ku,
Hiroshima 730-0031, Japan
Tel: +81 (82) 241 2810
Fax: +81 (82) 241 2811
Fukuoka OfficeKamiyo Watanabe Building 8F,
1-12-14 Tenjin, Chuo-ku,
Fukuoka 810-0001, Japan
Tel: +81 (92) 712 6300
Fax: +81 (92) 712 6301

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provide accurate andtimely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.

Contents

1

Taxation of Companies ................................................................ 1

1.1

Introduction ................................................................................ 1

1.2

Tax Status of Companies ............................................................ 1
Residence .......................................................................................... 1
Branch of a Foreign Company vs. Japanese Company ...................... 1
Permanent Establishment (PE) ......................................................... 2

1.3

Tax Rates..................................................................................... 5
Corporation Tax ................................................................................ 5
Business Tax ...................................................................................... 6
Prefectural and Municipal Inhabitant Taxes ................................... 11
Special Tax Due by Specified Family Company ............................... 12
Effective Statutory Corporate Income Tax Rate ............................. 14

1.4

Taxable Year of Companies ...................................................... 15

1.5

Taxable Income......................................................................... 15
Japanese Companies ....................................................................... 15
Foreign Companies Having a PE in Japan........................................ 15

1.6

Capital Gains ............................................................................. 16
Capital Gain Rollover Rules ............................................................. 16i

Special Rule for Land Acquired in 2009 and 2010........................... 17

1.7

Treatment of Excess Tax Losses ............................................... 17
Tax Loss Carry-Forwards ................................................................. 17
Tax Loss Carry-Back ......................................................................... 19
Change of Control ........................................................................... 20

1.8

Deduction of Expenses ............................................................. 21
Valuation of Inventories ................................................................. 21
Valuation of Marketable and Investment Securities ...................... 21
Provision for Bad Debts .................................................................. 22
Bad Debt Expenses.......................................................................... 24
Directors’ Compensation ................................................................ 25
Retirement/Severance Allowances for Directors ........................... 28
Restricted Stock .............................................................................. 29
Stock Options .................................................................................. 29
Devaluation Loss ............................................................................. 30
Corporate Taxes, etc. ...................................................................... 30
Donations ........................................................................................ 31
Entertainment Expenses ................................................................. 32
Interest: Thin Capitalization Regime/Earnings Stripping Regime ... 33
Translation into Japanese Currency (Yen) of Assets/Liabilities
in Foreign Currencies ...................................................................... 33
Management Service Fees .............................................................. 34
Allocation of Head Office Expenses ................................................ 35

1.9

Tax Depreciation....................................................................... 36
Fixed Assets and Depreciation ........................................................ 36
Deferred Charges ............................................................................ 41ii

1.10 Revenue to be excluded from Taxable Income ........................ 42
Dividends Received from Japanese Companies .............................. 42
Revaluation Gain on Assets............................................................. 43
Refunds of Corporate Taxes, etc. .................................................... 43

1.11 Tax Credits ................................................................................ 44
Withholding Income Tax Credits ..................................................... 44
Foreign Tax Credits ......................................................................... 45
Tax Credits for Research and Development (R&D) Costs ............... 45
Tax Credits for Promotion of Salary Increases ................................ 50
Restriction on Eligible Companies for Applying Tax Credits ........... 52

1.12 Administrative Overview .......................................................... 53
Tax Returns and Tax Payments ....................................................... 53
Tax Audits and the Statute of Limitations ....................................... 57

1.13 Group Taxation Regime ............................................................ 58
100 Percent Group .......................................................................... 58
Dividends Received Deduction (DRD) ............................................. 59
Deferral of Capital Gains/Losses ..................................................... 60
Provision for Bad Debts .................................................................. 62
Donations ........................................................................................ 62
Non-Recognition of Capital Gains/Losses from Transfers of
Shares to the Share Issuing Company ............................................. 63
Valuation Losses of Liquidating Companies/Merged
Companies ...................................................................................... 64

1.14 Japanese Group Relief System ................................................. 65
Applicable Company ....................................................................... 65
Offsetting Profits and Losses .......................................................... 65iii

Crystallization of Built-In Gains/Losses ........................................... 66
Write-Off of Tax NOLs and Restriction on Usage of Tax NOLs
and Unrealized Losses on Certain Assets at the Time
Immediately before the Start of or Participation in theJapanese Group Relief System ........................................................ 69
Aggregation Current Taxable Income and Tax NOLs ...................... 72
Tax Book Value Adjustments .......................................................... 73
Others ............................................................................................. 73

1.15 Corporate Reorganizations ....................................................... 74
Tax Qualified Reorganizations ........................................................ 74
Pre-Reorganization Losses .............................................................. 83
Taxation of Shareholders ................................................................ 85
M&A Using Own Shares .................................................................. 86

2

Taxation of Partnerships........................................................... 87

2.1

NK-Type Partnerships ............................................................... 87
Definition of NK-Type Partnerships ................................................ 87
Taxation of Partners ........................................................................ 88

2.2

Tokumei Kumiai ........................................................................ 90
Tokumei Kumiai (TK) ....................................................................... 90
Taxation of the Operator ................................................................ 91
Taxation of Silent Partners .............................................................. 91

2.3

Limitation on Utilization of Losses Derived from Partnerships 92
Corporate Partners of Partnerships Other than Japanese LLPs:
At-Risk Rule (AR rule) ...................................................................... 92
Individual Partners of Partnerships Other than Japanese LLPs ...... 93
Corporate Partners of Japanese LLPs .............................................. 94iv

Individual Partners of Japanese LLPs .............................................. 94

3

Taxation of Individuals.............................................................. 95

3.1

Introduction .............................................................................. 95

3.2

Taxpayers .................................................................................. 95
Classification of Individual Taxpayers ............................................. 95
Domicile .......................................................................................... 96
Short-Term Visitors ......................................................................... 97

3.3

Tax Rates................................................................................... 97
Tax Rates on Ordinary Income ........................................................ 97
Tax Rates on Capital Gains from Sales of Real Estate ..................... 98
Tax Rates on Investment Income .................................................... 99
Withholding Tax Rates on Investment Income ............................. 101
Tax Rates Imposed on Non-Residents .......................................... 102
Special Reconstruction Income Tax .............................................. 102

3.4

Assessable Income.................................................................. 103
Remuneration ............................................................................... 103
Treatment of Benefits ................................................................... 104
Exemptions and Concessions ........................................................ 108
Special Measures for Aggregation of Profits and Losses of Real
Estate Income Derived from Second-Hand Overseas Buildings.... 109

3.5

Allowable Deductions ............................................................. 111
Employment Income Deduction ................................................... 111
Retirement Income Deduction ..................................................... 112
Specific Deductions ....................................................................... 113

3.6

Personal Reliefs ...................................................................... 116v

Basic Deduction ............................................................................ 117
Spouse Deduction ......................................................................... 117
Special Spouse Deduction ............................................................. 118
Dependent Deductions ................................................................. 118
Additional Reliefs for Specific Cases ............................................. 119

3.7

Tax Credits .............................................................................. 120
Credit for Dividends ...................................................................... 121
Credit for Withholding National Income Tax ................................ 122
Credit for Foreign Taxes ................................................................ 122
Credit for Donations ..................................................................... 123

3.8

Remuneration Paid Outside Japan ......................................... 124

3.9

Exit Tax Regime....................................................................... 125

3.10 Filing Tax Returns and Tax Payments ..................................... 127
National Income Taxes .................................................................. 127
Inhabitant Taxes............................................................................ 129

3.11 Employers’ Obligations ........................................................... 129
National Income Taxes .................................................................. 129
Inhabitant Tax ............................................................................... 131

4International Tax .................................................................... 132

4.1

Foreign Dividend Exclusion..................................................... 132
Tax Treatment of Dividends from Foreign Subsidiaries ................ 132
Foreign Subsidiary ......................................................................... 133

4.2

Foreign Tax Credits ................................................................. 134
Basic Rules .................................................................................... 134viCreditable Limit ............................................................................. 134
Carry-Forward System .................................................................. 136
Tax Sparing Credits ....................................................................... 136

4.3

Transfer Pricing ....................................................................... 136
Transactions Subject to Transfer Pricing Legislation .................... 136
Related Overseas Companies ....................................................... 137
Arm’s-Length Price (ALP) .............................................................. 138
Price Adjustment Measure to Hard-to-Value Intangibles (HTVI) .. 139
Documentation Rules ................................................................... 141
Reporting of Information through Tax Returns ............................ 148
Miscellaneous ............................................................................... 150

4.4

Thin Capitalization Regime ..................................................... 150
Safe Harbor of Debt-Equity Ratio.................................................. 150
Definitions of Keywords ................................................................ 151
Amount to be Disallowed ............................................................. 152
Miscellaneous ............................................................................... 153

4.5

Earnings Stripping Regime ...................................................... 154
Limitation on Deductions for Excessive Interest Payments .......... 154
Definitions of Keywords ................................................................ 154
De Minimis Rules .......................................................................... 159
Deductions of Disallowed Interest Payments ............................... 160
Miscellaneous ............................................................................... 160

4.6

Controlled Foreign Company (CFC) Regime ........................... 161
Overall Picture of the CFC Regime ................................................ 161
Definitions of Keywords ................................................................ 163
Full-Inclusion Rules ....................................................................... 168

vii

Partial-Inclusion Rules ................................................................... 170
Tax Credits .................................................................................... 174
Tax Treatment of Dividends Received by a Japanese Company ... 174

4.7

Corporate Inversion ................................................................ 176

4.8

GloBE Rule – Income Inclusion Rule ....................................... 177
Outline .......................................................................................... 177
Corporation Tax on International Minimum Tax Amount for
Each Applicable Fiscal Year ........................................................... 177
Information Declaration System ................................................... 182
Local Corporation Tax on Specified Standard Corporation Tax
Amount ......................................................................................... 183

4.9

Taxation of Foreign Companies and Individuals/Tax Treaties 185
Tax Treaties ................................................................................... 185
Dividends, Interest and Royalties ................................................. 190
Real Estate .................................................................................... 193
Shares............................................................................................ 194

5

Indirect Tax ............................................................................. 199

5.1

Consumption Tax .................................................................... 199
Taxable Transactions..................................................................... 199
Export Transactions ...................................................................... 200
Digital Services .............................................................................. 201
Taxable Persons ............................................................................ 204
Taxpayers as an Importer ............................................................. 208
Taxable Base ................................................................................. 208
Tax Rate ........................................................................................ 209
Computation of Consumption Tax to be Paid ............................... 209

viii

Simplified Tax Credit System......................................................... 212
Taxable Period .............................................................................. 213
Tax Returns and Tax Payments ..................................................... 214
Invoicing System ........................................................................... 215

5.2

Customs and Tariffs ................................................................ 215
Customs Clearance and Importers of Record ............................... 216
Customs Duty Rate........................................................................ 216
Tariff Quota ................................................................................... 217
Customs Valuation ........................................................................ 217
Classification ................................................................................. 219
Rules of Origin ............................................................................... 220
Anti-dumping Duty........................................................................ 220
Recordkeeping .............................................................................. 221
Advance Rulings ............................................................................ 221
Post Entry Customs Audit and Related Administration ................ 222
Penalty Process and Statute of Limitations .................................. 223
Authorized Economic Operator Program ..................................... 223
Import Duty Savings Considerations ............................................. 224
Import and Export Data Access ..................................................... 226

5.3

Excise Duty.............................................................................. 227

6

Other Taxes and Surcharges ................................................... 228

6.1

Social Security and Payroll Taxes ............................................ 228

6.2

Stamp Duty ............................................................................. 229

6.3

Fixed Assets Tax and City Planning Tax .................................. 229

6.4

Business Occupancy Tax ......................................................... 229

ixTaxpayer........................................................................................ 229
Taxable Basis and Tax Rate ........................................................... 230
Method of Collection of Business Occupancy Tax ........................ 230

6.5

Registration and Real Estate Acquisition Tax ......................... 230

6.6

Inheritance and Gift Taxes...................................................... 232
Scope of Taxable Assets ................................................................ 232

x1

Taxation of Companies

1.1

Introduction

Japanese corporate income taxes consist of the following:• corporation tax (national tax)
• business tax (local tax)
• prefectural and municipal inhabitant taxes (local tax)
The relevant tax rates and details of the respective taxes are discussed
later in this chapter.
In addition to the normal corporate income taxes, certain closely heldcompanies known as Specified Family Companies can be subject toadditional taxation on undistributed retained earnings (please see 1.3.4).

1.2

Tax Status of Companies
Residence

In determining the residency of a company for tax purposes, Japanutilizes the ‘place of head office or main office’ concept, not the‘effective place of management’ concept. A Japanese company is defined
as a company whose head office or main office is located in Japan in the
tax law.

Branch of a Foreign Company vs. Japanese Company
Generally, there is no material difference between a branch of a foreigncompany and a Japanese company when computing taxable income. Tax
deductible provisions and reserves, the limitation of certain allowable
expenses such as entertainment expenses and donations, and thecorporate income tax rates are the same for both a branch and aJapanese company.

1However, a branch and a Japanese company have differing legal
characteristics and this results in differences in tax treatment in certain
areas including the following:• Scope of taxable income: please see 1.5.
• Special Tax Due by Specified Family Company (discussed in 1.3.4): notapplied to a branch of a foreign company• Japanese Group Relief System (discussed in 1.14): not applied to abranch of a foreign company• Foreign Dividend Exclusion (discussed in 4.1): not applied to a branchof a foreign company• Thin Capitalization Regime (discussed in 4.4): not applied to a branchof a foreign company• Controlled Foreign Company (CFC) Regime (discussed in 4.6): notapplied to a branch of a foreign company

Permanent Establishment (PE)Even where a foreign company has not established a registered branch inJapan, it can be treated as having a de facto branch or PE in Japan incertain circumstances. The Japanese Corporation Tax Law provides thedefinition of a PE for Japanese tax purposes.
(1) Fixed Place PE
A fixed place of business in Japan through which the business of aforeign company is carried on including the following facilities:
 a place of management, a branch, an office, a factory or a workshop
 a mine, an oil or gas well, a quarry or any other place of extracting
natural resources2(2) Construction PE
A construction or installation project or services in the supervising or
superintending of such projects in Japan, which a foreign company
carries on for a period of over 1 year
Where a period of a contract for a construction or installation project orservices discussed above is shorter than 1 year by splitting a contract
into two or more contracts and one of the principal purposes for the
splitting was to avoid construction PE status, the period of the project orservices should be determined by aggregating the periods of all the split
contracts, unless there are reasonable grounds for not doing so.
(3) Agent PE
A person who habitually concludes the following contracts in Japan onbehalf of a foreign company or habitually plays the principal role leading
to the conclusion of the following contracts in Japan on behalf of aforeign company that are routinely concluded without material
modification by the foreign company:(i) a contract concluded in the name of the foreign company, or(ii) a contract for the transfer of the ownership of, or for the granting of
the right to use, property owned by that foreign company or that theforeign company has the right to use, or(iii) a contract for the provision of services by that foreign company
Where a person acting on behalf of a foreign company in Japan carries
on its business independently from the foreign company in the ordinary
course of that business, the person is treated as an independent agent
which does not constitute a PE for the foreign company. However, if theperson acts exclusively or almost exclusively on behalf of its closely
related companies, that person is not considered as an independent
agent.

3

(4) Specific Activity Exemptions
Notwithstanding the provisions in (1) Fixed Place PE, the following places
will not constitute a PE for a foreign company, provided that thefollowing activity (or the overall activity of the fixed place of business inthe case of (vi)) is of a preparatory or auxiliary character:(i) a facility used solely for the purpose of storage, display or delivery of
goods or merchandise belonging to the foreign company(ii) a place for the maintenance of a stock of goods or merchandise
belonging to the foreign company solely for the purpose of storage,
display or delivery(iii) a place for the maintenance of a stock of goods or merchandise
belonging to the foreign company solely for the purpose ofprocessing by another enterprise(iv) a fixed place of business solely for the purpose of purchasing goods
or merchandise or of collecting information, for the foreign company(v) a fixed place of business solely for the purpose of carrying on, for theforeign company, any other activity(vi) a fixed place of business solely for any combination of activities
mentioned in subparagraphs (i) to (v).
Similar rules are also provided for (2) Construction PE and (3) Agent PE.
Furthermore, anti-fragmentation rules (rules to prevent a foreigncompany or a group of closely related companies from fragmenting acohesive business operation into several small operations in order toavoid PE status) are provided.

4

1.3

Tax Rates
Corporation Tax

Corporation tax is imposed on taxable income of a company at thefollowing tax rates:
Tax rates
Tax base
Taxable income up to
JPY8 million
in a year
Taxable income
in excess of
JPY8 million
(1)

(2)

Small and mediumscale companies(1)19%(15%(2))Other than small andmedium-scalecompanies

23.2%

23.2%

A small and medium-scale company is a company whose statedcapital is JPY100 million or less, except for either of the following
cases:-

where 100 percent of the shares of the company are directly or
indirectly held by one large company (a company whose statedcapital is JPY500 million or more).

-

where 100 percent of the shares of the company are directly or
indirectly held by two or more large companies in a 100 Percent
Group defined in 1.13.1.

15 percent is applied to fiscal years beginning prior to 31 March
2025. Note that 15 percent will not be applied to a small andmedium-scale company whose average taxable income for thepreceding 3 years is over JPY1.5 billion.

5

Business Tax
Business tax is basically imposed on taxable income of a company.
However, if the amount of stated capital is over JPY100 million, sizebased business tax is also levied. Moreover, if a company conducts
electricity/gas supply business or insurance business, business tax is
imposed on the adjusted gross revenue instead of its taxable income.
Please note the following: Part of business tax levied on taxable income/adjusted gross revenue
is collected as special business tax by the national government and isallocated to local governments in order to decrease the gap in tax
revenue between urban and rural areas.
 Business tax and special business tax are tax deductible expenses
when tax returns for such taxes are filed.
 Business tax rates indicated below are the standard tax rates.
Specific rates are determined by local tax jurisdictions within the
maximum tax rates.
(1) Companies with Stated Capital in Excess of JPY100 Million(other than companies indicated in (3))

 Business tax levied on taxable income and special business tax
Business tax

Special business tax

Taxable baseStandard
tax rates

Taxable baseTax rate

Taxable income

1.0%

Taxable incomex Standard tax rate ofBusiness Tax

260%

6

 Size-based business tax
Size-based business tax consists of two components and the tax bases ofeach component are as follows:
Components

Taxable base

Added value
component(a) Labor costs+ (b) Net interest payment+ (c) Net rent payment+ (d) Taxable income/tax loss for current year

Capitalcomponent

Larger amount of the following: Stated capital + Capital surplus for tax purposes
 Stated capital + Capital reserve for accounting
purposes

Where (a) (labor costs) is larger than 70 percent of the total of (a), (b)and (c), the tax base of the added value component will be reduced by
the excess portion.
Moreover, there are temporary measures to reduce the tax base of theadded value component if the condition (i) (for companies whose
number of regular employees is 1,000 or more with stated capital of JPY1
billion or more, the condition (i) and the requirement for the
management declaration on multi-stakeholders) for the tax credits forpromotion of salary increases discussed in 1.11.4 (for fiscal years
beginning between 1 April 2022 and 31 March 2024) is satisfied.
Size-based business tax rates are as follows:
Components

Standard tax rates

Added value component

1.2%

Capital component

0.5%

7

(2) Companies with Stated Capital of JPY100 Million or Less(other than companies indicated in (3))

 Business tax levied on taxable income and special business tax
Business tax
Taxable base(taxable income)In excess of
JPY4 million
JPY8 million
(*)

Up to
JPY4
million
JPY8
million-Special business tax
Standard
tax rates(*)
3.5%
5.3%
7.0%

Taxable baseTax rate

Taxable incomex Standard tax rateof Business Tax

37%

Only the highest rate of 7.0 percent is applied where a company has
offices in at least three different prefectures and stated capital of atleast JPY10 million.

 Size-based business tax
Not applicable.
(3) Companies Conducting Electricity/Gas Supply Business or Insurance
Business
Companies conducting electricity/gas supply business or insurance
business are subject to business tax on adjusted gross revenue instead oftaxable income, except for the following companies:
 Companies conducting retail electricity business, power generation
business or specific wholesale supply business among companies
conducting electricity supply business are subject to business tax on
adjusted gross revenue and size-based business tax, or business tax
on adjusted gross revenue and taxable income depending on theamount of stated capital.

8 Companies conducting specific gas supply business among companies
conducting gas supply business are subject to business tax on
adjusted gross revenue and size-based business tax.
 Companies conducting general gas supply business among companies
conducting gas supply business are subject to business tax under theprevious categories (1) and (2).
(i) Companies other than (ii), (iii) and (iv) Business tax levied on adjusted gross revenue and special businesstax

Business tax

Special business tax

Taxable baseStandard
tax rate

Adjusted grossrevenue

1.0%

Taxable baseTax rate

Adjusted gross revenue
x Standard tax rate ofBusiness Tax

30%

 Size-based business tax
Not applicable.
(ii) Companies with Stated Capital in excess of JPY100 million among
companies conducting retail electricity business, power generation
business or specific wholesale supply business Business tax levied on adjusted gross revenue and special businesstax

Business tax

Special business tax

Taxable baseStandard
tax rate

Adjusted gross revenue

0.75%

9

Taxable base
Adjusted gross revenue
x Standard tax rate ofBusiness Tax

Tax rate40% Size-based business tax
Components

Standard tax rates

Added value component

0.37%

Capital component

0.15%(iii) Companies with Stated Capital of JPY100 million or less among
companies conducting retail electricity business, power generation
business or specific wholesale supply business Business tax levied on adjusted gross revenue and taxable income,and special business tax
Business tax

Special business tax

Taxable baseStandard
tax rates

Adjusted gross revenue

0.75%

Taxable income

1.85%

Taxable baseTax rate

Adjusted gross revenue
x Standard tax rate ofBusiness Tax

40%

 Size-based business tax
Not applicable.
(iv) Companies conducting specific gas supply business Business tax levied on adjusted gross revenue and special businesstax

Business tax

Special business tax

Taxable baseStandard
tax rate

Adjusted gross revenue

0.48%

10

Taxable base
Adjusted gross revenue
x Standard tax rate ofBusiness Tax

Tax rate62.5%

 Size-based business tax
Components

Standard tax rates

Added value component

0.77%

Capital component

0.32%

Prefectural and Municipal Inhabitant Taxes
Prefectural and municipal inhabitant taxes consist of two elements; (1)an income tax calculated based on national corporation tax and (2) a percapita tax. Specific rates are determined by local tax jurisdictions within
the maximum tax rates.
(1) Inhabitant Tax Levied on Corporation Tax
Part of inhabitant tax levied on corporation tax is collected as local
corporation tax by the national government, which is allocated to local
governments in order to decrease the gap in tax revenue between urban
and rural areas.

 Inhabitant tax
Inhabitant tax
Taxable baseLocal corporation tax

Tax rates

Standard
tax rate
Corporation tax(National tax)
Maximumtax rate

Prefectural
1.0%
Municipal
6.0%
Total
7.0%
Prefectural
2.0%
Municipal
8.4%
Total
10.4%
11

Taxable baseTax rate

Corporation tax(National tax)

10.3%

(2) Per-Capita Tax
Per-capita prefectural tax is levied according to a published scale which
varies based upon the capital amount(*) of the company.
Per-capita municipal tax is similarly levied according to a published scale
which varies based upon the capital amount(*) of the company and thenumber of the company’s employees within the municipality.
(*)

The capital amount means the larger amount of the following:- Stated capital + Capital surplus for tax purposes- Stated capital + Capital reserve for accounting purposes

Special Tax Due by Specified Family Company
A Specified Family Company is liable to a special tax on retained earnings
for each fiscal year.
A ‘Specified Family Company’ is defined as a Japanese company that isstill a Controlled Company (defined below) even if its shareholders that
do not fall within the definition of Controlled Companies are excluded at
the time of the judgment. Note that a Specified Family Company does
not include a small and medium-scale company as defined in 1.3.1.
If a Japanese company is directly or indirectly controlled by one
shareholder and related persons of the shareholder, the company is a‘Controlled Company.’ For the purposes of this rule, if one shareholder
and its related persons hold more than 50 percent of the total
outstanding shares or more than 50 percent of the voting rights ofanother company, the company is treated as ‘controlled’ by theshareholder and its related persons. ‘Related persons’ are (i) the
shareholder’s family relatives, (ii) a company controlled by theshareholder and (iii) a company commonly controlled by a person which
controls the shareholder.
The taxable retained earnings (the portion of taxable income which
remains as retained earnings) of a fiscal year are the excess ofundistributed profits over the largest of the following three amounts:12 JPY20 million (reduced proportionately where fiscal year is less than
12 months)• 40 percent of the taxable income for the fiscal year
• 25 percent of the stated capital less the accumulated retained
earnings at the end of the fiscal year not including the earnings forthat fiscal year
The additional corporation tax is computed at the following rates per
year:
Excess retained earnings

Tax rates

Up to JPY30 million

10%

Excess over JPY30 million and up to JPY100 million

15%

Excess over JPY100 million

20%

Inhabitant tax is also payable on the above corporation tax.

13

Effective Statutory Corporate Income Tax Rate
Given the potential use of graduated rates in the calculation of both
corporation and business taxes, the differing local tax rates utilized andper-capita liabilities on prefectural and municipal taxes, effective
statutory tax rates vary from taxpayer to taxpayer. In addition, theeffective statutory tax rate for companies with stated capital in excess of
JPY100 million, which are subject to size-based business tax, is partly
determined by a number of factors other than taxable income.
For illustrative purposes, the simplified effective statutory tax rate based
upon the maximum rates in Tokyo is as follows:
Companies with statedCompanies with statedcapital in excess of JPY100 capital of JPY100 million
millionor less
Corporation tax

23.2%

23.2%

Business tax(1)

1.18%

7.48%

Special business tax
Inhabitant tax
Local corporation tax

2.6%(1.0% x 260%)

2.4128%(23.2% x 10.4%)

2.3896%2.59%(7.0% x 37%)2.4128%(23.2% x 10.4%)

2.3896%(23.2% x 10.3%)(23.2% x 10.3%)

Total

31.7824%

38.0724%

Effective statutory
tax rate(2)30.62%

34.59%(1)

In addition, companies with stated capital in excess of JPY100 million
are subject to size-based business tax which increases the overall
effective statutory tax rate.

(2)

The effective statutory tax rate is calculated after taking into accountthe tax deductible nature of business tax and special business tax
payments.
14

1.4

Taxable Year of Companies

The taxable year of a company is in line with the company’s accounting
period (i.e., fiscal year). A taxable year cannot exceed 12 months induration but can be less than 12 months.

1.5

Taxable Income
Japanese Companies

Taxable income represents the net of gross revenue less costs, expenses
and losses, in general, on an accrual basis in accordance with fairaccounting standards and as adjusted in accordance with therequirements of the tax laws.
Generally speaking, a Japanese company is subject to Japanese
corporate income taxes on its worldwide income. In order to eliminate
double taxation on income, the foreign taxes levied on a Japanesecompany may be credited against Japanese corporation tax and local
inhabitant tax under the foreign tax credits system as discussed in 4.2.
Note that dividends received from Foreign Subsidiaries are exempt in
calculation of a Japanese company’s taxable income under the foreign
dividend exclusion (FDE) system as discussed in 4.1.

Foreign Companies Having a PE in JapanA foreign company operating in Japan through a PE is liable for corporate
income taxes only on the income attributable to the PE under thedomestic tax laws. (Please note that certain Japanese source income not
attributable to the PE in Japan (e.g., capital gains from sales of realestate located in Japan and shares in certain Japanese companies)
should still be subject to corporate income taxes basically in the same
way as for a foreign company not having a PE in Japan.)The rules including the following are applied in calculating income
attributable to a PE in line with the Authorized OECD Approach (AOA)(1):15

 Income attributable to a PE is the income that the PE would haveearned if it were a distinct and separate enterprise from its head
office.
 Profits/losses derived from internal dealings are recognized at anarm’s length price in general. (Note that internal interest for nonfinancial institutions and internal royalties on intangibles are notrecognized if a tax treaty including a provision equivalent to the preamended Article 7(2) is applied.) When the amount of capital of a PE is smaller than the capital
attributable to the PE (capital to be attributable to the PE if the PE
were a distinct and separate enterprise from its head office), interest
expenses corresponding to such deficient portion are not allowed in
calculating income attributable to the PE.
(1)

AOA’ is an approach to calculate income attributable to a PE set out
in the ‘Report on the Attribution of Profits to Permanent
Establishments’ released by the OECD in 2008 and 2010.

(2)‘The pre-amended Article 7’ is Article 7 of the OECD Model Tax
Convention before the 2010 amendment. As the AOA was fully
adopted in Article 7 of the OECD Model Tax Convention when it wasamended in 2010, the pre-amended Article 7 adopted only partially
the AOA. Thus, the tax treatment may differ depending on which
type of Article 7 is included in the applicable tax treaty.

‘

1.6

Capital Gains

Capital gains from the sale of land, securities, etc. are subject to normal
corporate income taxes in the same manner as ordinary trading income
regardless of holding period.

Capital Gain Rollover Rules
Taxation of income realized from assets within the categories listed
below may be deferred by reducing the value of newly acquired fixed
assets by the amount of that income. Note that there are a number of
additional conditions with regard to accounting procedures and timing of16

acquisition and type of new fixed assets which must be met for this relief
to apply.
government subsidies
insurance loss payments
exchange of properties
acquisition of replacement property which is located in specificdistricts or falls under specific categories

Special Rule for Land Acquired in 2009 and 2010
In addition to the above, there is a special rule for land acquired in 2009
and 2010, which was introduced in the 2009 tax reform.
Where a company sells their land in Japan acquired in 2009 and 2010
after they have owned it for more than 5 years as of 1 January of theselling year, a special deduction can be applicable. The amount of thespecial deduction is the lower of JPY10 million or the amount of thecapital gain.
This special deduction also applies to individual taxpayers (please see
3.3.2).

1.7

Treatment of Excess Tax Losses
Tax Loss Carry-Forwards

Where a tax loss is realized in a given fiscal year, provided the company
has blue-form tax return filing status (please see below), that loss may
be carried forward by the company for use in sheltering taxable profits
of a future fiscal year.
The maximum deductible amount of tax loss carry-forwards is up to 50
percent of taxable income of the fiscal year.
By virtue of the 2021 tax reform, in consideration of the unprecedented
situation caused by COVID-19, temporary special measures wereintroduced for tax loss carry-forwards based on certain amendments to17

the Industrial Competitiveness Enhancement Act. The measures allow a
company satisfying certain conditions to utilize the tax loss carry-forward
system for tax losses incurred in fiscal years including the day during theperiod from 1 April 2020 to 1 April 2021 in principle, up to 100 percent of
current taxable income to the extent of the amount of investment statedin a certified plan under the amended Industrial Competitiveness
Enhancement Act (e.g., business rebuilding or reorganizations) over theperiod up to 5 years.
There are exceptional rules whereby tax loss carry-forwards can beoffset against the total amount of taxable income of the fiscal year,
which are applied to the following companies:
 Small and medium-scale companies defined in 1.3.1.

 Tax qualifying Tokutei Mokuteki Kaisha (TMKs) and Toushi Houjin(THs), etc.

 Companies which commenced rehabilitation procedures, etc.
This rule is applicable for fiscal years with days falling within a 7-year
period from the day on which the rehabilitation plan was confirmed. If
the company is re-listed on a Financial Instruments Exchange, thecompany will not be eligible for the fiscal years ending on or after thedate when the company is re-listed.
 Newly established companies
This rule is applicable for fiscal years with days falling within a 7-year
period from the establishment date. If the company is listed on a
Financial Instruments Exchange, the company will not be eligible forthe fiscal years ending on or after the date when the company islisted.
Note that this rule is applicable except for the following companies:- a company in which 100 percent of the shares are directly or

indirectly held by one large company (a company whose statedcapital is JPY500 million or more)18

- a company in which 100 percent of the shares are directly or

indirectly held by two or more large companies in a 100 Percent
Group defined in 1.13.1.

- a parent company established under a Share-Transfer (KabushikiIten) transaction

Tax loss carry-forwards can be utilized against taxable income for thefollowing periods depending on when the tax losses are suffered: 9 succeeding years - tax losses incurred in fiscal years ending on orafter 1 April 2008 and beginning before 1 April 2018 10 succeeding years - tax losses incurred in fiscal years beginning on
or after 1 April 2018
It should be noted that there is no distinction between losses of arevenue or capital nature for these purposes.
Obtaining blue-form tax return filing status confers a number of benefits
upon a company, the most important of which being the ability to carryforward tax losses as explained above. The conditions for obtaining blueform tax return filing status are not onerous, however it is importantthat a timely application is made (i.e., submission of an application bywhichever is the earlier, either 3 months from the establishment of thecompany or the end of the first fiscal year) to ensure tax losses are notextinguished.
Please see 1.15.2 for the treatment of pre-reorganization losses incurredin the case of corporate reorganization.

Tax Loss Carry-Back
The Japanese Corporation Tax Law also provides for a tax loss carry-backsystem at the option of the taxpayer company. This tax loss carry-backsystem, under which a company suffering a tax loss can get a refund of
the previous fiscal year’s corporation tax by offsetting the loss against
the income for the previous fiscal year, has been suspended since 1 April
1992 except for certain limited circumstances, including the following:19 small and medium-scale companies defined in 1.3.1
 fiscal years including the date of dissolution
 fiscal years ending during liquidation procedures

Change of Control
Where an ownership change occurs for a company which has tax losses
incurred in prior fiscal years or assets having built-in losses, if one ofcertain specified events occurs within 5 years from the date of theownership change, utilization of the tax losses of the company may be
restricted.
An ownership change for the purposes of this rule occurs when a newshareholder directly or indirectly acquires more than 50 percent of theoutstanding shares in a company except for acquisitions through certain
events such as a tax-qualified merger.
The specified events include the following:(i) (a) Where a company was a dormant company just before theownership change, (b) the company starts its business after theownership change.
(ii) (a) Where a company ceased (or plans to cease) its business carriedon just before the ownership change after the ownership change, (b)the company receives loans or capital contributions, the amount of
which exceeds five times the previous business scale.
(iii) In the case of (i)(a) or (ii)(a), the company is merged into anothercompany under a tax-qualified merger.
In the above cases, deduction of built-in losses of assets of the company
may be restricted as well.

20

1.8

Deduction of Expenses
Valuation of Inventories

The cost of inventories must include the entire actual cost of acquisitionof such inventories. Purchase or manufacturing cost variances are
required to be adjusted and recorded in the books of account. If not so
adjusted, the variances, particularly those which are allocable to theyear-end inventories, must be taken up as an adjustment in the tax
return.
Valuation of inventories at the end of each fiscal year must be made inaccordance with the method(s) reported for each class of inventory to
the tax office by the company. The valuation methods allowable for tax
purposes are cost method (specific identification, FIFO, weighted
average, moving average, recent purchase, or retail price discountmethod) or lower of cost or market value method.
The valuation method selected by the company must be appliedconsistently. If a company wishes to change the current method, anapplication for change of method must be submitted to the tax officeprior to the commencement date of the fiscal year in which the change is
to be effected.
At the end of each fiscal year, a physical inventory must be taken and alist thereof must be prepared (if not at the end of the fiscal year, areconciliation between the physical inventory and the year-end
inventory will be required).

Valuation of Marketable and Investment Securities
The acquisition cost of securities is the total of the price paid andincidental expenses in the case of acquisition by purchase or by
subscription. However, where shares are subscribed for at a value below
market price (except where such subscription is made equally by existing
shareholders), generally market value is treated as acquisition cost
regardless of the price actually paid.

21

Valuation of securities at the end of each fiscal year must be made inaccordance with the following method(s):Kind of securities
Securities held for
trading purposes
Other securities(*)

Valuation methods
Mark-to-market valuation method
Cost method(*)(weighted average or moving average)

In order to prevent tax avoidance by creating tax losses from thetransfer of shares in a subsidiary following dividends received fromthat subsidiary, the tax book value of shares in the subsidiary is
reduced by the amount equivalent to non-taxable dividend income
received from the subsidiary if a parent company received dividends
from the subsidiary which meet certain conditions (e.g., the amountof dividend received from a specific relationship subsidiary in a fiscal
year is greater than 10 percent of tax book value of shares in thespecific relationship subsidiary, etc.).

The transfer cost of securities is calculated in accordance with themethod(s) reported for each class of securities to the tax office by thecompany. Subsequent changes to the adopted method must be made ina similar manner as discussed under valuation of inventories above. Notethat amortization or accumulation is required in respect of securities
which are to be held to maturity.

Provision for Bad Debts
The allowable amount of a provision for bad debts is the total of (i) and(ii) below:(i) Specific doubtful receivables provision
A provision for a limited range of doubtful receivables, as specifically
identified under the tax law (up to the relevant limits specified under the
tax law)22

(ii) General bad debt provision
A provision for potential bad debts among existing receivables (otherthan those falling under (i) above) based upon the actual bad debt ratio
for the preceding 3 years
The amount of (ii) is calculated using the formula below:
Outstanding accounts
receivable at the end of the
fiscal year
(other than those under (i))

xAverage amount of bad debts forthe prior 3 years
Average outstanding accounts
receivable for prior 3 years

Provisions for bad debts are allowable only for companies categorized
into (A) or (B) below for tax purposes. Moreover, for companies
categorized into (B), provision for bad debts for tax purposes is limited toonly certain receivables.
(A)

Companies

Receivables subject tothe provision(*)
(*)

(B)

• Small and mediumCertain companies whichscale companies
hold certain monetarydefined in 1.3.1
claims• Banks, insurance(e.g., receivables
companies and similar incurred in finance lease
companies
transactions)
Finance lease
Monetary claims
receivables, etc.

Accounts receivable from companies in a 100 Percent Group defined
1.13.1 are excluded for fiscal years beginning on or after 1 April 2022.

For a small and medium-scale company defined in 1.3.1 (excluding acompany whose average taxable income for the preceding 3 years isover JPY1.5 billion), as an alternative to the formula above, the statutory
provision rate of bad debts for each industry may be applied against thecompany’s outstanding accounts receivable. The statutory provision23

rates are as shown below:
Industry sector

Statutory provision rates

Wholesale and retail

1.0%

Manufacturing

0.8%

Finance and insurance

0.3%

Installment retailer

0.7%

Other

0.6%

Bad Debt Expenses
If the following facts have occurred, the following amounts are treatedas tax deductible bad debt expenses in the fiscal year the facts arise:Facts

Bad debt expense amount

Approval of rehabilitation plans inaccordance with the Corporate
Rehabilitation Law or the Civil
Rehabilitation Law

The amount determined to be
written off

Approval of special liquidation
proceedings under the Companies
Act

The amount determined to be
written off

Resolution at creditors’ meetings or acontract between related parties by
arrangement by governments orbanks

The amount determined to be
written off

A notice issuance to a debtor who
has been insolvent for a certain
periodThe amount declared to be
written off in the notice

Also, a company can record a bad debt for a receivable from a debtor in
its accounting books when it becomes certain that the debtor cannot pay
off the receivable considering the financial situation and insolvency ofthe debtor.
24

Moreover, for receivables incurred from continuous sales transactions,when 1 year has passed since the last transaction with a debtor (a sales
transaction to the debtor or a collection from the debtor, whichever islater) or when expected costs to collect money exceed the outstanding
receivables, a company can write off the receivables with a remainingbalance of JPY1 in its accounting books.

Directors’ Compensation
If compensation (excluding retirement/severance allowances, which are
discussed in 1.8.6) paid to company directors (e.g., members of theboard of directors, officers and statutory auditors) falls under one of thefollowing three categories, (1) (2) or (3) below, the compensation isallowable as a deduction for corporation tax purposes, except for cases
where the amount is unreasonably high or it is paid by concealing facts
or disguising the accounting books.
(Please note that the keywords in this section are explained in (4).)(1) Fixed Amount Periodical Compensation‘Fixed amount periodical compensation’ means compensation which isregularly paid on a monthly/weekly/daily basis with a fixed amountthrough a fiscal year.
If the amount of the compensation is revised for the following reasons,regularly paid compensation of which the amounts before the change
are stable and regularly paid compensation of which the amounts after
the change are stable are treated as fixed amount periodical
compensation:- annual revision (revision made within 3 months from the beginningof the fiscal year, in principle)- extra-ordinary revision due to unavoidable reasons (e.g.,
reorganizations)- revision to decrease base compensation due to significant
25deterioration in the company’s financial situation
Fringe benefits where they are continuously provided and the value ofthe benefits is generally stable on a monthly basis are also categorized as
fixed amount periodical compensation.
(2) Fixed Compensation Notified in Advance‘Fixed compensation notified in advance’ is compensation satisfying all of
the following three conditions:(i) It is paid at a fixed time by a fixed amount of cash (or by a fixed
number of shares/stock options or by specified restricted
stock/specified stock options in exchange of a fixed amount ofmonetary claims for compensation).
(ii) It falls under neither ‘fixed amount periodical compensation’
discussed in (1) nor ‘performance-based compensation’ discussed in(4)(iv).
(iii) Advance notification stating details of the compensation is filed withthe competent tax office.
(This requirement is not imposed on certain types of compensation(e.g., compensation paid to non-executive directors of a non-family
company).)(3) Deductible Performance-Based Compensation‘Deductible performance-based compensation’ means performancebased compensation discussed in (4)(iv) that meets all of the following
four conditions:(i) It is paid to a managing director (a director involved in execution of
the business operations of a company) by a non-family company or afamily company that is wholly owned by a non-family company.
(ii) The amount of cash compensation, the number of shares/stock
options issued/granted as compensation or the number of cancelledstock options is calculated based on performance-linked parameters26

and the calculation method satisfies the following:-

The ceiling of the compensation is pre-determined.

-

The calculation method for the managing director is similar tothat for other managing directors.

-

The calculation method must be determined by theCompensation Committee prescribed by the Companies Act orequivalent procedures within the prescribed periods.

-

The calculation method is disclosed in a timely manner in a
Securities Report or certain similar reports.

(iii) The compensation is paid or expected to be paid to the director
within the prescribed periods.
(iv) The company records the compensation as an expense in its
accounting books when it is paid out or the company reverses a
provision for directors’ compensation in its accounting books.
(4) Definitions of Keywords(i) Specified restricted stock: please see 1.8.7.
(ii) Specified stock options: please see 1.8.8.
(iii) Shares (including specified restricted stock) issued as compensationmust be listed shares and stock options (including specified stock
options) granted as compensation must be those where the holder isentitled to obtain listed shares at the time of exercise. Moreover,they must be issued or granted by a company receiving services
performed by the individual or by a company holding directly or
indirectly more than 50 percent of the company receiving services.
(iv) Performance-based compensation is compensation falling undereither of the following:-

cash or shares/stock options the amount or number of which is27

determined based on performance of the company receiving
services or its related companies-

specified restricted stock/specified stock options the number ofwhich cancelled fluctuates based on any factor other than thelength of the period of services(v) Performance-linked parameters are broadly as follows:-parameters indicating profitability (e.g., profits, EBITDA, ROE andROA) disclosed in a Securities Report-parameters reflecting share market value-

parameters reflecting sales proceeds disclosed in a Securities
Report (only when they are used together with either of theabove two parameters.)

Retirement/Severance Allowances for Directors
Costs for retirement/severance allowances paid to company directors
are treated as follows:
Retirement/severance allowancesTaxtreatment

Not ‘performance-based compensation’ discussed in
1.8.5 (4)(iv) (1)Deductible(2)‘Deductible performance-based
compensation’ discussed in 1.8.5 (3)Deductible(2)Not ‘deductible performance-based
compensation’Nondeductible‘Performancebased
compensation’(1)

Where compensation by specified restricted stock or specified stock
options is accounted for as an expense over the service period, suchcompensation does not fall under Not 'performance-based
compensation' even if the end date of the transfer restriction periodof specified restricted stock or the start date of the exercisable
period of specified stock options is the resignation date of a director28

so that the compensation is treated as retirement income forindividual income tax purposes.
(2)

Note that it could be non-deductible if the amount is unreasonably
high, or it is paid by concealing facts or disguising the accounting
books.

Restricted Stock
Where a company issues specified restricted stock to individuals ascompensation for services performed by them, costs for such services
are deductible in the fiscal year when the transfer restrictions on thestock are determined to be released.
Restricted stock is defined as stock which is subject to restrictions ontransferability for a certain period of time and forfeiture upon certain
trigger events. Restricted stock is treated as specified restricted stock in
certain cases including where an employee/director of a company
contributes monetary claims for their compensation to the company inorder to obtain restricted stock from the company (i.e., a contributionin-kind).
Costs for specified restricted stock issued to company directors are
deductible if such compensation falls under ‘fixed compensation notified
in advance’ discussed in 1.8.5 (2), except for cases where the amount isunreasonably high, etc.
Please see 3.4.2 (8) for the individual income tax treatment of restricted
stock.

Stock Options
When a company grants specified stock options to individuals ascompensation for services performed by them, costs for such services
are deductible at the time of exercise of the stock options.
Stock options that are subject to restrictions on transferability for acertain period of time are treated as specified stock options in certain
cases including where an employee/director of a company contributes
29monetary claims for their compensation to the company in exchange forstock options. Tax-qualified stock options for Japanese individual income
tax purposes are not treated as specified stock options.
Costs for specified stock options granted to company directors are
deductible where such compensation falls under ‘fixed compensation
notified in advance’ discussed in 1.8.5 (2) or ‘deductible performancebased compensation’ discussed in 1.8.5 (3), except for cases where theamount is unreasonably high, etc.
Please see 3.4.2 (7) for the individual income tax treatment of stock
options, including conditions for tax-qualified stock options.

Devaluation Loss
A write-down of assets, other than a write down to market value in thecase of damage due to disaster or obsolescence of inventories or fixed
assets, should generally be disallowed for tax purposes.

Corporate Taxes, etc.
Corporation tax, prefectural and municipal inhabitant taxes, local
corporation tax, interest on delinquent taxes, penalties, fines, etc. should
be disallowed for tax purposes. Note that business tax and special
business tax are deductible basically when a tax return for such taxes islodged.
Japanese withholding taxes and foreign withholding taxes are generally
creditable (or deductible if not credited against corporation tax). Foreign
withholding taxes on a dividend from a Foreign Subsidiary are notcreditable. Neither are they deductible if the foreign dividend exclusion(FDE) is applied to the dividends. Please see 4.1 for the definition of a
Foreign Subsidiary and the FDE system.

30

Donations
Donations are partially deductible as follows:
Donations

Deductible limit(per annum)

 To national/local governments
 Designated by the national
governmentAll

To Specified Public Interest
Facilitating Corporations

3.125% of taxable income+ 0.1875% of stated capital andcapital reserve

Other than above

0.625% of taxable income+ 0.0625% of stated capital andcapital reserve

If the amount of donations to Specified Public Interest Facilitating
Corporations exceeds the above limit, the excess amount is treated asordinary donations and contributions in the third category.
Note that where a company pays donations to its Related Overseas
Company defined in 4.3.2, the full amount of such donations is notdeductible except for cases where the donations are treated as income
attributable to a PE in Japan of the Related Overseas Company.
Under the corporate version of the hometown tax regime, when a blueform tax return filing company pays contributions to local governmentswith respect to designated businesses stated in a certified regional
revitalization plan under the Regional Revitalization Act for the period
from 20 April 2016 to 31 March 2025, the company will be able to taketax credits (generally, 20 percent of the contribution for business tax
purposes and 40 percent of the contribution for inhabitant tax
purposes). Thus, the tax burden of the company could be reduced byapproximately 90 percent of such contributions; i.e., (i) 30 percent of thecontributions by taking a deduction for the contributions to local
governments (assuming that the effective corporate tax rate for thecompany is 30 percent) and (ii) 60 percent of the contributions by using
31

the above tax credit rules (assuming that the maximum amount iscreditable).
If assets are sold at a lower price than the fair market value, thedifference between them is treated as a donation, which has only limited
deductibility as discussed above. Since the donee is also required torecognize taxable income equal to the amount of the undervalue, thisoften results in additional net taxable income arising.
If a company makes a payment, details of which are not disclosed, suchpayment is disallowed for corporation tax purposes by the paying
company, and a surtax of 40 percent of the payment amount is levied asa penalty for making such improper payments in addition to regular
corporate taxes.
Please see 1.13.5 for donations between Japanese companies within a
100 Percent Group.

Entertainment Expenses
Entertainment expenses for a fiscal year in excess of the following
deductible limits are disallowed:
Size of company

Deductible limit

A small and medium-scale company
defined in 1.3.1

Higher of JPY8 millionor
50% of eating and drinking
expenses

Other thansmall andmedium-scalecompany

Company with statedcapital of JPY10 billion or
less

50% of eating and drinking
expensesCompany with statedcapital in excess of JPY10
billion0

Social and entertainment expenses include expenses generally disbursed
for the purposes of reception, entertainment, consolation, gifts, etc.
32However, it does not include expenses falling under contributions,discounts and rebates, welfare expenses, personnel costs, etc. which aretreated differently for tax purposes.
A company with stated capital of JPY10 billion or less is required to keep
relevant documents indicating details of eating and drinking expenses inorder to have such expenses to be subject to the 50 percent deduction.
The following items are excluded from eating and drinking expenses
subject to the 50 percent deduction:
 eating and drinking expenses solely for the company’s
directors/employees and relatives of them eating and drinking expenses which are not treated as entertainment
expenses, such as:-

expenses for business meetings-

expenses for welfare activities-

expenses whose cost is JPY5,000 or less per person that are
justified by relevant records (excluding those solely for thecompany’s directors/employees and relatives of them).

Interest: Thin Capitalization Regime/Earnings Stripping
RegimePlease see 4.4 and 4.5 for details.

Translation into Japanese Currency (Yen) of
Assets/Liabilities in Foreign Currencies
With respect to foreign currency receivables and payables, a company
may select either: (i) the method of translation based on the exchange
rate at the time such receivables or payables were created, or (ii) the
method of translation based on the exchange rate at the end of eachfiscal year. The default translation method for short-term receivable/payable is (ii) while that for long-term receivable/payable is (i).
33

If a company wishes to select a non-default translation method, thecompany is required to submit a report on the selected method oftranslation to the competent tax office by the due date of the first
relevant corporation tax return. If a company wishes to change themethod, an application for the change must be submitted to the tax
office prior to the commencement date of the fiscal year in which thechange is to be effected.
If a company has a forward contract on receivables and payables inforeign currencies at the end of a fiscal year, the Yen amount fixed undersuch forward contract is generally used for translation purposes insteadof the Yen amount translated at historical exchange rates or the spot
rates at the end of the fiscal year. If this is the case, exchange gains andlosses caused by application of a forward exchange rate are generally
dealt with as follows:-

If a forward contract is concluded before a transaction, the difference
between the forward rate and the spot rate at the transaction is
spread proportionately over the period from the transaction date to
the settlement date and included within taxable income/loss of therelevant fiscal year.

-

If a forward contract is concluded after a transaction, the difference
between the forward rate and the spot rate at the date of concluding
the forward contract is spread proportionately over the period fromthe date of concluding the forward contract to the settlement dateand included within taxable income/loss of the relevant fiscal year.

Management Service Fees
If a foreign parent company is operating in Japan through a subsidiary ora joint venture (JV) formed with a Japanese partner, there would besituations in which the foreign parent company provides management
services to the subsidiary or JV in Japan, for example by dispatching
expatriate staff to the operation in Japan, sending marketing, technical,
financial and administrative information useful for the Japanese
operations and training Japanese staff members. A management service
fee paid pursuant to such services should be a deductible expense forJapanese tax purposes. However, to ensure full deductibility, the34management service fee levied should be reasonable in view of thenature and extent of services provided and should not be used for the
purposes of shifting profits from the Japanese subsidiary to the foreign
parent company.
Japanese tax law contains transfer pricing provisions aimed at preventing
tax avoidance by companies through transactions with their Related
Overseas Companies (please see 4.3.2). This transfer pricing legislation isapplicable not only to the sale or purchase of goods but also to renderingof services, charging of interest and royalties, and to any othertransactions with Related Overseas Companies that do not meet thearm’s-length concept; further, the legislation obliges the taxpayer tojustify the reasonableness of transfer prices. Accordingly, arrangements
between a foreign parent or affiliates and related Japanese entities
should be carefully reviewed to determine whether such arrangements
and associated fees can be supported.

Allocation of Head Office Expenses
Where common costs incurred for businesses of both a PE in Japan andthe head office are allocated to the PE in Japan based on reasonableallocation keys, such allocated costs are allowable in the hands of the PE
in Japan provided that a document regarding the cost allocation ispreserved by the company.

35

1.9

Tax Depreciation
Fixed Assets and Depreciation(1) Acquisition Cost
The entire purchase or manufacturing cost, or in the case of acquisition
other than by purchase or manufacture, the fair market value, as well as
incidental expenses incurred directly in connection with acquisition of
fixed assets or in making the fixed assets available for use, must be
included in the acquisition cost.
Minor assets whose acquisition cost is less than JPY100,000 or which areused up within 1 year are not required to be taken up as fixed assets andthe cost of such assets can be expensed. For assets whose acquisition
cost is JPY100,000 or more but less than JPY200,000, the cost can beamortized over 3 years.
(2) Ordinary Depreciation
In principle, a company may generally select either the straight-line
method or the declining-balance method for computing depreciation ofeach respective class of tangible fixed assets located at different
business places. However, buildings (acquired on or after 1 April 1998)
and attachments to buildings and structures (acquired on or after 1 April2016) must be depreciated using the straight-line method whilst
intangible assets must also generally be amortized using this method.
Moreover, certain leased assets must be depreciated using the modified
straight-line method. The default depreciation method for most assets
other than these assets is the declining-balance method.
The depreciation and amortization allowable for tax purposes must be
computed in accordance with the rates corresponding to the statutory
useful lives provided in the Ministry of Finance Ordinance.
The calculation methods and depreciation rates vary depending on when
the tangible fixed assets are acquired as discussed below.

36 Tangible fixed assets acquired on or after 1 April 2007 but before 1
April 2012
Depreciation rates

Usefullife

Declining-balance method

Straight-line
methodDepreciation
rate
(A)

2
3
4
5
6
7
8
9
10
:

Calculation
methods
Straight-line
methodDepreciation
rate
(X)

Modifieddepreciation
rate
(Y)

1.000
0.833
0.625
0.500
0.417
0.357
0.313
0.278
0.250
:

----1.000
1.000
1.000
0.500
0.500
0.334
0.334
0.334
:

0.500
0.334
0.250
0.200
0.167
0.143
0.125
0.112
0.100
:

Minimum
annualdepreciation
rate(Z)----0.02789
0.05274
0.06249
0.05776
0.054960.051110.047310.04448:

Annual depreciable amount
Acquisition cost x Depreciation rate (A)(i) For the period where:

Tax book value at the beginning
Acquisition costof the fiscal year
> x Minimum annualx Depreciation rate (X)depreciation rate (Z)DecliningbalancemethodTax book value at the beginningx Depreciation rate (X)of the fiscal year(ii) For the period where:

Tax book value at the beginningof the fiscal year
x Depreciation rate (X)Acquisition cost
< x Minimum annual
depreciation rate (Z)Tax book value at the beginning
Modified depreciationof the first fiscal year when it
x
rate (Y)falls in (ii)

(Minimum residual value: JPY1)
37

Under the declining-balance method, for the first few years (e.g., 7 years
for an asset whose statutory useful life is 10 years) an asset isdepreciated using Depreciation rate (X), which is 250 percent of thedepreciation rate under the straight-line method, and for the remaining
years (e.g., the last 3 years for an asset whose statutory useful life is 10
years) the asset is depreciated equally using Modified depreciation rate(Y).
 Tangible fixed assets acquired on or after 1 April 2012
Depreciation rates

Useful
life

2
3
4
5
6
7
8
9
10
:

Declining-balance method

Straight-line
methodDepreciation
rate
(A)
0.500
0.334
0.250
0.200
0.167
0.143
0.125
0.112
0.100
:

Depreciation
rate
(X)

Modifieddepreciation
rate
(Y)

1.000
0.667
0.500
0.400
0.333
0.286
0.250
0.222
0.200
:

----1.000
1.000
0.500
0.334
0.334
0.334
0.250
0.250
:

Minimum
annualdepreciation
rate(Z)----0.11089
0.12499
0.10800
0.099110.086800.07909
0.07126
0.06552:

The calculation methods for assets under this category are the same as
those acquired on or after 1 April 2007 but before 1 April 2012.
The depreciation rate (X) is calculated as 200 percent of the depreciation
rate under the straight-line method.

38 Intangible Fixed Assets
Intangible assets are amortized over statutory useful lives under thestraight-line method without a depreciable limit.
(3) Reports on Depreciation Methods
The depreciation method(s) needs to be reported to the tax office in atimely manner if the company wishes to select a non-default method.
Such selection must be submitted by:-

the filing due date of the corporation tax return for the first fiscal
year in the case of a newly established company; and-the filing due date of the corporation tax return for the fiscal year inwhich assets of a different classification were acquired, if theselected depreciation method for such classification has not been
selected previously (i.e., if the depreciation method for furniture andfixtures has been selected and trucks were newly acquired, then areport on the depreciation method for the trucks is required).

The depreciation method must be applied consistently. If the company
wishes to change the method, an application for the change must be
submitted to the tax office prior to the commencement date of the fiscal
year in which the change is to be effected.
(4) Statutory Useful Lives
A company is generally required to follow the statutory useful lives
provided in the Ministry of Finance Ordinance.
Under extraordinary circumstances such as a 24-hour operation in thecase of machinery and equipment at factories, an application may besubmitted to the tax office for approval of shortening of useful lives ortaking extra depreciation.
With regard to second-hand property if it is difficult to estimate theremaining useful life, the useful life for tax purposes can be calculatedusing the following formula (subject to a minimum of 2 years):39

If statutory useful life
< number of years elapsed (A)Statutory useful life x 20%

If statutory useful life
> number of years elapsed (A)Statutory useful life
- (A) + 20% of (A)(5) Accounting and Tax Treatment
The depreciation and amortization must be recorded in the books ofaccount. If the amount of such charge is more than the allowable limit
for tax purposes as computed above (known as ‘excess depreciation’),the excess portion is required to be added back to accounting profit on
the tax return as pending allowance in subsequent fiscal years.
If the amount of the deductions is less than the allowable limit for tax
purposes (known as ‘short depreciation’), the resulting tax treatment of
the depreciation allowance is an effective extension of the useful life of
the assets concerned, since the allowable charge for each fiscal year fortax purposes is limited to the amount recorded in the books of account.
(6) Special Measures for Depreciation
Special depreciation by means of either increased first year depreciationor accelerated depreciation is available for companies filing blue-form
tax returns in relation to certain fixed assets as specified under the tax
law. Such reliefs merely accelerate the timing of depreciation rather thanincreasing the amount of depreciation which can be taken.
Since the special depreciation allowance is intended to help promote
political objectives of the government, restrictions are placed upon thecompanies or assets qualifying for such benefit.
In contrast to the treatment for ordinary depreciation, shortdepreciation arising in respect of the special depreciation allowance may
be carried forward for 1 year, and excess depreciation in such a year canbe set off against the short depreciation.

40

Deferred Charges
Expenditures made by a company that have a useful period of more than
1 year from the date of the disbursement should be treated as deferredcharges and subject to amortization for tax purposes.
The following expenditures fall under the category of deferred charges,
which can be amortized freely for tax purposes up to the amount ofamortization for accounting purposes:-

organization expenses-

pre-operating expenses incurred specifically in connection withcommencement of operations-

development expenses incurred specifically in connection withapplication of new technology or a new operating system, ordevelopment of resources-

expenses relating to issuance of new shares-

expenses relating to issuance of bonds

The following expenses are also treated as deferred charges and usuallyamortized over the period of the economic benefit:-

expenses, the benefit of which relates to a period of more than 1
year, such as the cost of installation of equipment, etc. for public use,
key money for leasing of property, cost of fixed assets provided tocustomers for advertising and sales promotion purposes, lump-sum
payment for know-how, etc.

The amortization of deferred charges is computed by applying thestraight-line method. Deferred charges of less than JPY200,000 per item
may be expensed immediately.

41

1.10 Revenue to be excluded from Taxable Income
Dividends Received from Japanese Companies
Dividends received by a company from other Japanese companies are
excludable in calculating taxable income as indicated below:
Categories ofsharesOwnership requirements

Excludable ratios

Shares in100%
subsidiaries

100% throughout
the calculation period(the maximum period:
1 year up to the end of
the calculation period)

Dividends received
x 100%

Shares inrelatedcompanies

more than 1/3 throughout
the calculation period (1)(the maximum period:
6 months up to the end of
the calculation period)(Dividends received- Interest on debts (2))
x 100%

Other shares(more than 5% but 1/3 or less)

Dividends received
x 50%

Noncontrollingshares5% or lessas of the record date (1)Dividends received
x 20%(40% for insurancecompanies)(1)

Ownership requirements are determined based on the total numberof shares held by the dividend recipient companies in a 100 Percent
Group defined in 1.13.1 for fiscal years beginning on or after 1 April
2022.

(2)

Interest on debts is calculated by the following formula, not on an
actual basis, for fiscal years beginning on or after 1 April 2022:
Amount of dividends from related companies x 4%
(Upper limit: Amount of interest on debts in the fiscal year x 10%)42

If dividends are received on shares which were acquired 1 month prior to
the end of the fiscal year of the issuing company and sold within 2months after the end of the same fiscal year, those dividends are notexcluded from gross income.

Revaluation Gain on Assets
It is not permissible for tax purposes to recognize revaluation gains on
assets except in certain limited cases such as on a revaluation performed
under the Corporation Reorganization Law.

Refunds of Corporate Taxes, etc.
Refunds of non-deductible items (corporation tax, prefectural andmunicipal inhabitant taxes, local corporation tax, interest on delinquenttaxes, penalties, fines, etc.) are not taxable if refunded. Note thatrefunds of business tax and special business tax constitute taxable
income since payments of these taxes are tax deductible.

431.11 Tax Credits
Withholding Income Tax Credits
Income tax withheld in Japan from interest and domestic dividends
received by a taxpayer company is generally creditable against
corporation tax. The excess of such withholding tax over the corporation
tax liability, if any, is refundable.
Withholding tax on bond interest received by a taxpayer company is fully
creditable regardless of the holding period.
If a recipient company holds shares for the full period of the dividend
calculation period, the withholding tax on the dividend is fully creditable.
If not held for the entire calculation period, the recipient company needs
to calculate creditable withholding tax by one of the following two
methods:
Principal method
Withholding tax
x
on dividends

No. of months in holding period of the respective
shares of dividends
No. of months in calculation period for therespective dividends

Simplified method
Withholding tax
x
on dividends

No. of shares held at the
beginning of the calculation + {(A) - (B)} x 1/2
period for dividends (B)No. of shares held at the end of the calculation
period for dividends (A)Note that special reconstruction income tax will be imposed onwithholding tax at 2.1 percent from 2013 to 2037. Such special
reconstruction income tax is creditable/refundable in a similar way as
discussed above.

44

Foreign Tax Credits
Please see 4.2 for details.

Tax Credits for Research and Development (R&D) Costs(1) Tax Credit for General R&D Costs
A company filing a blue-form tax return is eligible for R&D tax credits
based on total R&D costs. The creditable amount is calculated as follows: Large-sized companies (companies other than small and mediumsized companies)[Fiscal year beginning between 1 April 2023 and 31 March 2026]
Increase-decrease R&D ratio

Tax creditable amountMore than 12%

Total R&D costs x {11.5% + (Increasedecrease R&D ratio - 12%) x 0.375}(Upper limit: Total R&D costs x 14%)

12% or lessTotal R&D costs x {11.5% - (12% Increase-decrease R&D ratio) x 0.25}(Lower limit: Total R&D costs x 1%)

The maximum creditable amount varies between 20 percent and 30
percent of the corporation tax liability for the fiscal year depending on
the increase-decrease R&D ratio. Where the increase-decrease R&D
ratio is between 4 percent and minus 4 percent, the maximum creditableamount is 25 percent(*) of the corporation tax liability for the fiscal year.
Where the increase-decrease R&D ratio exceeds 4 percent, themaximum creditable amount is increased by a maximum of 5 percent of
the corporation tax liability for the fiscal year. Where the increasedecrease R&D ratio falls below minus 4 percent, the maximum creditableamount is decreased by a maximum of 5 percent of the corporation tax
liability for the fiscal year.
(*)

40 percent for certain venture R&D companies
45

Where the R&D ratio exceeds 10 percent, the tax creditable ratio, which
total R&D costs are multiplied by, is increased up to 14 percent based on
the R&D ratio. The maximum creditable amount is also increased up to
35 percent of the corporation tax liability. In this case, the larger
maximum creditable amount under this measure or the above measure
is applicable.
[Fiscal year beginning between 1 April 2021 and 31 March 2023]
Increase-decrease R&D ratio

Tax creditable amountMore than 9.4%

Total R&D costs x {10.145% + (Increasedecrease R&D ratio - 9.4%) x 0.35}(Upper limit: Total R&D costs x 14%)

9.4% or lessTotal R&D costs x {10.145% - (9.4% Increase-decrease R&D ratio) x 0.175}(Lower limit: Total R&D costs x 2%)

The maximum creditable amount is 25 percent of the corporation tax
liability for the fiscal year. If a company satisfies certain conditions, themaximum creditable amount will be increased as follows:- 40 percent of the corporation tax liability for the fiscal year, where acompany meets the definition of certain venture R&D companies- 30 percent of the corporation tax liability for the fiscal year, where acompany increases investment in R&D in spite of a certain degree of
decrease in sales

Where the R&D ratio exceeds 10 percent, the tax creditable ratio, which
total R&D costs are multiplied by, is increased up to 14 percent based on
the R&D ratio. The maximum creditable amount is also increased up to
35 percent of the corporation tax liability.

46

 Small and medium-sized companies[Fiscal year beginning between 1 April 2023 and 31 March 2026]
Increase-decrease R&D ratio

Tax creditable amountMore than 12%

Total R&D costs x {12% + (Increasedecrease R&D ratio – 12%) x 0.375}(Upper limit: Total R&D costs x 17%)

12% or lessTotal R&D costs x 12%

The maximum creditable amount is 35 percent of the corporation tax
liability for the fiscal year in the case where the Increase-decrease R&D
ratio is more than 12 percent or 25 percent of the corporation tax
liability for the fiscal year in the case where the Increase-decrease R&D
ratio is 12 percent or less.
Where the R&D ratio exceeds 10 percent, the tax creditable ratio, which
total R&D costs are multiplied by, is increased up to 17 percent based on
the R&D ratio. The maximum creditable amount is also increased up to
35 percent of the corporation tax liability.
[Fiscal year beginning between 1 April 2021 and 31 March 2023]
Increase-decrease R&D ratio

Tax creditable amountMore than 9.4%

Total R&D costs x {12% + (Increasedecrease R&D ratio – 9.4%) x 0.35}(Upper limit: Total R&D costs x 17%)

9.4% or lessTotal R&D costs x 12%

The maximum creditable amount is 35 percent of the corporation tax
liability for the fiscal year in the case where the Increase-decrease R&D
ratio is more than 9.4 percent or 25 percent of the corporation tax
liability for the fiscal year in the case where the Increase-decrease R&D
ratio is 9.4 percent or less. In addition, if a company increases
investment in R&D in spite of a certain degree of decrease in sales, 5
percent of the corporation tax liability for the fiscal year is added to the47

maximum creditable amount in each case above.
Where the R&D ratio exceeds 10 percent, the tax creditable ratio, which
total R&D costs are multiplied by, is increased up to 17 percent based on
the R&D ratio. The maximum creditable amount is also increased up to
35 percent of the corporation tax liability.
(2) Tax Credit for Specified R&D Costs
A blue-form tax return filing company conducting joint/consignment
R&D is eligible for R&D tax credits for the specified R&D costs, separatelyfrom the tax credits for general R&D costs. The creditable amount iscalculated as follows:
Specified R&D costs x 20% or 25% or 30%
The maximum creditable amount is 10 percent of the corporation tax
liability for the fiscal year.
(3) Definitions of Keywords(i) A small and medium-sized company means (a) or (b) below:(a) Companies with stated capital of JPY100 million or less, except
for either of the following cases:- at least 50 percent of the shares are held by one large-scalecompany (e.g., a company whose stated capital is over
JPY100 million)- at least two-thirds of the shares are held by two or morelarge-scale companies(b) Companies with no capital whose number of regular employees
is 1,000 or less
Note that a company whose average taxable income for thepreceding 3 years is over JPY1.5 billion will be excluded from aneligible company.
48

(ii) Increase-decrease R&D ratio = (a)/(b)(a): [Total R&D costs in a fiscal year] - [Annual average of R&D costs
for the preceding 3 fiscal years](if the figure is negative, the negative figure is used.)(b): Annual average of R&D costs for the preceding 3 fiscal years(iii) R&D ratio = (a)/(b)(a): Total R&D costs in a fiscal year(b): Annual average of sales proceeds for the preceding 3 fiscal years
and the current fiscal year(iv) Specified R&D costs means costs for joint/consignment R&D
activities with/to universities, national R&D organizations, etc. undercertain conditions.
***
Note that large-sized companies are subject to a restriction for applying
tax credits for R&D costs (discussed in 1.11.5).

49

Tax Credits for Promotion of Salary Increases
Tax credits for promotion of salary increases are aimed at promoting
substantial salary increases for each employee based on a long-term
perspective and encouraging returns to various stakeholders including
not only shareholders but also employees and business partners.
The tax credits are applicable for a company filing a blue-form tax return,which is not a small and medium-sized company (defined in 1.11.3), forfiscal years beginning between 1 April 2022 and 31 March 2024 underfollowing conditions:(1) Conditions:(i)[Salary payments for continuously employed people in thecurrent fiscal year]> [Salary payments for continuously employed people in thepreceding fiscal year] x 103%

(ii)

[Salary payments for continuously employed people in thecurrent fiscal year]> [Salary payments for continuously employed people in thepreceding fiscal year] x 104%

(iii)

[Education and training costs in the current fiscal year]> [ Education and training costs in the preceding fiscal year]
x 120%

 Requirements for the management declaration on multi-stakeholders
For companies, whose number of regular employees is 1,000 or more,with stated capital of JPY1 billion or more at the end of the fiscal year,
this measure is applicable only when they have notified the Minister of
Economy, Trade and Industry (‘METI’) that they have made publicannouncements about the policy of salary increases, the policy ofbuilding appropriate relationships with subcontractors and otherbusiness partners, and other matters through the internet, and attach
copies of the notification receipt issued by the METI to their final tax
returns, etc. for the fiscal year.
50

(2) Tax Credits:
Where only
condition (i) is
satisfied{[Salary payments in the current fiscal year] [Salary payments in the preceding fiscal year]}x 15%

Where condition (ii)is satisfied{[Salary payments in the current fiscal year] [Salary payments in the preceding fiscal year]}x 25%

Where conditions (i)and (iii) are satisfied{[Salary payments in the current fiscal year] [Salary payments in the preceding fiscal year]}x 20%

Where conditions (ii)and (iii) are satisfied{[Salary payments in the current fiscal year] [Salary payments in the preceding fiscal year]}x 30%

The maximum total creditable amount is 20 percent of the corporation
tax liability for the fiscal year.
(3) Definitions of Keywords(i) ‘Salary payments’ means salary paid to domestic employees which isdeductible in calculating the company’s income for each fiscal year.
(ii) ‘Continuously employed people’ means domestic employees who
worked for the full period of the current fiscal year and the fullperiod of the preceding fiscal year.
***
Note that the tax credits for promotion of salary increases are available
for a small and medium-sized company for fiscal years beginning
between 1 April 2022 and 31 March 2024 under different conditions.

51

Restriction on Eligible Companies for Applying Tax
Credits
With the aim of promoting sustainable pay-raises and domestic capital
investment for large-sized companies (companies other than small andmedium-sized companies (defined in 1.11.3)), a large-sized company thatsatisfies neither condition (i) nor (ii) in (1) will not be allowed to apply tax
credits related to the five special tax measures indicated in (2) below for
fiscal years beginning between 1 April 2018 and 31 March 2024.
(1) Conditions(i)[Salary payments for continuously employed people in thecurrent fiscal year]> [Salary payments for continuously employed people in thepreceding fiscal year](ii)[Total acquisition costs of depreciable assets located in Japan in
the current fiscal year]> [Total depreciation costs of depreciable assets recorded in
the current fiscal year] x 30%

By virtue of the 2022 tax reform, the condition (i) is strengthened forcompanies whose number of regular employees is 1,000 or more withstated capital of JPY1 billion or more at the end of the fiscal year and thepreceding fiscal year’s income exceeds zero as follows:
Fiscal years
beginning
between 1 April
2022 and 31
March 2023

[Salary payments for continuously employedpeople in the current fiscal year]> [Salary payments for continuously
employed people in the preceding fiscalyear] x 100.5%

Fiscal years
beginning
between 1 April
2023 and 31
March 2024

[Salary payments for continuously employedpeople in the current fiscal year]> [Salary payments for continuously
employed people in the preceding fiscalyear] x 101%

52

The meanings of ‘salary payments’ and ‘continuously employed people’are the same as 1.11.4.
(2) Scope of Tax Credits to be Restricted-

Tax credits for Research and Development (R&D) costs (discussed in
1.11.3)-

Tax credits for promotion of future investment in communities-

Tax credits for promotion of investment in 5G technology-

Tax credits for promotion of investment in digital transformation-

Tax credits for promotion of investment for carbon neutrality

Note that this restriction is not applied for fiscal years where the current
fiscal year’s adjusted taxable income is equal to or smaller than thepreceding fiscal year’s adjusted taxable income even if the company
cannot satisfy the conditions in (1) above.

1.12 Administrative Overview
Tax Returns and Tax Payments(1) Final Tax Returns
A company is required to file final tax returns (a corporation tax return tothe relevant tax office and inhabitant/business tax returns to the local
governments) within 2 months after the end of its fiscal year, whether or
not it has positive income for that fiscal year.
The filing extension rules which are applicable by submitting anapplication form are provided as follows:53 For a company not using the Japanese Group Relief System discussed
in 1.14
Cases

Extension periods

Where it is reasonable to conclude, from the
Articles of Incorporation, etc. or due to special
circumstances, that an ordinary generalshareholders meeting is not held within 2months after the end of each fiscal year

1 monthWhere a company is subject to audit by anindependent accounting auditor and it isreasonable to conclude, from the Articles ofIncorporation, etc., that an ordinary generalshareholders meeting is not held within 3months after the end of each fiscal year

Number of months
designated by therelevant tax office, up
to 4 months

Where it is reasonable to conclude, due tospecial circumstances, that an ordinary generalshareholders meeting is not held within 3months after the end of each fiscal year

Number of months
designated by therelevant tax office54

 For a company using the Japanese Group Relief System discussed in
1.14
Cases

Extension periods

Where it is reasonable to conclude, from the
Articles of Incorporation, etc. or due to special
circumstances, that an ordinary generalshareholders meeting is not held within 2months after the end of each fiscal year

2 months

Where it is reasonable to conclude that it isdifficult to file a tax return within 2 months
after the end of each fiscal year because it
takes time to complete it
Where a company is subject to audit by anindependent accounting auditor and it isreasonable to conclude, from the Articles ofIncorporation, etc., that an ordinary generalshareholders meeting is not held within 4months after the end of each fiscal year

Number of months
designated by therelevant tax office, up
to 4 months

Where it is reasonable to conclude, due tospecial circumstances, that an ordinary generalshareholders meeting is not held within 4months after the end of each fiscal year or that
it is difficult to file a tax return within 4 months
after the end of each fiscal year because it
takes time to complete it

Number of months
designated by therelevant tax office

The final tax liability for the fiscal year must be paid to the tax office andlocal governments within 2 months after the end of the fiscal year
regardless of whether a filing extension has been obtained.
A final corporation tax return must be accompanied by the company’sbalance sheet, profit and loss statement, statement of changes in net
assets, details of accounts, statement of outline of business activities
and, depending upon circumstances, certain other prescribeddocuments.

55

(2) Interim Tax Returns
A company, the fiscal year of which is longer than 6 months, should fileinterim tax returns within 2 months of the end of the first 6 months of
the fiscal year. If the amount of the annual corporation tax for thepreceding fiscal year multiplied by six and divided by the number ofmonths of the preceding fiscal year is JPY100,000 or less, the company isgenerally not required to file interim tax returns. However, a company
subject to the size-based business tax or business tax imposed on grossrevenue rather than net income is always required to file an interim tax
return with respect to business tax regardless of the amount of thecorporation tax for the preceding fiscal year.
The amounts of taxes to be reported in interim tax returns are chosen by
the company from 2 methods:(i) tax for the preceding fiscal year multiplied by six and divided by the
number of months of the preceding fiscal year(ii) tax computed on the basis of the provisional results for the first 6month period of the present fiscal year
In case of either of the following, it is not possible to file an interim tax
return based on the provisional results:
 the amount calculated under (i) < JPY100,000
 the amount calculated under (i) < the amount calculated under (ii)
The tax reported on the interim tax returns should be paid to the tax
office and local governments within the time limit for filing interim tax
returns.
(3) Electronic Tax Filing Obligations
The following companies are obliged to file their final tax returns andinterim tax returns through online systems (e-Tax):
 a Japanese company whose stated capital is over JPY100 million at56

the beginning of the fiscal year a Japanese company which is a mutual company, a Toushi Houjin (JREIT) or a Tokutei Mokuteki Kaisha (TMK) Japanese companies in an Aggregation Group discussed in 1.14

Tax Audits and the Statute of Limitations
The Japanese corporate tax filing system utilizes a self-assessment basis.
The tax authorities may then carry out a tax audit of returns filed andmake any necessary adjustments within the limitations laid down by thelaw. The basic statutory time limits for such adjustments are as follows:
Nature of adjustments

Limitation period

Relating to underreporting of taxable income

5 years

Relating to amendment of excess tax losses

10 years(1)Relating to taxation on transfer pricing/internal
dealings for a PE in Japan of a foreign company

7 years(2)Relating to fraud

7 years(1)

9 years for tax losses incurred in fiscal years beginning on or before
31 March 2018.

(2)

6 years for taxation on transfer pricing/internal dealings for a PE in
Japan of a foreign company incurred in fiscal years beginning on or
before 31 March 2020.

57

1.13 Group Taxation Regime
The Group Taxation Regime is provided in order to make the Japanesetaxation system more in line with a business environment wherebusiness operations are managed on a unified basis across a corporategroup.
Although the Japanese Group Relief System discussed in 1.14 is applied
to Japanese companies that have made an election for the system, theGroup Taxation Regime is automatically applied to certain transactions
carried out by companies belonging to a 100 Percent Group, including an
Aggregation Group discussed in 1.14.

100 Percent GroupA 100 Percent Group under the Group Taxation Regime is a group
comprising companies having a 100 Percent Control Relationship, whichis: relationship in which a person holds directly or indirectly 100 percentof the outstanding shares in a company; or relationship in which 100 percent of the outstanding shares in acompany and 100 percent of the outstanding shares in anothercompany are directly or indirectly held by the same person.
A ‘person’ as described above should include not only a Japanesecompany but also a foreign company or an individual. Even if foreigncompanies are interposed between Japanese companies, they could
have 100 Percent Control Relationships. Note that, however, the Group
Taxation Regime is applicable only to the transactions between Japanesecompanies in a 100 Percent Group, in principle.
When determining whether a 100 Percent Control Relationship exists,
the number of shares owned by an employee stock ownership plan or
the number of shares owned by employees and directors that wereacquired through exercises of stock option plans can be disregarded if
the total number of those shares is less than 5 percent of the total
58

number of outstanding shares.
A structure diagram showing 100 Percent Control Relationships should
be attached to corporation tax returns.

Dividends Received Deduction (DRD)(1) Dividends from a 100 Percent Japanese Subsidiary
When a Japanese company receives dividends from a 100 percent
Japanese subsidiary, such dividends should be fully excluded fromtaxable income without deducting interest expenses attributable to such
dividends.
This rule is also applicable to a Japanese branch of a foreign company
when it receives dividends from a 100 percent Japanese subsidiary.
A 100 percent Japanese subsidiary for the purposes of this rule is defined
as follows: In the case of a dividend other than deemed dividends
A Japanese company that had a 100 Percent Control Relationshipwith the company receiving the dividend for the whole of thecalculation period for the dividend
 In the case of a deemed dividend
A Japanese company that had a 100 Percent Control Relationshipwith the company receiving the dividend on the day prior to theeffective date of the deemed dividend***
The same rule is included in the Japanese Group Relief System. This rule
is applicable for companies not electing for the Japanese Group Relief
System.

59

(2) Determination on Categories of Shares in Related Companies/NonControlling Shares
Categories of ‘shares in related companies’ and ‘non-controlling shares’
defined in 1.10.1 are determined based on the total number of shares
held by the dividend recipient companies in a 100 Percent Group forfiscal years beginning on or after 1 April 2022.

Deferral of Capital Gains/Losses(1) Deferral of Capital Gains/Losses
When a Japanese company transfers certain assets to another Japanesecompany having a 100 Percent Control Relationship with the firstmentioned company, capital gains/losses arising from the transfer
should be deferred.
(2) Assets Covered by This Rule
Assets covered by this rule are fixed assets, land (if land is not treated asa fixed asset), securities, monetary receivables and deferred charges,
excluding those whose tax book value just before the transfer is less than
JPY10 million, and securities held for trading purposes for either thetransferor company or the transferee company.
(3) Realization of Capital Gains/Losses
The deferred capital gains/losses on a transfer of an asset under this rule
will be realized in the hands of the transferor company, for example,
when the transferee company transfers the asset to another person.
The following table shows the main trigger events for realization ofdeferred capital gains/losses and the amount of realized capitalgains/losses:

60

Trigger events

Amount of realized capital gains/losses

Transfer of the asset by thetransferee company

Amount of deferred capitalgains/losses

The asset becoming a bad debt,
or retirement/revaluation andsimilar events related to theasset by the transfereecompany

Amount of deferred capitalgains/losses

Depreciation or amortization of
the asset by the transfereecompany (Depreciable assets ordeferred charges)

Losing the 100% Control
Relationship between thetransferor company and thetransferee company

Amount of deferred capitalgains/losses
Depreciation or amortization
amount included in deductible
expenses of the transfereecompanyx
Acquisition costof the asset
Instead of the above, it is possible forthe transferor company to realize theamount of deferred capitalgains/losses over the useful life being
applied to the asset in the transfereecompany (Simplified Method).
Amount of deferred capitalgains/losses(4) Notification
 When assets subject to this rule are transferred within a 100 Percent
Group, the transferor company should notify the transferee companyof that fact (including the intention that the transferor company will
use the Simplified Method for depreciable assets/deferred charges, if
this is the case) after the transfer without delay.

61 When the transferred assets are the securities held for trading
purposes by the transferee company, the transferee company should
notify the transferor company about that fact, after the above
notification without delay. Also if the transferor company has said
that it intends to use the Simplified Method for depreciable
assets/deferred charges, the transferee company should notify thetransferor company of the useful lives for such assets, after theabove notification without delay.
 If an event to realize deferred capital gains/losses happens, thetransferee company should notify the transferor company about thatfact and the day of the event (including tax deducted
depreciation/amortization amount, if the transferor company does
not use the Simplified Method) as soon as possible after the closing
date of the fiscal year in which the event happens.
***This rule is almost the same as the rule provided for under the JapaneseGroup Relief System. This rule is applicable for transfers of assets forcompanies not electing for the Japanese Group Relief System.

Provision for Bad Debts
Account receivables from a company in a 100 Percent Group are
excluded from the calculation of the allowable amount of a provision forbad debts for fiscal years beginning on or after 1 April 2022.

Donations(1) Donations
When a Japanese company pays donations to another Japanesecompany which has a 100 Percent Control Relationship (excluding such
relationship controlled by an individual), the donations are treated as
non-deductible for the donating company and non-taxable for therecipient company.
Donations under the Japanese Corporation Tax Law have a broader
meaning than simply donations to charitable entities/political parties.
62

(2) Adjustments to Tax Book Value of Shares
In order to prevent a shareholder company of the donating/recipientcompany from conducting tax-avoidance through a transfer of value ofthe shares in these companies by taking advantage of the rule fordonations within a 100 Percent Group, the shareholder company isrequired to make adjustments to the value of the shares as follows: If a company has a 100 Percent Control Relationship with the
donating company, the shareholder company should decrease thetax book value of the shares in the donating company by the amountof the donation attributable to the direct holding ratio of theshareholder company.
 If a company has a 100 Percent Control Relationship with therecipient company, the shareholder company should increase the tax
book value of the shares in the recipient company by the amount of
the receipt attributable to the direct holding ratio of the shareholder
company.
Although the above adjustments should be applied to indirect
shareholders in the 100 Percent Group in theory, in consideration of theadministrative burden, the adjustments are required only for direct
shareholders. If the shareholder company belongs to an Aggregation
Group to which the donating company or the recipient company
belongs, instead of this rule, another rule for adjustments to the value ofshares under the Japanese Group Relief System is applied.

Non-Recognition of Capital Gains/Losses from Transfersof Shares to the Share Issuing Company
Where a Japanese company (shareholder company) receives money orassets other than money from another Japanese company (share issuing
company) having a 100 Percent Control Relationship with the firstmentioned company for the following reasons or surrenders the sharesin the share issuing company for the following reasons (including a casewhere it becomes certain that the share issuing company has no residual
assets after its dissolution), the shareholder company does not recognize
any capital gains/losses from the shares.
63-

non tax-qualified merger
non tax-qualified horizontal type corporate division
non tax-qualified Share-Dividend
return of capital or distribution of residual assets due to dissolution
acquisition of shares by a company issuing the shares
retirement of investmentschange of the corporate type of a company (when assets other thanshares in the company are distributed to shareholders)

Under this rule, for example, when a Japanese company is liquidated, ashareholder company having a 100 Percent Control Relationship with theliquidated company does not recognize capital gains/losses from theshares. (Note that, however, tax losses incurred by the liquidated
company may be transferred to the shareholder company subject tocertain conditions.)

Valuation Losses of Liquidating Companies /Merged
Companies
Valuation losses of shares in a Japanese company in a 100 Percent Groupare not deductible by its shareholder companies in the same group if theJapanese company is:- in the process of liquidation,- expected to be dissolved (excluding dissolution by merger), or-

expected to be dissolved due to a tax qualified merger within a 100
Percent Group.

641.14 Japanese Group Relief System
The Consolidated Tax Return Filing System was revised fundamentally to
the Japanese Group Relief System under the 2020 tax reform. The
Japanese Group Relief System, which is applicable for fiscal years
beginning on or after 1 April 2022, allows aggregation of profits andlosses or current taxable income and tax net operating losses (NOLs) ofcompanies belonging to a 100 percent group, although each company inthe group continues to calculate and file their tax returns individually.

Applicable Company
The Japanese Group Relief System will be applied by election (ordinarily
irrevocable) to a Japanese domestic parent company and all of its
Japanese subsidiaries having a 100 percent control relationship without
foreign companies or certain ineligible companies being interposed(Aggregation Group).
The 100 percent control relationship is a relationship in which a Japanese
domestic company holds directly 100 percent of the outstanding sharesin another Japanese domestic company (except for certain ineligible
companies (same as below)).
Where (i) a Japanese domestic company and one or more companies
which have the 100 percent control relationship with the Japanese
domestic company or (ii) one or more companies which have the 100
percent control relationship with the Japanese domestic company hold
100 percent of the outstanding shares in the other Japanese domestic
company, the Japanese domestic company is deemed to hold 100
percent of the outstanding shares in the other Japanese domestic
company.

Offsetting Profits and Losses
Current year taxable profits and tax losses within the Aggregation Groupare offset for corporation tax purposes, which is the most beneficial
treatment under the Japanese Group Relief System.

65

The aggregation method is on a pro-rated basis, and if amendments orcorrections of the taxable income or tax loss stated in corporation tax
returns filed by the due date of a company are made under in a tax
audit, other companies in the Aggregation Group will not be affected by
the amendments or the corrections in principle.

Crystallization of Built-In Gains/Losses(1) At the Start of the Japanese Group Relief System
The crystallization of built-in gains/losses on certain assets is required forcompanies other than the following companies at the start of theJapanese Group Relief System:(i) A parent company which will be expected to maintain 100 percent
control relationships with its subsidiaries after approval of theJapanese Group Relief System.
(ii) A subsidiary which will be expected to maintain a 100 percent
control relationship with its parent company after approval of theJapanese Group Relief System.
(2) At the Time of Participation in the Japanese Group Relief System
The crystallization of built-in gains/losses on certain assets is required forcompanies which do not fall under any of the following at the time ofparticipation in the Japanese Group Relief System:(i) A company that has become a 100 percent owned subsidiarythrough a tax-qualified Share-for-Share Exchange (Kabushiki-Kokan)
etc.
(ii) A newly established subsidiary within the Aggregation Group(iii) A subsidiary that satisfies all of the following conditions(1) (where thecontrol relationships exist at the time immediately before theparticipation, conditions (a)~(c) only):

66

(a) A 100 percent control relationship with a parent company is
expected to continue after approval of the Japanese Group
Relief System.
(b) Approximately 80 percent or more of the employees ofsubsidiary immediately before the establishment of a 100
percent control relationship are expected to engage in thebusiness of the subsidiary.
(c) The subsidiary is expected to continue to operate the main
business conducted before the establishment of a 100 percent
control relationship.
(d) One of the main businesses of the subsidiary and othercompanies(2) conducted before the establishment of a 100
percent control relationship relevant to one of the businesses ofthe parent company and other companies(3) in the Aggregation
Group conducted before the establishment of a 100 percent
control relationship.
(e) Each business size in the above (d) is not considerably different(within a 1:5 ratio), or all senior directors of the subsidiary, whomanage the business of the subsidiary on the day before theestablishment of a 100 percent control relationship, do notretire.
(1)

Similar conditions for a tax-qualified corporate reorganization(2)

Companies which have a 100 percent control relationship with thesubsidiary at the time immediately before the establishment of a 100
percent control relationship by the parent company with thesubsidiary.

(3)Companies which have a 100 percent control relationship with theparent company at the time immediately before the establishment of
a 100 percent control relationship by the parent company with thesubsidiary.

67

(3) At the Time of Withdrawal from the Aggregation Group
Where a company withdraws from the Aggregation Group and falls under
any of the cases listed in below, the withdrawing company is subject tothe crystallization of built-in gains/losses on certain assets in the fiscal
year immediately before the withdrawal:(i) When the major business of the withdrawing company will not be
expected to be continued (except for the case where the amount of
unrealized gains is greater than or equivalent to the amount of
unrealized losses at the time immediately before the withdrawal).
(ii) When it is expected that a loss on sales of assets whose book value
exceeds JPY1 billion, and a loss on the sales of the shares of thewithdrawing company will be recognized.
(4) Assets Subject to the Crystallization of Built-In Gains/Losses in (1)~(3)Assets subject to the crystallization of built-in gains/losses are certain
fixed assets, land (if land is not treated as a fixed asset), securities(excluding trading securities), monetary receivables and deferredcharges. Among the above assets, the following assets are not subject tothe crystallization of built-in gains/losses:
 Assets whose book value is less than JPY10 million (except for
goodwill in case of (3) for fiscal years beginning on or after 1 April
2022)
 Assets whose unrealized gain or loss is less than the smaller amountof (i) 1/2 of the amount of stated capital of the company or (ii) JPY10
million
Other than above, the assets to be excluded from the crystallization of
built-in gains/losses are defined in each provision of (1) to (3).

68Write-Off of Tax NOLs and Restriction on Usage of Tax
NOLs and Unrealized Losses on Certain Assets at theTime Immediately before the Start of or Participation in
the Japanese Group Relief System(1) Companies Subject to the Crystallization of Built-In Gains/Losses
Tax NOLs of a company, which is subject to the crystallization of built-in
gains/losses discussed in 1.14.3 (1)(2), at the time immediately before
the start of or participation in the Japanese Group Relief System will be
written off.
(2) Companies NOT Subject to the Crystallization of Built-In Gains/Losses(A) Companies which are NOT subject to the write-off of tax NOLs andthe restriction on usage of tax NOLs and unrealized losses on certain
assets among companies NOT subject to the crystallization of built-in
gains/losses discussed in 1.14.3 (1)(2)
A company which satisfies either of the following conditions is not
subject to the write-off of tax NOLs and the restriction on usage of tax
NOLs and unrealized losses on certain assets:(i) A company which had a control relationship with its parent
company(1) for over 5 years(ii) A company that satisfies the following conditions(2) ‘(a)(b) and (c)’ or‘(a) and (d)’ or ‘(e)’:(a) One of the main businesses(3) of the company or othercompanies(4) conducted before the approval of the JapaneseGroup Relief System is relevant to one of the businesses(3) of theparent company or other companies(5) in the Aggregation Group
conducted before the approval of the Japanese Group Relief
System.
(b) Each business size in the above (a) is not considerably different(within a 1:5 ratio).
69

(c) The size of one of the main businesses(6) of the company orother companies(4) conducted before the approval of theJapanese Group Relief System is not considerably different fromthe size of the above main business at the latest date of theestablishment of a control relationship with the parent company(within 1:2 ratio).
(d) All senior directors, who manage one of the main businesses in
the above (c), do not retire after the establishment of a 100
percent control relationship.
(e) A company which satisfies either of the following:-

A subsidiary that satisfies all of the conditions in
1.14.3(2)(iii), where the 100 percent control relationshipdoes not exist at the time immediately before theparticipation-

A 100% owned subsidiary that participated in the
Aggregation Group as a result of a non-tax-qualified Sharefor-Share Exchange (Kabushiki-Kokan) etc. and satisfies all of
the conditions for a tax-qualified Share for Share Exchange,
except for ‘no-boot requirement’ (please see 1.15.1(3))(1)

With regard to the parent company, the term ‘control relationshipwith its parent company’ shall be replaced by ‘control relationshipwith any of the subsidiaries in the Aggregation Group’(2)

Similar conditions for a tax-qualified corporate reorganization(3)

Limited to the business conducted before the approval of theJapanese Group Relief System(4)Companies which have a 100 percent control relationship with thecompany before the approval of the Japanese Group Relief System(5)Companies which have a 100 percent control relationship with theparent company before the approval of the Japanese Group Relief
System70

(6)Limited to the business relevant to the business of the parent
company or other companies(5) conducted before the approval of theJapanese Group Relief System(B) Companies which are subject to the write-off of tax NOLs and therestriction on usage of tax NOLs and unrealized losses on certain
assets among companies NOT subject to the crystallization of built-in
gains/losses discussed in 1.14.3 (1)(2)
A company which does not fall under (A) above is subject to the write-offof a part of tax NOLs and/or the partial restriction on usage of tax NOLs
and unrealized losses on certain assets depending on the following
categories. The tax treatments in (a)(iii), (b) and (c) below are applied
until the earlier of (i) the day on which 5 years have elapsed from the day
when the control relationship occurred or (ii) the day on which 3 years
have elapsed from the start of or participation in the Japanese Group
Relief System:(a) In the case where acompany starts a
new business after
the control
relationship started(i) Tax NOLs which were incurred before thecontrol relationship started will be
extinguished.
(ii) Tax NOLs consisting of the realized losses
which are generated from certain assets
held before the control relationshipstarted and are realized before the start ofor participation in the Japanese Group
Relief System will be extinguished.
(iii)The deduction of the realized losses which
are generated from certain assets held
before the control relationship started andare realized after the start of orparticipation in the Japanese Group Relief
System will be disallowed.

71

(b) In the case where

Tax NOLs which were incurred in the
Aggregation Group in the fiscal year that fallunder the condition as shown on the left will
not be included in the aggregation of profits
and losses.

(c) In the case where acompany does not
fall under any of theabove categories

Among tax NOLs which were incurred in the
Aggregation Group, tax NOLs consisting ofrealized losses which are generated fromcertain assets held before the control
relationship started will not be included in theaggregation of profits and losses.

the ratio ofdepreciation
expenses to thetotal costs of acompany exceeds
30%Aggregation Current Taxable Income and Tax NOLs
The deductible amount of tax NOLs is calculated separately dependingon whether the losses are Specific Tax NOLs, which are deductible to theextent of the amount of taxable income of each company having SpecificTax NOLs, or Non-Specific Tax NOLs, which are deductible from thetaxable income of the entire Aggregation Group.
Under the Japanese Group Relief System, the following tax NOLs aretreated as Specific Tax NOLs:• Tax NOLs which are not subject to the write-off by the companies(companies NOT subject to the crystallization of built-in gains/losses
discussed in 1.14.4 (2)(A)).

• The part of tax NOLs which are not subject to the write-off or thepartial restriction on usage of tax NOLs and unrealized losses oncertain assets of the companies (companies which are subject to therestriction on usage of tax NOLs and unrealized losses on certain
assets discussed in 1.14.4 (2)(B)).

72• Specific Consolidated Tax NOLs attributable to a consolidated

subsidiary under the Consolidated Tax Return Filing System at thetime of the shift to the Japanese Group Relief System.

If amendments or corrections of the deductible amount of tax NOLs, etc.
stated in corporation tax returns filed by the due date of a company are
made in a tax audit, other companies in the Aggregation Group will not
be affected by the amendments or the corrections in principle.

Tax Book Value Adjustments
 Evaluation gains or losses on the shares of a subsidiary in the
Aggregation Group, and gains or losses on the sales of shares of a
subsidiary in the Aggregation Group transferred to other companies
in the Aggregation Group are not recognized.
 The tax book value of the shares of a company withdrawing from theAggregation Group at the time immediately before the withdrawal isadjusted to the amount equivalent to the tax book value of the net
assets of the withdrawing company. (Note that certain goodwill
equivalent value included in the purchase price of the shares in thewithdrawing company can be added to the tax book value of the net
assets of the withdrawing company under certain conditions.)
 Evaluation gains or losses are recognized by the shareholder on theshares of a subsidiary which starts or participates in the JapaneseGroup Relief System and is not expected to continue the 100 percent
control relationship with its parent company.

Others The Japanese Group Relief System is applied provided that blue-form
tax return is filed. Consequently, the applicable companies for theJapanese Group Relief System are blue-form tax return fillingcompanies. The companies whose blue-form tax return filing wascancelled or withdrawn, are excluded from the applicable companies
for the Japanese Group Relief System.

73

 Companies which apply the Japanese Group Relief System are obliged
to file tax returns through the e-Tax system.
 If any of the companies in the Aggregation Group is not a small andmedium-scale company (please see 1.3.1)/a small and medium-sizedcompany (please see 1.11.3), all companies in the Aggregation Groupare not treated as small and medium-scale companies/small andmedium-sized companies, for which certain tax benefits are provided.
 Although each company in the Aggregation Group continues tocalculate and file their tax returns individually in principle, someprovisions are calculated based on the consolidated status (e.g., tax
credit for R&D costs, foreign tax credit).
 The Japanese Group Relief System does not apply to local taxes.
Therefore, each company in the Aggregation Group must continue tofile their own tax returns based upon their own taxable income
without offsetting losses from elsewhere in the group for the
purposes of inhabitant tax levied on corporation tax and business tax.

1.15 Corporate Reorganizations
Tax Qualified Reorganizations
The Japanese Corporation Tax Law sets out the conditions for taxqualified reorganizations, which are generally categorized depending on
relationship of the parties of the reorganizations (i.e., 100 Percent
Control Relationship, More than 50 Percent Control Relationship or 50
Percent or less relationship).
(1) Merger
The following is a general outline of the conditions required for a taxqualified merger:

74

Relationship

Conditions(i) 100% Control
Relationship(a) Only shares in the surviving company are
distributed as consideration for the transfer (Noboot requirement).
(b) The 100% Control Relationship is expected toremain.

(ii) More than
50% Control
Relationship(a) Same as (i)-(a)(b) The More than 50% Control Relationship is
expected to remain.
(c) Approximately 80% or more of
directors/employees of the merged company are
expected to be engaged in the business of thesurviving company.
(d) The surviving company is expected to continue tooperate the main business of the merged
company.

(iii) 50% or lessrelationship(a) Same as (i)-(a), (ii)-(c) and (d)(b) One of the main businesses of the merged
company has a relationship with one of thebusinesses of the surviving company.
(c) The relative business size (i.e., sales, number of
employees, etc.) of the related businesses is notconsiderably different (within a 1:5 ratio), or atleast one of the senior directors from each side is
expected to become a senior director of thesurviving company after the merger.
(d) Where one of the shareholders of the merged
company held more than 50% of the shares in
the company before the merger, suchshareholder is expected to continue to hold theshares in the surviving company received due tothe merger.

The following should be noted for the no-boot requirement discussed in(i)-(a): In the case of a triangular merger, if shares in the parent company
75

that directly or indirectly holds 100 percent of the shares in thesurviving company are distributed instead of shares in the surviving
company, the no-boot requirement will be satisfied in principle.
 Where the surviving company held more than two-thirds of theshares in the merged company before the merger, even if minority
shareholders receive boot, the no-boot requirement will not be
jeopardized (the 2/3 exceptional rule).
Under a tax-qualified merger, assets and liabilities are transferred at tax
book value (i.e., recognition of gains/losses is deferred) for tax purposes,
while under a non-tax-qualified merger, assets and liabilities aretransferred at fair market value (i.e., capital gains/losses are realized)
unless the merged company and the surviving company have a 100
Percent Control Relationship.
(2) Corporate Division/Contribution-In-Kind
The following is a general outline of the conditions required for a taxqualified corporate division or a tax-qualified contribution-in-kind:
Relationship

Conditions(i) 100%
Control
Relationship(a) Only shares in the transferee company are
distributed as consideration for the transfer (Noboot requirement).
(b) The 100% Control Relationship is expected toremain.

(ii) More than
50% Control
Relationship(a) Same as (i)-(a)(b) The More than 50% Control Relationship is
expected to remain.
(c) The main assets/liabilities of the transferredbusiness are transferred.
(d) Approximately 80% or more of
directors/employees who were engaged in thetransferred business are expected to be engaged in
the business of the transferee company.
(e) The transferee company is expected to continue tooperate the transferred business.
76

(iii) 50% or lessrelationship(a) Same as (i)-(a), (ii)-(c)(d) and (e)(b) The transferred business has a relationship with
one of the businesses of the transferee company.
(c) The relative business size (i.e., sales, number of
employees, etc.) of the related businesses is notconsiderably different (within a 1:5 ratio), or atleast one of the senior directors from each side is
expected to become a senior director of thetransferee company after the reorganization.
(d) Horizontal type corporate division — where one of
the shareholders of the transferor company held
more than 50% of the shares in the company, suchshareholder is expected to continue to hold theshares in the transferee company received due tothe horizontal type corporate division.
Vertical type corporate division/ Contribution-inkind — the transferor company is expected tocontinue to hold the shares in the transfereecompany received due to the reorganization.

The following should be noted for the no-boot requirement discussed in(i)-(a): In the case of a triangular corporate division, if shares in the parent
company that directly or indirectly holds 100 percent of the shares inthe transferee company are distributed instead of shares in thetransferee company, the no-boot requirement will be satisfied inprinciple.
 In the case of a horizontal type corporate division, shareholders of
the transferor company must receive shares in the transfereecompany (or the parent company of the transferee company)
proportionate to their shareholding ratio in the transferor company.
If a corporate division or a contributions-in-kind is tax-qualified, assets
and liabilities are transferred at tax book value (i.e., recognition ofgains/losses are deferred) for tax purposes, while if it is not tax-qualified,assets and liabilities are transferred at fair market value (i.e., capitalgains/losses are realized) unless the transferor company and the77transferee company have a 100 Percent Control Relationship.
(3) Share-for-Share Exchange/Share-Transfer
The following is a general outline of the conditions required for a taxqualified Share-for-Share Exchange and Share-Transfer(*):(*)

A ‘Share-for-Share Exchange’ (Kabushiki-Kokan) means an exchangeof shares whereby a company(s) causes all of its issued shares to beacquired by another company. A ‘Share-Transfer’ (Kabushiki-Iten)means a transfer of shares whereby a company(s) causes all of its
issued shares to be acquired by a newly established company.
Note that in the table below, the first mentioned company and thesecond mentioned company are referred to as the Subsidiary and the
Parent Company, respectively.
Relationship

Conditions(i) 100% Control
Relationship(a) Only shares in the Parent Company are
distributed as consideration for the transfer(No-boot requirement).
(b) The 100% Control Relationship is expected toremain.
(a) Same as (i)-(a)(b) The More than 50% Control Relationship is
expected to remain.
(c) Approximately 80% or more of
directors/employees in the Subsidiary are
expected to continue working for theSubsidiary.
(d) The Subsidiary is expected to continue tooperate its own main business.

(ii) More than 50%
Control
Relationship78

(iii) 50% or lessrelationship(a) Same as (i)-(a),(ii)-(c) and (d)(b) One of the main businesses of the Subsidiary hasa relationship with one of the Parent Company’sbusinesses (the other Subsidiaries’ businesses in
the case of a Share-Transfer).
(c) The relative business size (i.e., sales, number of
employees, etc.) of the related businesses is notconsiderably different (within a 1:5 ratio), or atleast one of the senior directors of the Subsidiary
does not resign upon the reorganization.
(d) The 100% Control Relationship between the
Parent Company and the Subsidiary is expected
to continue after the reorganization.
(e) Where one of the shareholders of the Subsidiary
held more than 50% of the shares in thecompany, such shareholder is expected tocontinue to hold the shares in the Parent
Company received due to the reorganization.

The following should be noted for the no-boot requirement discussed in(i)-(a) above: In the case of a triangular Share-for-Share Exchange, if shares in theparent company that directly or indirectly holds 100 percent of theshares in the Parent Company are distributed instead of shares in the
Parent Company, the no-boot requirement will be satisfied inprinciple.
 Where the Parent Company held more than two-thirds of the sharesin the Subsidiary before the Share-for-Share Exchange, even if
minority shareholders receive boot, the no-boot requirement will not
be jeopardized (the 2/3 exceptional rule).
When a Share-for-Share-Exchange and a Share-Transfer is carried out asa non-tax-qualified reorganization, built-in gains/losses in assets held by
the Subsidiary will be crystallized although assets and liabilities are nottransferred and remain in the Subsidiary unless the Parent Company andthe Subsidiary had a 100 Percent Control Relationship before thereorganization.
79

(4) Squeeze-Out
Certain squeeze-out (SQO) transactions in which a target company will
become a wholly owned subsidiary of its largest shareholder using
Shares Subject to Class-Wide Call, Consolidation of Shares and Demandfor Sales of Shares are treated as reorganization transactions for tax
purposes.
The conditions for the More than 50% Control Relationship of Share-forShare Exchange are also applied when determining if the SQOtransactions are tax-qualified. Note that boot received by minority
shareholders does not jeopardize the no-boot requirement.
When a SQO transaction is carried out as a non-tax-qualified
reorganization, built-in gains/losses in assets held by the target company
will be crystallized although assets and liabilities are not transferred andremain in the target company.
(5) Spin-Off
The following two types of spin-off are treated as tax-qualified
reorganizations.
(i) Horizontal-type corporate division
A horizontal-type corporate division in which a company transfers one ofits businesses to a newly established company will be treated as a taxqualified corporate division if all of the following conditions are met:80

Conditions(a) Shareholders of the transferor company receive only shares issued by
the newly established company proportionate to their shareholding
ratio in the transferor company (No-boot requirement).
(b) No party owns more than 50% of the transferor company before thecorporate division and it is expected that no party will own more than
50% of the newly established company after the corporate division.
(c) At least one of directors or important employees of the transferorcompany is expected to become a senior director of the newly
established company.
(d) The main assets/liabilities of the transferred business are transferred.
(e) Approximately 80% or more of directors/employees engaged in thetransferred business are expected to be engaged in businesses of the
newly established company.
(f) The newly established company is expected to continue to operate
the transferred business.
If a corporate division is tax-qualified, assets and liabilities aretransferred at tax book value (i.e., recognition of gains/losses isdeferred) for tax purposes, while if it is not tax-qualified, assets andliabilities are transferred at fair market value (i.e., capital gains/losses
are realized).
(ii) Share-Dividend
Where a company distributes all of the shares in its wholly owned
subsidiary to its shareholders (i.e., a Share-Dividend/Kabushiki-Bunpai),such Share-Dividend will be treated as tax-qualified provided that all of
the following conditions are met:
Conditions(a) Shareholders of the dividend paying company receive only sharesissued by the subsidiary proportionate to their shareholding ratio in
the dividend paying company (No-boot requirement).
(b) No party owns more than 50% of the dividend paying company before
the Share-Dividend and it is expected that no party will own morethan 50% of the subsidiary after the Share-Dividend.
81

(c) At least one of the senior directors of the subsidiary does not resign
upon the Share-Dividend.
(d) Approximately 80% or more of directors/employees of the subsidiaryare expected to continue working for the subsidiary after the ShareDividend.
(e) The subsidiary is expected to continue to operate its own main
business.
By virtue of the 2023 tax reform, a partial spin-off treated as a taxqualified reorganization was introduced as a temporary measure from 1
April 2023 to 31 March 2024 (‘eligible period’).
Under this measure, where a company, whose business restructuring
plan under the Industrial Competitiveness Enhancement Act is certified
during the eligible period, distributes more than 80 percent of the sharesin its wholly owned subsidiary to its shareholders (i.e., a certified ShareDividend/Nintei-Kabushiki-Bunpai), the certified Share-Dividend, whichmeets all of the following conditions, is treated as a tax-qualified
reorganization:
Conditions(a) Shareholders of the dividend paying company receive only sharesissued by the subsidiary in proportion to their shareholding ratio in
the dividend paying company (No-boot requirement).
(b) No party owns more than 50% of the dividend paying company before
the certified Share-Dividend and it is expected that no party will own
more than 50% of the subsidiary after the certified Share-Dividend.
(c) At least one of the senior directors of the subsidiary does not resign
upon the certified Share-Dividend.
(d) Approximately 90% or more of directors/employees of the subsidiaryare expected to continue working for the subsidiary after the certified
Share-Dividend.
(e) The subsidiary is expected to continue its own main business.
(f) The number of shares in the subsidiary held by the dividend paying
company immediately after the certified Share-Dividend is less than
20% of the total issued shares.
(g) The subsidiary satisfies certain requirements for expected growth anddevelopment of its business (e.g., stock options are granted or are
expected to be granted to specified directors of the subsidiary).
82

As shares are treated as being transferred at tax book value as a result ofa tax-qualified Share-Dividend, there is no recognition of capitalgains/losses in the hands of the dividend paying company.
(6) Dividend-In-Kind
When a Japanese company pays a dividend-in-kind to its shareholders, if
all of the shareholders are Japanese companies which have a 100
Percent Control Relationship with the dividend paying company at thetime of the payment, the dividend-in-kind are treated as a tax-qualified
dividend-in-kind.
When an asset is transferred under a tax-qualified dividend-in-kind, as
the asset is treated as being transferred at tax book value for thedividend paying company, there is no recognition of capital gains/losses
in the hands of the dividend paying company.

Pre-Reorganization Losses(1) Pre-Reorganization Losses Incurred by a Merged Company, etc.
While under a non-tax-qualified merger, pre-merger losses are nottransferred from the merged company to the surviving company, undera tax-qualified merger, pre-merger losses are transferred from themerged company to the surviving company in principle. However, if thefollowing conditions are not met, the amount of such losses transferred
may be restricted.
Relationship

Conditions

100% Control RelationshipMore than 50% Control
Relationship(i) 5-year control relationshiprequirementsor(ii) Joint business operations requirements

50% or less relationship

No conditions (therefore, no restriction)83

(i) 5-year control relationship requirements
If there has been a More than 50 Percent Control Relationship between
the surviving company and the merged company continuously since thelatest day among the following, this requirement should be passed:-

5 years before the first day of the fiscal year including the merger
dateestablishment day of the surviving company
establishment day of the merged company(ii) Joint business operations requirements
If the following conditions ((a) to (d) or (a) and (e)) are satisfied, thisrequirement should be passed:(a) The business of the merged company has a relationship with one of
the surviving company’s businesses.
(b) The relative business size (i.e., sales, number of employees, etc.) of
the related businesses does not exceed around 1 to 5.
(c) The relative business size of the merged company at the time when
the More than 50 Percent Control Relationship was formed and thesize at the time of the merger does not exceed around 1 to 2.
(d) The relative business size of the surviving company at the time when
the More than 50 Percent Control Relationship was formed and thesize at the time of the merger does not exceed around 1 to 2.
(e) One or more senior directors of both the merged company and thesurviving company become senior directors of the surviving
company after the merger.
When a Japanese company under liquidation procedures determines theamount of its residual assets, if the shareholders of the company are
Japanese companies having a 100 Percent Control Relationship, tax
losses incurred by the liquidating company are transferred to theshareholders provided that the 5-year control relationship requirement84

is satisfied.
(2) Pre-Reorganization Losses Incurred by a Surviving Company, etc.
As for pre-merger losses incurred in the surviving company, if the merger
is tax-qualified and requirements discussed in (1) are not met, there may
be restrictions on utilization of such losses against future profits after themerger.
This rule is also applied to the following reorganizations:-non tax-qualified merger between companies having a 100 Percent
Control Relationshiptax-qualified corporate divisions
tax-qualified contributions-in-kind
tax-qualified dividends-in-kind (The joint business operations
requirements are not applicable.)

Furthermore, there is a rule to restrict utilization of built-in losses after
the above reorganizations unless the requirements discussed in (1) aremet.

Taxation of Shareholders
Where the no-boot requirement (without applying the 2/3 exceptionalrule) is satisfied for a merger, a horizontal corporate division, a Sharefor-Share Exchange, a Share-Transfer or a Share-Dividend, capitalgains/losses from the transfer of the shares are deferred in the hands ofthe shareholders of the merged company, the transferor company, theSubsidiary or the dividend paying company.
However, if the shareholder is a foreign shareholder and receives sharesin a foreign company, the deferral of capital gains/losses is notapplicable unless the shares surrendered due to the reorganization were
attributable to a PE of the foreign shareholder in Japan. Note that even if
the deferral is not available, if the capital gains are not Japanese source
income or if tax treaty protection is available, the capital gains will not be
taxed in Japan.
85Moreover, in the case of a merger, a horizontal type corporate division
or a Share-Dividend, if the reorganization is non tax-qualified, theshareholders of the merged company or the transferor company
recognize a receipt of deemed dividends.

M&A Using Own Shares
Separately from the tax qualified reorganization regime (discussed in
1.15.1 to 1.15.3), there is a tax measure under which the recognition ofcapital gains or losses of shareholders of a target company is deferredwith regard to M&A to acquire shares in the target company by using
own shares.
This measure is applied to cases where shareholders (both companies(1)and individuals) transfer shares in the target company and acquire
shares(2) in the acquiring company under a ‘Share Delivery System’(Kabushiki-Kofu Seido) under the Companies Act.
(1)

For foreign companies, the measure is applied only to the portion ofcapital gains or losses on shares in the target company which aremanaged at their permanent establishments located in Japan.

(2)

Where any assets other than shares in the acquiring company aredelivered to the shareholders, the measure is applied only in cases
where the value of the shares in the acquiring company is 80 percent
or more of the total value of assets delivered as consideration for theacquisition. In this case, deferral of capital gains or losses is limited tothe portion attributable to the shares in the acquiring company.

86

2

Taxation of Partnerships

In Japan, a partnership (Kumiai) is not recognized as a separate taxable
entity and the partners (Kumiai-In) are liable for Japanese tax on thebasis of their share of profits under a partnership agreement and inaccordance with their own Japanese tax status.

2.1

NK-Type Partnerships
Definition of NK-Type Partnerships

There are the following three types of NK-type partnership in Japan.
These NK-type partnerships are formed by an agreement in which
partners agree to jointly carry on business. Generally, assets of an NKtype partnership are deemed to belong to all partners jointly. A foreign
partnership similar to these Japanese NK-type partnerships also falls
under the definition of an NK-type partnership.
(1) Nini Kumiai (NK)An NK is formed under the Civil Law. All partners of an NK are liable forthe obligations of the NK. One or more managers may be appointed to
manage the business operation of the NK. There is no limitation on thekinds of business which an NK can carry on and no registration isrequired.
(2) Investment Limited Partnership (Toshi Jigyo Yugen Sekinin Kumiai or
Investment LPS)
An investment LPS is formed by general partners and limited partners for
conducting investment business under the Investment LPS Act. A generalpartner has unlimited liability for the obligations of the LPS and manages
the operation of the LPS business. A limited partner has limited liability
for the obligations of the LPS to the extent of its capital investment. An
Investment LPS must be registered at a local legal affairs bureau.

87

(3) Limited Liability Partnership (Yugen Sekinin Jigyo Kumiai or LLP)An LLP is formed under the LLP Act. All partners of an LLP have limited
liability for the obligations of the LLP to the extent of their capital
investment in the LLP and must participate in the management of the
LLP business in principle. Either an individual or a company can be apartner of an LLP but another partnership cannot be a partner of an LLP.
Furthermore, at least one of the partners must be an individual resident
in Japan or a Japanese company. There is a restriction on businesses tobe carried on by an LLP. For example, neither accounting firms nor law
firms are able to use LLPs, unlike in some foreign countries. An LLP must
be registered at a local legal affairs bureau.

Taxation of Partners(1) Japanese Resident Partners
Income/loss of an NK-type partnership allocated to its partners generally
retains its nature for tax purposes. Japanese resident partners (bothJapanese resident individuals (individuals who have their domicile inJapan or who have resided in Japan for a continuous period of 1 year ormore) and Japanese companies) are required to declare theirincome/loss generated from the partnership by filing tax returns during
each of their taxable periods regardless of whether any actual
distribution is made.
If the income calculation of a partnership is made once a year or more
and the income/loss is allocated to each partner within 1 year after theincome/loss is generated, the partners can declare such income/loss forthe taxable period in which the calculation period end date of thepartnership falls.
In certain cases, utilization of losses generated from partnerships isrestricted (please see 2.3 below).
(2) Foreign Partners Having a PE in Japan
In the same way as Japanese resident partners, foreign partners (bothforeign individuals and foreign companies) having a permanent88establishment (PE) in Japan are required to declare their taxable
income/loss generated from an NK-type partnership. Also, in certain
cases, utilization of losses generated from partnerships is restricted(please see 2.3 below).
Profit allocations to foreign partners having a PE in Japan derived frombusinesses carried on in Japan using an NK-type partnership are subject
to withholding tax at 20 percent (20.42 percent from 2013 to 2037,
including a special reconstruction income tax). The withholding tax iscreditable when declaring such income in the partner’s Japanese tax
return.
In general, where a person makes a payment subject to withholding tax,
the person is required to pay the withholding tax to the competent tax
office by the 10th day of the following month. As for the profit allocationfrom an NK-type partnership, the income is deemed to be paid on the
day when the cash or any other assets are distributed (or the day when 2months have passed from the end of the calculation period of the NKtype partnership if no distribution is made within 2 months after the endof the calculation period). Also, a person who allocates partnershipincome is deemed to be the person responsible for the withholding
obligations.
It is sometimes difficult to judge whether the business carried on
through an NK-type partnership arrangement is a business carried on in
Japan and whether it causes a foreign partner to be treated as having apermanent establishment in connection with the business carried on by
the partnership.
If a foreign partner of Investment LPSs or foreign partnerships similar toan Investment LPS (collectively, hereinafter referred to as ‘Investment
Funds’) falls under the scope of a ‘Specified Foreign Partner’, the foreign
partner is taxed in the same way as a foreign partner not having a PE in
Japan.
A Specified Foreign Partner of an Investment Fund is a partner who
satisfies the following conditions:89

(i) being a limited partner of the Investment Fund(ii) not being involved in the operation of the Investment Fund(iii) holding an interest of less than 25 percent in the assets of theInvestment Fund(iv) not having a special (affiliate) relationship with the general partnersof the Investment Fund(v) not having a PE in Japan with respect to business other than thebusiness carried on by the Investment Fund
A foreign partner must file an application form to the relevant tax officethrough a general partner along with a copy of the partnershipagreement (including Japanese translation of the agreement) in order toapply the above rule. Also, the foreign partner is required to show thegeneral partner of the Investment Fund a certificate to verify its foreign
resident status.
(3) Foreign Partners Not Having a PE in Japan
Income of an NK-type partnership allocated to its partners generally
retains its nature for tax purposes. Thus, it is generally taxed depending
on its nature as if it were directly derived by each partner.

2.2

Tokumei Kumiai
Tokumei Kumiai (TK)

A Tokumei Kumiai, or TK, is a silent partnership arrangement provided
for under the Commercial Code of Japan. The silent partner(s) in the TK(Tokumei Kumiai-In) contributes funds under a TK agreement for theoperation of a specific business carried on by an operator (Eigyosha) andin return is able to participate in the profits or losses from that
operation. In entering into a TK arrangement, the TK silent partner(s)does not obtain any interest in the underlying assets of the TK operator’sbusiness, nor generally can the TK silent partner(s) participate in the
management or operation of the business. The mechanics of a TK can be90

used in any kind of business.

Taxation of the Operator
A TK operator carrying on business in Japan is subject to normal
Japanese corporate income tax/individual income taxes in relation to theoperation of its business. However, when calculating taxable income, theTK operator is entitled to take a deduction for any element of profits
allocated to the TK silent partner(s). Conversely, where losses areallocated to the TK silent partner(s), the TK operator is required torecognize corresponding taxable income.

Taxation of Silent Partners
The Japanese tax consequences for a TK silent partner relating to income
under a TK arrangement depends upon whether or not the TK silent
partner is Japanese resident.
(1) Japanese Resident Partners
The TK profit/loss allocation is treated as normal taxable income/loss of
the TK silent partner for the taxable period in which the calculation
period end date of the TK arrangement falls.
As for corporate silent partners, utilization of losses generated from a TK
is restricted (please see 2.3 below). As for individual silent partners, theTK profit/loss allocation is basically classified as ‘miscellaneous income’,
which means that a loss allocation from a TK cannot be offset against anyother types of income. However, if the individual silent partner isinvolved with managing the business operation together with theoperator, the TK profit/loss allocation may be classified as other types ofincome that may be offset against other income if the result is a loss.
Withholding tax is levied on actual distributions of TK profit to silent
partners at the rate of 20 percent (20.42 percent from 2013 to 2037,
including a special reconstruction income tax), which is creditable for thesilent partners when declaring such income in their tax returns.

91

(2) Foreign Partners Having a PE in JapanThe TK profit/loss allocation to foreign TK silent partners (both foreign
individuals and foreign companies) having a permanent establishment(PE) in Japan is treated in the same way as Japanese resident partners.
(3) Foreign Partners Not Having a PE in Japan
20 percent withholding tax (from 2013 to 2037, 20.42 percent
withholding tax, including a special reconstruction income tax) is applied
on actual distributions of TK profit allocations. There is no requirement
to file a tax return in Japan.
It should be noted that foreign TK silent partners located in certain
jurisdictions with which Japan has concluded a tax treaty containing anappropriate ‘Other Income’ article, which provides that ‘Other Income’ istaxable only in the country of the recipient, can apply to the tax
authorities to have the withholding tax on their distributions of TK profit
allocations exempted. Note that tax treaties with some countries such as
the US, the UK, France, Hong Kong and the Netherlands include a special
article for TK income whereby the Japanese tax authorities are given thetaxing right with respect to TK distributions.

2.3

Limitation on Utilization of Losses Derived from
Partnerships

There are rules to limit the utilization of losses derived from apartnership at the level of each partner as discussed below. For a foreign
investor, these rules affect the investor’s taxable income in Japan only
when the investor has a permanent establishment in Japan.

Corporate Partners of Partnerships Other than Japanese
LLPs: At-Risk Rule (AR rule)
Where a corporate partner of a certain partnership suffers losses fromthe partnership in its fiscal year, the following amount (excess
partnership losses) is not deductible in calculating taxable income for the
fiscal year:92

(i) Where a corporate partner is not at risk with respect to liabilities ofthe partnership due to an arrangement such as non-recourse
financing:
the partnership losses exceeding the amount calculated based on
the capital contribution of the corporate partner(ii) Where it is obvious that the business of the partnership results in
profits due to an arrangement such as a profit guarantee contract ora residual value insurance/guarantee:
the partnership losses
If the corporate partner derives profits from the partnership business insubsequent fiscal years, the excess partnership losses incurred from thesame partnership in prior fiscal years can be offset against the profits.
This rule does not apply to a corporate partner who is continuously
involved in decision-making of important transactions of the partnership
activity and continuously performs important parts of the transactions(such as negotiating the contracts).
Partnerships covered by this rule are as follows:(i) NK(ii) Investment LPS(iii) Tokumei-Kumiai (TK) and any other arrangement similar to a TK(iv) foreign arrangements similar to (i), (ii) and (iii)(v) foreign arrangements similar to a Japanese LLP

Individual Partners of Partnerships Other than Japanese
LLPs
Where an individual partner of a certain partnership that is involved inrental real property activity incurs losses from the rental activity, suchlosses are disregarded for individual income tax purposes and cannot be
carried over to the following years. This rule does not apply to anindividual partner who is continuously involved in decision-making ofimportant transactions of the partnership activity and continuously
performs important parts of the transactions (such as negotiating
contracts).
93Partnerships covered by this rule are as follows:(i) NK(ii) Investment LPS(iii) foreign arrangements similar to (i) and (ii)
(iv) foreign arrangements similar to Japanese LLP‘Rental real property activity’ includes not only the rental of land andbuildings but also leasing ships and aircraft.

Corporate Partners of Japanese LLPs
When a corporate partner of an LLP incurs losses from the LLP businessin its fiscal year, the losses exceeding the amount calculated based on
the capital contribution of the corporate partner (excess LLP losses) are
not deductible in calculating taxable income for the fiscal year.
If the corporate partner derives profits from the LLP business insubsequent fiscal years, the excess LLP losses incurred from the same LLP
in prior fiscal years can be offset against the profits.

Individual Partners of Japanese LLPs
When an individual partner of an LLP derives rental real property
income, business income or forestry income from the LLP business, if thelosses incurred from the LLP business in a year exceed the amountcalculated based on the capital contribution of the individual partner,such excess portion is not treated as deductible expenses in calculating
taxable income for the year.
While a corporate partner of an LLP can offset excess losses against
profits generated from the same LLP in subsequent years, the treatment
is not available if the partner is an individual.

94

3

Taxation of Individuals

3.1

Introduction

Individual income taxes in Japan consist of national income tax and local
inhabitant tax. The taxable year for national income tax is the calendar
year. Inhabitant tax is assessed by the municipal governments on
individuals who reside or have domicile therein as of 1 January of eachyear, based on income for the preceding year. Moreover, thoseindividuals who are operating certain specified businesses of their own
at fixed places in Japan are liable for business tax assessable byprefectural governments.

3.2

Taxpayers
Classification of Individual Taxpayers

Under the Income Tax Law of Japan, there are two categories ofindividual taxpayers; resident and non-resident.
(1) Resident
A resident is an individual who has their domicile in Japan or who has
resided in Japan for a continuous period of 1 year or more. Residents arefurther divided into either non-permanent or permanent residents withconsequential tax implications as described below.
(i) Non-permanent resident
A non-permanent resident is a resident who does not have Japanesenationality and has lived in Japan for 5 years or less in the last 10 years.
A non-permanent resident is subject to normal Japanese income andinhabitant taxes on (a) income other than foreign source income plus (b)foreign source income paid in or remitted to Japan.

95

(ii) Permanent resident
A permanent resident is a resident other than a non-permanent
resident; therefore, an individual who has Japanese nationality, or has
been domiciled or resident in Japan for a period of more than 5 years in
the last 10 years falls under this category.
A permanent resident is subject to Japanese income and inhabitant taxes
on their worldwide income.
(2) Non-Resident
A non-resident is an individual other than a resident; therefore, anindividual who has no domicile in Japan, or has not been resident for acontinuous period of 1 year or more in Japan, falls under this category.
Note that in this chapter, the tax treatment of a non-resident is
discussed on the assumption that the non-resident has no permanentestablishment in Japan.

Domicile‘Domicile’, as provided for in the Income Tax Law of Japan, means theprincipal place of living. Whether or not an individual has their domicile
in Japan is determined on the basis of objective facts, such as the factthat the person has an occupation in Japan, that the person’s spouse orother relatives make up the person’s household in Japan, or that theplace of business is located in Japan. In view of the nature of a domicile,an individual can never be regarded as having more than one domicile atthe same moment.
Generally speaking, if a person, regardless of whether the person is aJapanese national or a foreign national, has come to reside in Japan toengage in business or an occupation, the person is presumed to have a
domicile in Japan, unless it is made clear from the employment contract,etc. based on which the person has come to Japan, that the period of theperson’s stay in Japan is not 1 year or more. It should be noted in thisconnection that the visa status under which a foreign national has been
permitted to enter Japan is not directly relevant.
96

Short-Term Visitors
Generally, Japan’s double tax treaties are in line with the OECD ModelTax Convention with respect to the tax-exempt treatment of foreign
employees temporarily working in Japan. Such employees are generally
tax exempt if they fulfill the following three criteria:
 They are present in Japan for not more than 183 days in any 12month period commencing or ending in the fiscal year concerned.
 Their salary is paid by a non-resident employer.
 None of the salary is borne by a permanent establishment of the
non-resident employer in Japan.

3.3

Tax Rates
Tax Rates on Ordinary Income

The following progressive tax rates are applied to the net of assessableordinary income minus allowable deductions and personal reliefs.
(1) National Income Tax Rates
Taxable income
From1,950,000
3,300,000
6,950,000
9,000,000
18,000,000
40,000,000

But not over
1,950,000
3,300,000
6,950,000
9,000,000
18,000,000
40,000,000-

97

Tax rates
applicableto taxable
income band
5%
10%
20%
23%
33%
40%
45%

(JPY)
Deduction
97,500427,500
636,000
1,536,000
2,796,000
4,796,000

(2) Inhabitant Tax Rates
Inhabitant tax consists of two elements; a small levy imposed regardlessof the amount of income (per capita levy) and a more significant tax
based upon the taxable income of the individual taxpayer (Income basedlevy).
 Per capita levy

(JPY)

Municipal inhabitant tax

Prefectural inhabitant tax

3,000

1,000

 Income based levy
The inhabitant tax rate is 10 percent regardless of the amount of taxable
income.

Tax Rates on Capital Gains from Sales of Real Estate
Capital gains from sales of real estate are taxed separately from ordinary
income as follows: short-term capital gains (the period of possession is 5 years or less asof 1 January of the sale year) － 30 percent national income tax and 9
percent inhabitant tax
 long-term capital gains (the period of possession is more than 5 years
as of 1 January of the sale year) － 15 percent national income tax
and 5 percent inhabitant tax
Where the asset sold is a residence, further concessions such as special
deductions, tax loss carry-forwards and preferential tax rates areavailable provided that certain conditions are satisfied.
Note that if land in Japan was acquired in 2009 and 2010, a special
deduction for long-term capital gains may be available, which is
discussed in 1.6.2.
98

Tax Rates on Investment Income(1) Investment Income Derived from Listed Shares/Specified Bonds
Dividend income from listed shares, in principle, is required to be added
to ordinary income; however, a taxpayer has the following options tosettle their tax liability on the dividends from listed shares unless the
taxpayer holds 3 percent or more of the outstanding shares of aJapanese dividend paying company at the record date of the dividends(by virtue of the 2022 tax reform, the taxpayer will also be included
where the taxpayer and companies, 50 percent of whose outstanding
shares are held by the taxpayer, hold more than 3 percent or more of
the outstanding shares of a Japanese dividend paying company in theaggregate at the record date of the dividends paid on or after 1 October
2023 ):
 No-declaration in an income tax return:This is applied to dividends from a Japanese company. Tax
liabilities on dividends are settled by withholding tax.
 Declaration separately from ordinary income:
Dividend income is taxed at a flat rate of 20 percent (15 percent
national income tax and 5 percent inhabitant tax).
Interest from specified bonds is also subject to the above separate
declaration.
‘Specified bonds’ include the following: Japanese government bonds, local government bonds, foreign
national government bonds, foreign local government bonds
 publicly-offered bonds, listed bonds
 bonds issued on or before 31 December 2015 (except for discountbonds where tax is withheld at the time of issuance)
Capital gains from sales of listed shares and specified bonds are basicallytaxed at 20 percent (15 percent national income tax and 5 percent
99inhabitant tax) separately from ordinary income. When calculating thecapital gains, any gains/losses from sales of listed shares and specified
bonds are aggregated.
Note that when a taxpayer suffers capital losses from certain sales oflisted shares and specified bonds in a given year, such losses can beoffset against dividend income from listed shares declared separatelyfrom ordinary income and interest income from specified bonds.
Moreover, it is possible to carry over capital losses incurred from certain
sales of listed shares and specified bonds for 3 years to set off against
the following income: dividend income from listed shares declared separately from ordinary
income interest income from specified bonds
 capital gains from listed shares and specified bonds
Note that dividends and capital gains from publicly-offered stock
investment trusts are basically treated in the same way as those fromlisted shares. Also, interest and capital gains from publicly-offered bondinvestment trusts are treated in the same way as those from specified
bonds.
(2) Investment Income Derived from Non-Listed Shares/Ordinary Bonds
Dividend income from non-listed shares is generally taxed as ordinary
income; however, a taxpayer can settle their tax liability by withholding
tax without declaration in their income tax return if the amount of thedividend from a Japanese company does not exceed JPY100,000 per
annum (where the calculation period of the dividend is less than 1 year,
instead of JPY100,000, the amount calculated by multiplying JPY100,000
by the number of the months of the calculation period of the dividendand divided by 12.). Note that such dividends are still required to be
declared for inhabitant tax purposes.

100Interest from ordinary bonds (i.e., bonds other than specified bonds) is
generally taxed only through withholding tax and declaration in an
income tax return is not required provided that the interest is paid inJapan.
Capital gains from sales of non-listed shares and ordinary bonds arebasically taxed at 20 percent (15 percent national income tax and 5
percent inhabitant tax) separately from ordinary income. Whencalculating the capital gains, any gains/losses from sales of non-listed
shares and ordinary bonds are aggregated.
Note that dividends and capital gains from privately-offered stock
investment trusts are basically treated in the same way as those from
non-listed shares. Also, interest and capital gains from privately-offeredbond investment trusts are treated in the same way as those fromordinary bonds.
(3) Investment Income Derived from Bank Deposits
Interest from bank deposits is generally taxed only through withholding
tax and declaration in an income tax return is not required provided thatthe interest is paid in Japan.

Withholding Tax Rates on Investment Income
Withholding tax rates on interest/dividends paid to individuals in Japanare as follows:
Investment income
Dividends from listed shares(*)/publicly-offered stock investment
trustsDividends from non-listed shares/
privately-offered stock investment
trustsInterest on bonds/bond investment
trusts/bank deposits
101

National income
tax

Inhabitant
tax

15%

5%

20%

-

15%

5%

(*)

Where a taxpayer holds 3 percent or more of the outstanding sharesof a Japanese dividend paying company at the record date of thedividends (by virtue of the 2022 tax reform, the taxpayer will also be
included where the taxpayer and companies, 50 percent of whose
outstanding shares are held by the taxpayer, hold 3 percent or moreof the outstanding shares of a Japanese dividend paying company inthe aggregate at the record date of the dividends paid on or after 1
October 2023), the tax rate for dividends from non-listed shares isapplied.

Please see 4.9.2 for details of withholding tax imposed on investment
income earned by non-residents.

Tax Rates Imposed on Non-Residents
In general, a non-resident is liable for Japanese individual income tax at
the flat rate of 20 percent of the gross amount of their Japanese source
income except for certain income such as Japanese source real estate
income which is taxed at progressive tax rates on a net basis. A nonresident is generally not liable for inhabitant tax. Where a non-resident isregistered in the relevant municipal government under the Basic
Resident Registration system, the individual may be liable for inhabitanttax.

Special Reconstruction Income Tax
In addition to the above, special reconstruction income tax will be
imposed at 2.1 percent on the national income tax liability from 2013 to2037 in order to increase tax revenue to finance post-earthquake
reconstruction. If a taxpayer takes foreign tax credits (discussed in 3.7.3),
special reconstruction income tax will be calculated based on thenational income tax liability before the foreign tax credits.
Note that special reconstruction income tax will be imposed not only on
national income tax declared in an income tax return but also on
withholding tax.
Also, inhabitant tax (per capita levy) is increased by JPY1,000 (JPY500 formunicipal inhabitant tax and JPY500 for prefectural inhabitant tax) from1022014 to 2023 for reconstruction funding.

3.4

Assessable Income

An individual’s taxable income is defined as assessable income lessallowable deductions. Assessable income for these purposes consists ofthe following:











interest income
dividend income
real estate income
business income
employment income
retirement income
timber income
capital gains
occasional income
miscellaneous income

Remuneration
When considering the tax position of expatriates assigned to work inJapan, the most significant item of assessable income is likely to be
employment income.
Employment income may commonly include the following items:













basic salarybonus
cost of living allowanceoverseas premium
housing allowance or company housing
maid allowance
utility allowancechildren’s tuition allowanceforeign exchange allowancetax equalization
medical allowancestock options103 other economic benefits, such as company car or home leavetransportation
In addition to the foregoing, the expatriates may continue to be coveredby pension and/or profit sharing plans maintained by their head offices
while they are in Japan.
As can be noted from the above, whilst employment income will
principally consist of cash payments, it is not limited to cash amounts
and payments in kind or economic benefits are also included withinassessable income, unless specifically exempted from taxes under the
tax laws, regulations or administrative guidance.

Treatment of Benefits(1) Company Housing
Rent paid by an employer is not entirely included in assessable income if
the ‘assessed rent (legal rent)’ (i.e., minimum rent measured byadministrative guidance of the income tax law) is paid by the employee.
(2) Children’s Tuition Allowance
Tuition fees for children paid by an employer are included in assessable
income to the employee. However, an exception to such taxable
treatment has been established by private tax rulings with respect to thecontribution plan of certain international schools in Japan. Under suchplans, an employer company can effectively make a donation to theschool and in recognition of this, children of employees are exemptedfrom tuition fees for attending the school. The employees are notrequired to report any benefits arising from this arrangement as taxable
income. However, employer companies are required to treat thecontribution payments as donations for corporation tax purposes. As
discussed in 1.8.11, donations have only limited deductibility forcorporation tax purposes.
Certain international schools have now been granted status as Specified
Public Interest Facilitating Corporations. As a result, it may be possible
for companies to enjoy a tax deduction for a greater portion of104

donations to such qualifying schools.
(3) Company Car
A company car used for the employer’s business is not treated as ataxable economic benefit.
(4) Home Leave Transportation
Cash or an in-kind benefit provided by an employer to an expatriate inJapan to facilitate a home leave trip to that expatriate’s country of origin
will generally not be treated as assessable income of the expatriate. The
home leave expense can also cover the costs of the expatriate’s cohabiting family members. Such home leave should, generally speaking,be limited to a single trip per year and should be in accordance with theemployer’s working rules, terms of the expatriate’s contract, etc.
Further, the expense should be reasonable based upon the relevantfacts, such as available routes, distance, fare, etc.
(5) Moving Expenses
Moving expenses are generally treated as non-taxable income.
(6) Tax Reimbursements
Any tax reimbursement or settlement made by an employer for an
expatriate should be included in assessable income on a cash basis.
(7) Stock Options(i) Qualified stock options
The income earned from qualified stock options is subject to tax when
the stock is sold. Therefore, the tax on income generated by exercise of
the stock option is deferred until the stock is sold as a capital gain.
The conditions for qualified stock options are as follows: The holder of the stock options is a director (including not only a105

member of the board of directors but also officers) or an employee of
the issuing company, or is a director or an employee of a company
whose voting stock is 50 percent or more owned directly or indirectlyby the issuing company.
 The stock option rights have to be exercised within the period
between the second anniversary of the date of the resolution of theshareholders meeting for the option grant and the tenth anniversary(the fifteenth anniversary where the issuing company is an unlistedcompany and was established less than 5 years ago(*)).
(*)

This treatment is applicable to the stock options to be granted
under agreements, which are concluded based on the resolution
for the option grant by the shareholders meeting on or after 1
April 2023.

 The total exercise price of all options exercised in a year must notexceed JPY12 million.
 The exercise price of the option must be equal to or higher than thefair market value of the underlying shares on the date, when theagreement for the option grant is concluded.
 The option rights cannot be transferred.
 Issuance of new stock pursuant to the stock options was made incompliance with the Japanese Companies Act relating to ashareholders’ meeting resolution.
 With respect to the stock that is issued at the time the option is
exercised, the share certificates must not be transferred to or held byan option holder, but must be kept in trust and custody by either asecurities company or a trust company (Trust) in accordance with aprearranged agreement made between a company and the Trust.
That is, share certificates must be kept under the supervision andcontrol of the Trust until such shares are sold (excluding cases where
the issuing company is an unlisted company which does not issue
share certificates and satisfies certain requirements).

106

(ii) Non-qualified stock options
Any benefits arising from non-qualified stock options for the
directors/employees are taxable at the time of exercise of the option.
The director/employee is taxed on the difference between the fairmarket value and exercise price on the date of exercise. The income isgenerally treated as additional compensation and subject to ordinary
income taxes.
(8) Restricted Stock
Where a company grants specified restricted stock to its
directors/employees as compensation for services performed by them,such individuals should recognize taxable benefits at the fair market
value of the stock when the restrictions on the stock lapse (i.e., thevesting date).
Restricted stock is defined as stock which is subject to restrictions oftransferability for a certain period of time and forfeiture upon certain
trigger events. Restricted stock is treated as specified restricted stock in
certain cases including where an director/employee of a company
contributes monetary claims for their compensation to the company inorder to obtain restricted stock from the company (i.e., a contributionin-kind).

107

Exemptions and Concessions
The following items of income and benefits are specifically excluded
from treatment as assessable income: commutation allowances not exceeding the lesser of JPY150,000 or
actual monthly commutation costs reasonable costs of presents, etc. for the commendation of officers
or employees for their long-service with the employer company
 costs of goods given to directors or employees in connection with thecommemoration of anniversaries, etc. (Such goods must be suitable
for the commemoration, and the estimated disposal value thereof
shall not exceed JPY10,000.)
 discount sale of merchandise (The discounted sales price must be atleast 70 percent of the ordinary sales price, and the quantity ofmerchandise sold at a discount should be such that ordinary
consumers normally consume for their own household use.) utilities for a dormitory interest on loans in the case of emergency, such as calamity, sickness,
etc. or where the amount of such interest does not exceed JPY5,000
a year cost of recreation, such as outings, etc. up to a reasonable amount life insurance or casualty insurance premiums borne by the employer
on behalf of directors and employees provided that the insurance
proceeds are to be made to the employer upon expiration of theinsurance term insurance premiums, provided that the amount borne by theemployer shall not exceed JPY300 a month compensation for damage paid to a third party and legal fees inconnection therewith where such damage was caused by an officer108

or employee while on duty and not due to their fault
 golf club or social club membership fees, etc. provided that they areconnected with the business of the employer
 dividends and capital gains from listed shares held in an individual
savings account (NISA: Nippon individual savings account), in which
an individual can make investments in listed shares up to JPY1.2
million per year from 2016 to 2023 and hold them for a maximum of
5 years
In addition to the above NISA scheme, the Junior NISA scheme, which
will end in 2023, for minors less than 20 years old (18 years old in2023) and the installment-type NISA scheme for investments in listed
stock investment trusts, etc. are also available.
From 2024, the current NISA scheme will shift to the new NISA
scheme which was introduced under the 2023 tax reform. Under the
new NISA scheme, an individual can make investments in listed
shares or certain investment trusts up to JPY3.6 million in total per
year and hold them for an indefinite period. The new NISA scheme isa permanent measure.
 subsidies provided by the national or local governments to cover theusage fees of childcare facilities or childcare service

Special Measures for Aggregation of Profits and Losses ofReal Estate Income Derived from Second-Hand Overseas
Buildings
Where an individual has real estate income derived from second-handoverseas buildings and there is any amount of losses from overseas real
properties in the calculation of the amount of the real estate income forthe year, the amount attributable to depreciation of the second-handoverseas buildings among the amount of losses from overseas real
properties will be disregarded for the purpose of the application of theprovisions of income tax.
Note that the amount of disregarded depreciation above will not be
deducted from acquisition costs of the second-hand overseas buildings in109

the calculation of capital gains, when the second-hand overseas buildings
are transferred.
 Definitions of Keywords(1) Second-Hand Overseas Buildings
Among buildings overseas which had been used by individuals or put into
use for business by companies and which were acquired by an individual
and used in business operations to generate real estate income, buildings
for which the calculation method of the useful life applied in thecalculation of depreciation included in the necessary expenses in realestate income is one of the following methods:-

Simplified method(i) If statutory useful life < number of years elapsed (A)Useful life: statutory useful life x 20%(ii) If statutory useful life > number of years elapsed (A)Useful life: statutory useful life - (A) + 20% x (A)-Estimating method
Useful life: estimated remaining useful life

(Except for the cases where certain documents are attached to theincome tax return to prove that the useful life complies with the laws of
the state of the second-hand overseas buildings or the estimatedremaining useful life is appropriate.)(2) Amount of Losses from Overseas Real Properties
The amount of losses from renting out second-hand overseas buildings in
the calculation of real estate income (if there is any amount of real estate
income derived from other overseas properties, the amount of theremaining balance after being netted against real estate income fromthose overseas properties)

110

3.5

Allowable Deductions
Employment Income Deduction(1) Standard Deduction(i) For a taxpayer other than (ii)

(JPY)

Amount of compensation (A)Standard deduction

Up to1,625,000

550,000

Excess overUp to1,625,000
1,800,000(A) x 40% - 100,000

Excess overUp to

1,800,000
3,600,000(A) x 30% + 80,000

Excess overUp to

3,600,000
6,600,000(A) x 20% + 440,000

Excess overUp to

6,600,000
8,500,000(A) x 10% + 1,100,000

Excess over

8,500,000

1,950,000(ii) For a taxpayer meeting any of the following conditions: The taxpayer is a special handicapped person.
 The taxpayer has a dependent aged less than 23 in the same
household.
 The taxpayer has a special handicapped dependent or special
handicapped spouse in the same household.
The additional deduction calculated as follows is applicable:(Total amount of compensation - JPY8,500,000) × 10%(maximum: JPY150,000)
Thus, the total of the standard deduction and the additional deduction is
as follows for such taxpayers:
111

(JPY)
Standard deduction+ Additional deduction

Amount of compensation (A)Up to

8,500,000

Same as (i)Excess overUp to

8,500,000
10,000,000(A) x 10% + 1,100,000

Excess over

10,000,000

2,100,000(2) Deduction of Specified Expenditure
When a resident taxpayer having employment income has borne
specified expenditure in a given year, the amount of specified
expenditure less 50 percent of the standard deduction can be deductedfrom gross compensation in addition to the standard deduction.
Specified expenditure includes expenditure for commuting, relocation,
training and business trips. Expenses for books, clothing andentertainment directly required to perform duties are also treated as
specified expenditure, up to JPY650,000 a year.

Retirement Income Deduction
Circumstances(JPY)
Standard deduction

Up to first 20 years of service

400,000 per year of service

For each year of service over 20
years

700,000 per year of service

Minimum deduction

800,000 per caseSpecial deduction for those retiring
due to physical handicap

Amount of the above deduction +1,000,000

Note that taxable retirement income is calculated as 50 percent of
retirement income after the standard deduction, and it is taxed at theordinary tax rates but separately from ordinary income. The 50 percent
reduction will not apply to retirement allowances that a director whose
service period is 5 years or shorter receives for the service period.
112

In addition, even where an employee other than a director whose service
period is 5 years or shorter receives retirement allowances, the 50
percent reduction will not apply to the portion of retirement allowances
after the standard deduction exceeding JPY3 million.

Specific Deductions
The following deductions are applicable to a resident taxpayer. Note thata non-resident taxpayer subject to progressive tax rates may also enjoy
special deductions for casualty losses incurred on the assets in Japan anddonations.
(1) Casualty Losses
A deduction is available for losses incurred on a taxpayer’s assets, or
those of family members living in the same household, from a disaster ora robbery. The deductible amount is equivalent to any loss not coveredby insurance proceeds, etc. in excess of the smaller of JPY50,000 or 10
percent of assessable income.
(2) Medical Expenses
 Basic measure
A deduction is available for medical expenses for the taxpayer and family
members living in the same household. The deductible amount isequivalent to medical expenses not covered by insurance proceeds, etc.
in excess of the smaller of JPY100,000 or 5 percent of assessable income.
The maximum deduction is limited to JPY2 million.
 Special measure
A special measure for the deduction for medical expenses with respect
to expenses for so-called switch OTC drugs (drugs that were previously
sold as prescription drugs and have been switched to over-the-counter
drugs) is applicable from 2017 to 2026.
Under the special measure, where an individual who receives a medical
checkup or a vaccination, etc. in order to maintain and improve their113

health condition and prevent diseases pays designated switch OTC drug
expenses for the person or their family members living in the same
household, the total amount of switch OTC drug expenses less JPY12,000
will be deductible in calculating taxable income up to JPY88,000.
The special measure will not be applicable where the medical deduction
under the basic measure is applied.
(3) Social Insurance Premiums
Only premiums paid under Japanese social insurance schemes for a
taxpayer and family members living in the same household are
deductible. Foreign social insurance premiums are not deductible.
However, in accordance with the protocol of the Japan-France tax treaty
signed in January 2007, contributions paid to the French social security
system may be deductible under certain circumstances.
(4) Life Insurance Premiums
The maximum deductible amount for each type of qualified life
insurance premiums is as follows:[For insurance policies entered into before 31 December 2011]
National
income tax(JPY)
Inhabitanttax

Life insurance premiums

50,00035,000

Personal pension insurance premiums

50,00035,000Life insurance premiums[For insurance policies entered into on or after 1 January 2012]
National
income tax(JPY)
Inhabitanttax

Life insurance premiums

40,00028,000

Personal pension insurance premiums

40,00028,000

Medical care insurance premiums

40,00028,000Life insurance premiums

114

The total annual caps of the deductible amount for the above insurance
premiums are JPY120,000 and JPY70,000 for national income tax
purposes and for inhabitant tax purposes, respectively.
Note that insurance premiums paid on policies concluded abroad byforeign insurance companies are not qualified for the life insurance
deduction.
(5) Fire and Other Household Casualty Insurance Premiums
The income deduction for casualty insurance premiums has basically
been abolished. However, the deduction for long-term casualty
insurance premiums remains available provided that the policies wereentered into before 1 January 2007. The maximum deduction for longterm casualty insurance premiums is JPY15,000 and JPY10,000 fornational income tax purposes and for inhabitant tax purposes,
respectively.
If an individual applies for both a deduction for earthquake insurance
premiums (discussed below) and a deduction for long-term casualty
premiums, the maximum deductible amount in total is JPY50,000 fornational income tax purposes and JPY25,000 for inhabitant tax purposes.
(6) Earthquake Insurance Premiums
Certain earthquake insurance premiums up to the value of JPY50,000 canbe deducted from income for national income tax purposes, and a half ofthe premiums for inhabitant tax purposes (up to JPY25,000).
(7) Donations
Donations qualifying as a deduction do not mean charitable
contributions or donations in general but those to the following:(i) the national government(ii) local governments(iii) institutions for educational, scientific or other public purposes as
115

designated by the Minister of Finance(iv) public interest incorporated associations/foundations, educational
institutions and social welfare institutions, etc.
(v) political parties or organizations (where the donations are qualified
under certain conditions and made by 2024)(vi) authorized Non-Profit Organizations (NPOs) (where donations are
qualified under certain conditions)
The deductible amount is equivalent to the amount of the donations
paid during the year (subject to a ceiling of 40 percent of the total
assessable income) in excess of JPY2,000. Receipts are required as
evidence to support the deduction.
Tax credits are also available for certain donations in lieu of deductions.
Please see 3.7.4 for details. For inhabitant tax purposes, only tax credits
for donations are available. Please see 3.7.4 for details.

3.6

Personal Reliefs

The reliefs described below are available to reduce taxable income fornational income tax and inhabitant tax purposes. Reliefs are separately
applied to each individual taxpayer. Note that a non-resident taxpayer
subject to progressive tax rates is only entitled to the basic deduction.
When a resident taxpayer applies personal reliefs for non-resident family
members, submission or presentation of documents identifying thefamily members and documents for money transfers are required.

116

Basic Deduction
The amount of the basic deduction is as follows:(JPY)
Basic deduction

Amount of total income(goukei-shotoku-kingaku)

National income
tax

Inhabitant
tax

Up to

24,000,000

480,000

430,000

Excess overUp to

24,000,000
24,500,000

320,000

290,000

Excess overUp to

24,500,000
25,000,000

160,000

150,000

Excess over

25,000,000

00Spouse Deduction
A taxpayer whose total income (goukei-shotoku-kingaku) is not over
JPY10 million and who has a spouse who resides in the taxpayer’s
household and whose total income is JPY480,000 or less is eligible forthe spouse deduction.
The deductible amounts are as follows:(JPY)
Spouse deduction

Amount of taxpayer’s
total income(goukei-shotoku-kingaku)

National income
tax

Inhabitant
tax

Up to

9,000,000

380,000(480,000)

330,000(380,000)

Excess overUp to

9,000,000
9,500,000

260,000(320,000)

220,000(260,000)

Excess overUp to

9,500,000
10,000,000

130,000(160,000)

110,000(130,000)

Excess over

10,000,000

0

0

117

The deductible amounts shown in parentheses are applied for a spouse
who is 70 years or older.

Special Spouse Deduction
Even when the spouse deduction is not applicable since the total income(goukei-shotoku-kingaku) of the spouse who resides in the taxpayer’s
household is over JPY480,000, the special spouse deduction in the rangeof JPY10,000 to JPY380,000 for national income tax purposes (JPY10,000
to JPY330,000 for inhabitant tax purposes) may be applied depending on
the amount of the spouse’s total income, provided that the total income
for the taxpayer and the spouse is not over JPY10 million and JPY1.33
million, respectively.
Note that the special spouse deduction is not applicable to both of the
taxpayer and the spouse simultaneously.

Dependent Deductions
A taxpayer who has a dependent who resides in the taxpayer’s
household and whose total income (goukei-shotoku-kingaku) is
JPY480,000 or less is eligible for the dependent deduction.
The deductible amounts are as follows:(JPY)
Dependent deduction

Conditions of dependent

National
income tax

Inhabitanttax

16-18 years of age

380,000

330,000

19-22 years of age

630,000

450,000

23-69 years of age

380,000

330,000

70 years or older

480,000

380,000

Parent, 70 years old or older, of the
taxpayer or his or her spouse living
under the same roof

580,000

450,000

118

By virtue of the 2020 tax reform, where a resident taxpayer has a family
member aged between 30 and 69, the dependent deductions will beapplicable only if the family member falls under any of the following
conditions: The family member becomes non-resident due to studying abroad.
(required to submit or present documents to prove that a person
resides in a foreign country with the status of residence as a student
issued by the foreign government) The family member is a handicapped person.
 The family member receives a payment of JPY380,000 or more tocover living expenses or education costs in the year from thetaxpayer. (required to submit or present documents for moneytransfers to prove that the amount of remittance is JPY380,000 or
more)This amendment will be applied from 2023 for national income tax
purposes and from 2024 for inhabitant tax purposes (for income earnedin 2023).

Additional Reliefs for Specific Cases
National
income tax(JPY)
Inhabitanttax

Physically handicapped person

270,000

260,000

Severely physically handicapped person

400,000

300,000

If severely physically handicapped
person is living with the taxpayer

750,000

530,000

Widow, divorcee or working student

270,000

260,000

Single parent

350,000

300,000

Relief119

 Definitions of Keywords(1) Widow
A widow is a person other than ‘(3) single parent’ and who does not remarry after the death of her husband and whose total income (goukeishotoku-kingaku) is not over JPY5 million.
(2) Divorcee
A divorcee is a person other than ‘(3) single parent’ and who has
dependents without re-marrying after divorcing her husband and whose
total income is not over JPY5 million.
(3) Single Parent
A single parent is an unmarried person with a child who resides in the
person’s household and whose income (sou-shotoku-kingaku) is
JPY480,000 or less and total income of the person is not over JPY5
million.
(A taxpayer having a partner who has a de facto marriage relationshipwith the taxpayer will be excluded from (1)(2) and (3) above.)

3.7

Tax Credits

The following tax credits can, where applicable, be claimed by a resident
filing a final tax return. Note that a non-resident subject to progressive
tax rates is also entitled to credits for withholding income tax anddonations.

120

Credit for Dividends
This credit is applicable to domestic dividend receipts only. The amountof the credit is calculated at the following rates:
Total assessable income(including the dividend income)
Up to
JPY10,000,000

Dividends from shares
Distribution from stock
investment trusts
Dividends from shares(i)

The portion
exceeding
JPY10,000,000
Other than
the above

(ii)
Over
JPY10,000,000(*) Distribution from stock
investment trusts
The portion(i)
exceeding
JPY10,000,000
Other than(ii)
the above
(*)

Rates
National
income tax
purposes

Inhabitant
tax purposes

10%

2.8%

5%

1.4%

-

-

5%

1.4%

10%

2.8%

-

-

2.5%

0.7%

5%

1.4%

Where the total assessable income exceeds JPY10 million, theamount of the credit is calculated given the assumption that thedividend income from stock investment trusts is the top slice of thetotal assessable income and the dividend income from shares is thesecond top slice of the total assessable income.

Note that alternatively, more complex tax credit arrangements are also
applicable to certain other types of distributions.
A taxpayer may declare dividend income from listed shares separatelyfrom ordinary income. In this case, the above tax credit is not available.
121Credit for Withholding National Income Tax
National income tax withheld from employment income, from dividends
not subject to separate taxation and from other income reportable in a
final income tax return should be credited against national income tax
due on the final income tax return. Special reconstruction income tax
imposed on such withholding tax is also creditable against special
reconstruction income tax due on the final income tax return.

Credit for Foreign Taxes
Where a resident taxpayer pays foreign taxes in a year, such foreigntaxes are creditable against their Japanese income tax payable to theextent of the limit calculated by the following formula:Creditable
limit

=

Japanese national
income tax

xForeign source
incomeEntire income taxable
in JapanAny excess foreign tax can be credited against special reconstruction
income tax to the extent of the creditable limit for special reconstruction
income tax purposes calculated using a similar formula to the above. If
there is still excess foreign tax, such amount can be credited against
inhabitant tax to the extent of 18 percent of the creditable limit fornational income tax purposes (municipal inhabitant tax) and 12 percentof the creditable limit for national income tax purposes (prefectural
inhabitant tax).
Any remaining excess of foreign tax suffered can be carried forward for
crediting in the 3 succeeding years. Similarly, any residual amount of thecreditable limit for national income tax and inhabitant tax purposes canbe carried forward for up to 3 years.

122Credit for Donations(1) National Income Tax
If a taxpayer pays donations to the following organizations, the taxpayer
is able to choose to claim a tax credit instead of taking an income
deduction for national income tax purposes.
Creditable amount = (i) + (ii)(i) Tax credits for donations topolitical parties(The smaller of either (a) or (b))(ii) Tax credits for donations toauthorized NPOs/public
interest entities(The smaller of either (a) or (b))(a) (Donations to political parties(1) JPY2,000) x 30%(b) Income tax before tax credits x
25%(a) Total of the following: (Donations to designated NPOs(2) JPY2,000) x 40%
 (Donations to certain public
interest entities(3) - JPY2,000) x
40%(b) Income tax before tax credits x 25%(1)

Donations to political parties or organizations (where the donations
are qualified under certain conditions and made by 2024)(2)

Donations to authorized NPOs (where donations are qualified undercertain conditions)(3)

Donations to public interest incorporated associations/ foundations,educational institutions and social welfare institutions, etc. (where
donations are qualified under certain conditions)

In principle, the total of the creditable donations and deductible
donations is subject to a ceiling of 40 percent of the total assessable
income.

123

(2) Inhabitant Tax
For inhabitant tax purposes, the following tax credits are available:
Creditable amount = (i) + (ii)(i) Basic tax credit(Total amount(1) of eligible donations(2) JPY2,000) x 10%(ii) Additional tax
credit(The smaller of either(a) or (b))(a) (Total amount of donations to local
governments(3) - JPY2,000) x (90% - marginalincome tax rate for the individual x 102.1%(4))(b) Inhabitant tax before tax credits x 20%(1)

Subject to a ceiling of 30 percent of the total assessable income(2)

The eligible donations are donations to local governments anddonations designated by the Minister of Internal Affairs andCommunications and local governments.

(3)

Donations to local governments subject to the additional tax credit
are limited to the donations to specified local governments
designated by the Minister of Internal Affairs and Communications.

(4)

2.1 percent is an equivalent of the special reconstruction income tax.

3.8

Remuneration Paid Outside JapanAs discussed in 3.2, expatriates with not more than 5 years residence inJapan are generally treated as non-permanent residents and are liable
for Japanese taxes only on (a) income other than foreign source income
plus (b) foreign source income paid in or remitted to Japan. As a result of
this treatment, it is possible for expatriates (other than corporate
officers) to mitigate their Japanese income tax burden for the first 5
years of an assignment in Japan where their salaries are administeredand paid outside Japan (offshore payroll).
Where an offshore payroll is used, the element of the expatriate’s
employment income treated as non-Japan source can be determined124based upon the number of days spent outside Japan on business during
the year. Such income will not be taxable in Japan provided no part of
the relevant amount is remitted to Japan. For these purposes,
remittance would include drawings from the offices in Japan of an
employer company, foreign currency brought into Japan, borrowings inJapan to be repaid outside Japan, etc. Where an offshore payroll
arrangement is utilized, it is necessary for relevant employees to keep arecord of remittances made to Japan.
As noted above, this benefit is effective only for expatriate staff having
non-permanent resident status in Japan. If an expatriate employee has
lived in Japan for more than 5 years in the last 10 years, the expatriate
employee will become a permanent resident for tax purposes and will betaxed in Japan on their worldwide income.
An additional benefit from the utilization of an offshore payroll is thatpayments made outside Japan should not be subject to Japanese
withholding tax. In such cases, the tax liabilities would be settled by filingan income tax return and the associated tax payment dates would be as
discussed in 3.10.

3.9

Exit Tax Regime

The exit tax regime is a special measure to impose individual income tax
on unrealized capital gains on financial assets at the time of departure inorder to prevent wealthy individuals from avoiding tax on capital gains inJapan by moving out of Japan with appreciated financial assets andsubsequently selling those assets.
(1) Eligible Person
A resident individual departing from Japan and satisfying both of thefollowing conditions:(i) Total value of eligible assets held by the person as of departure fromJapan is JPY100 million or more.
(ii) The person has lived in Japan(*) for more than 5 years in the last 10
years before departure.
125

(*)

The period of living in Japan includes the grace period described in(3) below, but excludes the period of staying in Japan with a status ofresidence under Table 1 of the Immigration Control and Refugee
Recognition Act (e.g., engineer/specialist in humanities/international
services, intra-company transferee).

(2) Eligible Assets
 securities stipulated in the Income Tax Law (excluding stock options
and specified restricted stock) contributions under a silent partnership agreement (Tokumei Kumiai(TK) agreement discussed in 2.2)
 unsettled derivatives transactions
 unsettled margin transactions
 unsettled when-issued transactions (e.g., trading transactions inadvance of shares being issued)(3) Grace Period for Tax Payments
An individual subject to exit tax will be allowed to enjoy a tax payment
grace period for 5 years (subject to extension upon an application to 10
years) when collateral equivalent to the amount of the exit tax isprovided and a notification for appointment of a tax agent is submitted.
(4) Tax Reliefs(i) Reversal of taxation
Where an individual who was subject to exit tax returns to Japan within
5 years (10 years for an individual who enjoys a 10-year grace period)
from the departure, the exit tax on unsold eligible assets will be reversed
by filing a request for correction.
(ii) Reduction of income tax
An individual enjoying the grace period may file a request for correctionin order to reduce their exit tax under the following circumstances:126

(a) In the case where the eligible assets are sold prior to the expirationof the grace period and the sales price of the assets falls below thevalue of the assets as of departure(b) In the case where the grace period is terminated and the value of theeligible assets at the date of the termination falls below the value ofthe assets as of departure(5) Exit Tax in the case of Gift, Inheritance or Bequest
The exit tax will also be imposed when eligible persons’ eligible assets
are transferred to non-resident individuals upon a gift, inheritance orbequest.

3.10 Filing Tax Returns and Tax Payments
National Income Taxes(1) Final Tax Returns and Tax Payments Therefor
For individuals, the tax year is the calendar year and a final income tax
return must be filed by 15 March of the following year in principle.
Extensions of the filing deadline are not available. The final tax due
needs to be paid by the same day, which may be extended for about 1
month if the automatic bank transfer system is elected. A tax return for
special reconstruction income tax should be filed together with the final
income tax return.
If the remuneration subject to withholding tax does not exceed JPY20
million and the amount of other income is less than JPY200,000, theperson is not required to file a tax return since the tax liabilities aresettled through a year-end adjustment of income tax on the salaries
made by the employer and the amount of the other income is minor. If
such person has claimable deductions such as for casualty losses,
medical expenses and donations that are not deductible through theyear-end adjustment procedures, a tax return should be filed to declaresuch deductions.

127

(2) Estimated Tax Payments
Those who have filed a final income tax return for the previous year will
be required to make estimated tax payments for the current year in Julyand November. The estimated tax payments are generally equal to onethird of the net of the income tax amount for the previous year lesswithholding tax declared in such tax return. Note that special
reconstruction income tax is also imposed on the estimated tax at 2.1
percent from 2013 to 2037. If the total of the net amount and special
reconstruction income tax thereon is less than JPY150,000, prepayments
are not required.
(3) Reporting Requirement for Assets/Liabilities
An individual who falls under any of the following conditions must
submit a ‘Statement of Assets/Liabilities’ to report necessary information
on assets/liabilities such as type, number, location, value of assets andamount of liabilities as of the end of the calendar year by 30 June of thefollowing year:(i)

An individual who has an obligation to lodge their income tax
return and meets the following two criteria:(a) Total income exceeds JPY20 million for a calendar year(b) Total value of assets as of the end of a calendar year is
JPY300 million or moreor
Total value of the eligible assets for exit tax (discussed in 3.9)
as of the end of a calendar year is JPY100 million or more(ii)

A resident whose assets have a total value of JPY1 billion ormore as of the end of a calendar year (No criteria based on thesize of income)Proper reporting of assets/liabilities may bring the individual taxpayer
reduction in penalties when understatements of tax are found in a tax
audit, whereas improper reporting may bring them additional penalties.

128

(4) Reporting Requirement for Overseas Assets
Permanent residents who own overseas assets valued at over JPY50
million as of the end of a calendar year must submit ‘Statement ofOverseas Assets’ to report their overseas assets by 30 June of thefollowing year.
Proper reporting of overseas assets may bring the individual taxpayer
reduction in penalties when understatements of tax are found in a tax
audit, whereas improper reporting may bring them additional penalties.

Inhabitant Taxes
Generally, an inhabitant tax return is not required to be filed since theinformation necessary for assessment is either submitted by employers
or included in the final income tax return filed with a national tax office.
If remuneration is paid through an employer in Japan, inhabitant tax onsuch income is paid to a municipal office through the employer as
discussed in 3.11.2. Inhabitant taxes on other income including
remuneration paid outside Japan for the previous year are generally paid
directly by the taxpayer in four installments, whose payment due dates
are 30 June, 31 August and 31 October of the current year, and 31
January of the following year.

3.11 Employers’ Obligations
National Income Taxes(1) Withholding Tax on Remuneration
The employer company is required to withhold tax monthly fromsalaries, wages, remuneration, bonuses and other employment income,including taxable economic benefits paid and/or provided in Japan toofficers and employees, and to pay the withheld tax to the governmentby the 10th day of the following month.

129

With respect to non-residents however, the withholding tax rate is 20
percent, which is applied to the gross amount of their employment
income. Moreover, if the employer company of a non-resident has apermanent establishment in Japan, employment income paid to suchnon-resident outside Japan is regarded as having been paid by thepermanent establishment and the 20 percent tax thereon is required tobe paid to the government by the end of the month following the monthof payment of such employment income outside Japan.
It is common practice for foreign companies operating in Japan to pay
expatriates’ salaries on a net basis through an offshore payroll (pleasesee 3.8). However, in such situations it can often be the case that certain
taxable economic benefits continue to be provided in Japan and thesewould give rise to withholding tax administration obligations. Sucheconomic benefits might include: provision of company housing
 payment of utility costs payment of school fees for children of expatriates.
Therefore, it is important to review the arrangements with regard to thecompensation packages of expatriate members of an organization in
Japan, including taxable fringe benefits, in order to ensure that any
withholding requirements are being properly met.
The employer company of residents (except those whose gross
employment income exceeds JPY20 million and daily-employed workers)
is required to make year-end adjustments of withholding income tax forthe calendar year concerned in connection with the last payment ofsalaries or bonuses for that year so that the total tax withheld from eachpayment should be the national income tax to be imposed on the annualcompensation.
Note that withholding tax is also subject to special reconstruction
income tax at 2.1 percent from 2013 to 2037.

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(2) Reporting Requirement for Foreign Stock-Based Compensation
If directors/employees of a Japanese subsidiary of a foreign company(only where 50 percent or more of the outstanding shares in theJapanese subsidiary are directly or indirectly held by the foreigncompany) or a Japan branch of a foreign company earn stock-based
compensation, the Japanese subsidiary or the Japan branch is required
to prepare and submit a report including names/addresses of thedirectors/employees and details of the stock-based compensation to thecompetent tax office by 31 March (30 April for non-resident
directors/employees) of the following year.
Directors/employees subject to reporting include those who are nonresidents and those who are ex-directors/employees.

Inhabitant Tax
Payers of employment income are required to submit a report on theemployment income subjected to withholding income tax for thepreceding year, in respect of officers and employees of such payers as of
1 January of the current year, to the appropriate offices of themunicipalities in which the officers and employees resided as of suchdate.
The municipal offices are to assess inhabitant tax to be collected fromthe officers and employees in 12 equal installments, from June of thecurrent year to May of the following year. The payers of the officers’ andemployees’ salaries are then required to deduct from monthly salaries
the amount of each installment and pay it to the municipalities.

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4

International Tax

4.1

Foreign Dividend Exclusion
Tax Treatment of Dividends from Foreign Subsidiaries

A Japanese company holding a Foreign Subsidiary is generally entitled to
the foreign dividend exclusion (FDE).
 Dividends other than Deductible Dividends
Under the FDE rules, dividends from Foreign Subsidiaries and foreign
withholding tax(1) thereon are treated as follows:
Dividends from Foreign
Subsidiaries

Foreign withholding tax
on the dividends
Non-deductible
and non-creditable

95% tax exempt(2) Deductible Dividends

The following tax treatments of deductible dividends from Foreign
Subsidiaries and foreign withholding tax(1) thereon under the FDE rules
are provided based on the recommendation of ‘Action 2 - Neutralising
the Effects of Hybrid Mismatch Arrangements’ included in the firstdeliverables released in September 2014 under the OECD/G20 Base
Erosion and Profit Shifting (BEPS) Project:[In principle]
Deductible dividends
from Foreign Subsidiaries

Foreign withholding tax
on the dividends
Deductible
or creditable

Fully taxable

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[Exceptional rule]
When only part of the dividends paid by a Foreign Subsidiary is deductedin the country where the Foreign Subsidiary is located, only such portionis treated fully taxable as indicated below:
Deductible dividends
from Foreign Subsidiaries

Foreign withholding tax on
the dividends

Deductible
portionFully taxable

Deductible
or creditableNon-deductible
portion

95% tax exempt(2)Non-deductible
and non-creditable(1)

Please see 4.6.6 for the treatments of foreign withholding tax wherea Foreign Subsidiary was subject to the Controlled Foreign Company(CFC) Regime.

(2)

95 percent of dividends (before deduction of withholding taxes
thereon) from a Foreign Subsidiary are exempt from corporation tax
in the hands of the Japanese parent company.

Foreign Subsidiary
A Foreign Subsidiary for the purposes of the FDE is a foreign company
which satisfies the following two tests:(1) 25 Percent Test
25 percent or more of the shares are held directly by a Japanesecompany. The holding ratio for this purpose is determined based on thenumber of outstanding shares or the number of shares with voting
rights.
Where a tax treaty with Japan and the country of residence of theforeign company has a reduced holding threshold for indirect foreign tax
credits or FDE, such reduced holding ratio will be used instead of 25
percent, for determining whether the foreign company is a Foreign
Subsidiary under the FDE (e.g., 10 percent for the US, Australia and the133Netherlands, 15 percent for France).
(2) 6-Month Test
The 25 percent test should be continuously satisfied for at least 6months prior to the point in time when the obligation to pay thedividends is determined.
For foreign companies established within 6 months prior to the date on
which the obligation to pay the dividends is determined, continuous
shareholding from the date of establishment to the date when the
obligation is determined should be treated as fulfilling the 6-month test.

4.2

Foreign Tax Credits
Basic Rules

Under the foreign tax credit system, a Japanese company and a foreigncompany having a permanent establishment (PE) in Japan are allowed totake credits for foreign corporation tax or counterpart of Japanese
corporation tax, including foreign local tax and withholding tax, suffereddirectly by the Japanese company and the foreign company.

Creditable Limit
The amount of foreign tax for which credit can be taken is limited to thelower of:(i) the adjusted creditable foreign tax; and(ii) the creditable limit.
In calculating adjusted creditable foreign tax, certain foreign taxes suchas those imposed at a high rate (generally a rate in excess of 35 percent)must be excluded from the creditable foreign tax.
The creditable limit for corporation tax purposes is calculated as follows:134

[Japanese company]
Japanese corporation tax

xForeign source income
Total taxable income[Foreign company having a PE in Japan]
Japanese corporation
tax on incomexattributable to the PE
in JapanForeign source income included in income
attributable to the PE in Japan
Income attributable to the PE
in Japan

The following points should be noted in relation to the formula above:-

Japan utilizes an overall limitation system rather than a country
limitation system or a separate basket limitation system.

-

Foreign source income does not include income which is exemptedfrom foreign taxation.

-

The ratio of foreign source income to total taxable income (income
attributable to the PE in Japan of a foreign company) for the
purposes of the calculation is limited to a maximum of 90 percent.

-Any allocation of expenses between domestic source income andforeign source income should be done on a reasonable basis.

-If the amount of the adjusted creditable foreign tax is over thecreditable limit for corporation tax purposes, such excess amount iscreditable against local corporation tax to the extent of the creditable
limit for local corporation tax purposes, which is calculated in asimilar way as discussed above.

-

Foreign tax credits are also available for prefectural and municipal
inhabitant tax purposes with additional creditable limits (i.e., thecreditable limit indicated in the above formula multiplied byinhabitant tax rates).

135

Carry-Forward System
If due to the application of the creditable limit restriction there remains
eligible foreign tax which has not been credited in the fiscal year, thisamount may be carried forward for up to 3 years to enjoy as a credit in
future fiscal years.
Conversely, where there have been insufficient eligible foreign taxes in a
fiscal year to make full use of the creditable limit for that fiscal year, theresidual amount of the creditable limit can be carried forward for up to 3
years to increase the creditable limit applicable in subsequent fiscal
years.

Tax Sparing Credits
A tax sparing credit is allowed under a very limited number of the tax
treaties concluded by Japan. In relation to those applicable treaties, if,for example, interest payable on an approved investment incentive loan
is exempt from withholding tax in the treaty partner country, the tax
which has been ‘spared’ is nevertheless creditable in Japan in connection
with the calculation of the foreign tax credit of a Japanese company. A
tax sparing credit provision can accordingly be of considerable benefit.
Note that such provision is generally being repealed under Japan’s
recent tax treaty policy.

4.3

Transfer Pricing

The transfer pricing legislation is set out under the Special Taxation
Measures Law for the purposes of preventing tax avoidance bycompanies through transactions with their Related Overseas Companies.

Transactions Subject to Transfer Pricing Legislation
The sale of assets, purchase of assets, rendering of services and anyother transactions with Related Overseas Companies which do not meet
the arm’s-length concept are subject to the transfer pricing legislation.
Transactions with Related Overseas Companies conducted throughunrelated companies could also be subject to this legislation.
136

Note that where a company pays donations to its Related Overseas
Company, the full amount of such donations is not deductible except forcases where the donations are treated as income attributable to a PE of
the Related Overseas Company in Japan.

Related Overseas Companies
A Related Overseas Company for these purposes is a foreign company
which has any of the following specific relationships with a Japanesecompany:(i) Shareholding relationship-a relationship between two companies in which one company owns
directly or indirectly 50 percent or more of the total issued shares ofthe other company-

a relationship between two companies in which the same person
owns directly or indirectly 50 percent or more of the total issued
shares in both companies(ii) Substantial control relationship-a relationship between two companies in which one company can, in
substance, engage in decision making regarding the other company’sbusiness affairs due to shared directors, substantial business
transactions, financing, etc.

-

a relationship between two companies in which the same person can,in substance, engage in decision making regarding both companies’
business affairs due to shared directors, substantial business
transactions, financing, etc.

(iii) Combination of shareholding relationship and substantial control
relationship137

Arm’s-Length Price (ALP)The transfer pricing legislation provides for six methods to reach an ALP:
(1) comparable uncontrolled price method, (2) resale price method, (3)cost-plus method, (4) profit split method, (5) transactional net margin
method and (6) discounted cash flow method.
(1) Comparable Uncontrolled Price Method
Under this method the price is determined based upon the pricing of atransaction carried out between unrelated parties which is similar innature to the subject transaction. Where there are differences in theconditions between the comparable transaction and the subject
transaction, price adjustments should be taken into account.
With respect to comparable transactions for this purpose, there are two
types: (i) transactions made by one of the related companies with anunrelated company, and (ii) transactions made between third parties.
(2) Resale Price Method
Under this method the price is calculated based on the sales price of thebuyer to unrelated companies minus a gross profit which is applicable tosimilar transactions with unrelated companies (subject to adjustment
depending upon the circumstances).
(3) Cost-Plus Method
Under this method the price to be applied to the transactions withRelated Overseas Companies is calculated at cost for the seller plus an
ordinary profit on similar transactions with unrelated companies (subject
to adjustment depending upon the circumstances).
(4) Profit Split Method
Under this method the price is calculated based on allocating the total
profit arising from the overall transactions using the respective amountof expenses, fixed assets or other reasonable factors.
138

(5) Transactional Net Margin Method
Under this method the price is determined by reference to net profit oncomparable uncontrolled transactions expressed as a percentage of abase factor (e.g., cost, sales).
(6) Discounted Cash Flow Method
Under this method the price is calculated based on the total amount of
the present value of the projected income at the time of the transactions
with Related Overseas Companies discounted by a reasonable discountrate.

Price Adjustment Measure to Hard-to-Value Intangibles(HTVI)
Japan adopts the price adjustment measure to HTVI in line with the‘OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations 2017’, which reflected the recommendations of the
OECD/G20 Base Erosion and Profit Shifting (BEPS) Project Action 8-10
final report ‘Aligning Transfer Pricing Outcomes with Value Creation.’(1) Outline of the Measure
Where ex-post outcomes give a result different from the assumptions
used in calculating the ALP of the HTVI transaction with a Related
Overseas Company, the Japanese tax authorities will be able to make a
tax assessment based on the ALP measured by the most appropriate
method to reach an ALP of the HTVI transaction taking into consideration
the details of the transaction, functions performed by the transaction
parties and other circumstances.
This measure will not be applied as long as the ratio of the difference
between the above ALP and the original transaction price is 20 percent
or less.

139

(2) Definition of HTVIHTVI means intangibles(*) with all of the following characteristics:
 Unique and being used to create highly added value
 ALP is calculated based on the income projection.
 Assumptions used in valuing the ALP have considerably uncertain
factors.
(*)

Intangibles subject to transfer pricing rules are defined as follows:
Patent rights, utility model rights and other assets (assets other thanphysical assets and financial assets), which should be compensatedfor their commercial usage (sales, loan, etc.) between independent
parties under ordinary terms and conditions(3) Rules for Exemption
Where documents described in (i) or (ii) below are submitted by the
taxpayer within a certain period at the request of the Japanese tax
authorities, the price adjustment measure to HTVI will not be applied.
(i) Documentation regarding the consideration of probability of
unforeseen events
 Documents describing assumptions used in calculating the ALP of the
HTVI transaction with a Related Overseas Company, and Documents describing the following facts with respect to the above
assumptions:--

The discrepancy between the projections and the ex-post
outcomes is due to a disaster or any other similar events that
could not be foreseen at the time of the transaction,or
The ALP was determined taking into account the probability of140

events to cause such discrepancy.
(ii) Documentation regarding the differences between actual income
and projected income
Documents describing that the ratio of the difference between theactual income and the projected income against the projected income in
the Examination Period(*) of the HTVI transaction with a Related
Overseas Company is 20 percent or less(*)

For 5 years starting from the beginning of the fiscal year in which thefirst income from an unrelated party was generated from the use of
the HTVI

Note that where the requirement (ii) is satisfied, the price adjustment
measure to HTVI will not be applied after the Examination Period.

Documentation Rules
Japan adopts a three-tiered approach (i.e., Country-by-Country reports(CbC reports), master files and local files) to the transfer pricing
documentation rules in accordance with the recommendations of ‘Action
13 - Transfer Pricing Documentation and Country-by-Country Reporting’of the OECD/G20 BEPS Project.
(1) CbC Reports
A reporting entity of a Specified MNE Group must file a CbC report to thecompetent tax office by the deadline through an online system (e-Tax).
 Reporting entity(i) Primary mechanism
Either of the following Japanese companies which are Constituent
Entities of a Specified MNE Group: Ultimate Parent Entity
 Surrogate Parent Entity141

(ii) Secondary mechanism(This mechanism will be applied in limited cases where the Japanese tax
authorities acknowledge that a CbC report is not provided through thejurisdiction in which the Ultimate Parent Entity or the Surrogate Parent
Entity is resident for tax purposes.)
Either of the following Constituent Entities of a Specified MNE Group: A Japanese company which is neither the Ultimate Parent Entity nor
the Surrogate Parent Entity
 A foreign company having a PE in Japan Items to be reported(i) Overview of allocation of income, taxes and business activities by tax
jurisdiction
Revenues, profit (loss) before income tax, income tax paid, income tax
accrued, stated capital, accumulated earnings, number of employees,
tangible assets other than cash and cash equivalents by each tax
jurisdiction(ii) List of all the Constituent Entities of Specified MNE Group includedin each aggregation per tax jurisdiction
Names and main business activities of Constituent Entities by each tax
jurisdiction(iii) Additional information
Other information to explain the above information
 Language
English142

 Deadline for filing
Within 1 year after the end of the reporting fiscal year of the Ultimate
Parent Entity
 Penalties
If a reporting entity fails to file a CbC report to the competent tax officeby the deadline without good reason, a fine up to JPY300,000 will be
imposed.
(2) Notification of Ultimate Parent Entity for CbC Reports
A reporting entity of a Specified MNE Group must submit a notificationof the Ultimate Parent Entity for CbC reports to the competent tax officeby the deadline through an online system (e-Tax).
 Reporting entity
Either of the following Constituent Entities of a Specified MNE Group: A Japanese company
 A foreign company having a PE in Japan Items to be reported
Name, location, corporate number of the Ultimate Parent Entity or
Surrogate Parent Entity and the name of its representative Deadline for submission
The end of the reporting fiscal year of the Ultimate Parent Entity143(3) Master Files
A reporting entity of a Specified MNE Group must file a master file to thecompetent tax office by the deadline through an online system (e-Tax).
 Reporting entity
Either of the following Constituent Entities of a Specified MNE Group: A Japanese company
 A foreign company having a PE in Japan Items to be reported
Organizational structure, description of businesses, intangibles,intercompany financial activities, financial positions of the Specified MNEGroup Language
Japanese or English
 Deadline for filing
Within 1 year after the end of the reporting fiscal year of the Ultimate
Parent Entity
 Penalties
If a reporting entity fails to file a master file to the competent tax officeby the deadline without good reason, a fine up to JPY300,000 will be
imposed.

144

(4) Local Files (Contemporaneous Documentation)
A company conducting transactions with Related Overseas Companies
must prepare or obtain documents considered to be necessary forcalculating the ALP for the transactions (local files) by the filing due dateof a final corporation tax return and preserve them for 7 years (10 years
for fiscal years in which tax losses are incurred).
 Company which must prepare local files
A company that conducts transactions with Related Overseas Companies
 Transactions not subject to contemporaneous documentation
Transactions with a Related Overseas Company for the current fiscal year
are exempt from the contemporaneous documentation requirement
provided that both of the following conditions are met:
 Total transaction amount with that Related Overseas Company forthe previous fiscal year (the current fiscal year if the previous fiscal
year does not exist) is less than JPY5 billion.
 Total transaction amount for intangibles with that Related Overseas
Company for the previous fiscal year (the current fiscal year if theprevious fiscal year does not exist) is less than JPY300 million.

145 Documents to be prepared/obtained<Transactions subject to contemporaneous documentation>
Deadline ofContemporaneouspresentation or
documentation
submission(1)Documents
Documents considered to benecessary for calculating the ALP for
the transactions(Local files)(2)Required

45 daysDocuments considered to beimportant for calculating the ALP for
the transactions(3)Not required

60 days<Transactions not subject to contemporaneous documentation>

Documents

Contemporaneous
documentation

Deadline ofpresentation or
submission(1)Documents considered to beimportant for calculating the ALP
for the transactions(4)Not required

60 days(1)

The tax authorities may ask a company to present or submit theabove documents in the event of a tax audit. The deadline ofpresentation or submission is designated by the tax authorities within
45 days or 60 days indicated above. If the company fails to present or
submit such documents by the deadline, the tax authorities may
make an assessment presumptively and inspect third parties
conducting similar trade or business.

(2)- Documents containing details of transactions with Related
Overseas Companies- Documents used to determine the ALP

146

(3)

- Documents consisting of items that provide the basis of the local
files- Documents consisting of items related to the local files- Other documents(4)- Documents equivalent to the local files- Documents consisting of items that provide the basis of the local
files- Documents consisting of items related to the local files- Other documents(5) Definitions of Keywords
 Enterprise Group(i) a collection of enterprises for which consolidated financial
statements are compiled or (ii) a collection of enterprises for which
consolidated financial statements would be compiled if shares in theparent company were listed, provided that the parent company of
the group is not a subsidiary of other collections of enterprises forwhich consolidated financial statements are compiled or for which
consolidated financial statements would be compiled if shares in theparent company were listed
 MNE Group (multinational enterprise group)(i) an Enterprise Group consisting of Constituent Entities who residein two jurisdictions or more or (ii) an Enterprise Group consisting ofConstituent Entities who reside in the same jurisdiction but have PEs
in other jurisdictions
 Specified MNE GroupAn MNE Group whose total consolidated revenue for the preceding
fiscal year of the Ultimate Parent Entity is JPY100 billion or more147 Constituent Entity(i) an entity of an Enterprise Group of which assets and profits/losses
are included in the consolidated financial statements of theEnterprise Group (including those which would be complied if sharesin the parent company were listed) and (ii) an entity of an EnterpriseGroup of which assets and profits/losses are not included in the
consolidated financial statements of the Enterprise Group solely forsize or materiality grounds
 Ultimate Parent Entity
One of the Constituent Entities in an Enterprise Group that controls
other Constituent Entities of the group through holding a majority ofthe voting rights, etc. and is not controlled by any other persons in
the group Surrogate Parent Entity
One of the Constituent Entities other than the Ultimate Parent Entity
in a Specified Enterprise Group, which the Ultimate Parent Entity has
appointed as a reporting entity of CbC reports.

Reporting of Information through Tax Returns
If a company has any transactions with Related Overseas Companies, thecompany must attach to its final corporation tax return statement
providing information on the Related Overseas Companies and details of
the transactions as follows:
Information concerning Related Overseas Companies:
-

name

-

address of head office or principal office-main business-total number of employees148-amount of stated capital-classification of Related Overseas Companies by nature of
relationship, such as capital relationship, management relationship,business relationship and financial relationship-percentage of shareholding relationship of Related Overseas
Companies-

operating revenue, expenses, operating profits and profits before tax
for the preceding fiscal year-

amount of earned surplus

Information concerning transactions with Related Overseas Companies:-

total amount of sales or purchases of inventories and the transfer
pricing method-

receipt or payment of compensation for services and the transfer
pricing method-

receipt or payment of rental fees for tangible assets and the transfer
pricing method-

receipt or payment of consideration for the transfer of intangible
assets and the transfer pricing method-

receipt or payment of royalties for intangible assets and the transfer
pricing method-

receipt or payment of interest on loans and the transfer pricing
method-Advance Pricing Agreement (APA) status

149

Miscellaneous In a case where the transactions subject to this legislation are thosewith Controlled Foreign Companies (CFCs), the taxable income of the
CFC subject to the full-inclusion rules discussed in 4.6.3 should be
calculated based on the adjusted ALP in order to eliminate double
taxation.
 The statute of limitations in relation to tax audits of transfer pricing
issues is 7 years (6 years for fiscal years beginning on or before 31
March 2020), while the statute of limitations for non-transfer pricing
issues is normally 5 years.
 A grace period for the payment of corporation tax and penalties
thereon may be granted for those requesting a Mutual Agreement
Procedure (MAP) under the relevant tax treaty.

4.4

Thin Capitalization Regime
Safe Harbor of Debt-Equity Ratio

The thin capitalization regime is applicable if the debt-equity ratios in (i)and (ii) below for a Japanese company are both more than 3:1.
Debt

Equity(i)

Debts
due to Overseas Controlling
Shareholders
and Specified Third Parties

Net Equity owned
by Overseas Controlling
Shareholders(ii)

Total Debts

Net Equityof the Japanese company

Alternatively, a Japanese company has the option to use the debt-equity
ratio of a comparable Japanese company operating the same business,and having similar characteristics relating to size, etc. as opposed to the
3:1 safe harbor ratio.

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Definitions of Keywords
The definitions of the keywords under the thin capitalization regime areas follows:(1) Overseas Controlling Shareholders
If a non-resident individual or a foreign company has a specified
relationship with a Japanese company, that person is treated as an
Overseas Controlling Shareholder of the Japanese company. The criteria
for determining whether there is a specified relationship for bothindividuals and companies are very similar. Where the person is a foreigncompany, a specified relationship is defined as follows: a relationship between a Japanese company and a foreign company
in which the foreign company owns directly or indirectly 50 percent
or more of the total outstanding shares in the Japanese company
 a relationship between a Japanese company and a foreign company
in which the same person owns directly or indirectly 50 percent ormore of the total outstanding shares in both companies
 a relationship between a Japanese company and a foreign company
in which the foreign company can, in substance, engage in decision
making regarding the Japanese company’s business affairs due toshared directors, substantial business transactions, financing, etc.
(2) Specified Third Parties
If a person falls under either of the following, that person is treated as aSpecified Third Party:
 a third party who provides a loan to a Japanese company under aback-to-back loan arrangement with an Overseas Controlling
Shareholder of the Japanese company
 a third party who provides a loan to a Japanese company guaranteedby an Overseas Controlling Shareholder of the Japanese company151 a third party who provides a loan to a Japanese company by taking
bonds the Japanese company has borrowed from an Overseas
Controlling Shareholder of the Japanese company as collateral a third party (A) who lends bonds to a Japanese company which are
guaranteed by an Overseas Controlling Shareholder of the Japanesecompany, and a third party (B) who provides a loan to the Japanesecompany by taking the above bonds as collateral(3) Debts
Debts means the average balance (daily, monthly or quarterly average)of interest-bearing debts. Note that Debts also include zero or negativeinterest rate debts.
(4) Net Equity
The average balance of the net of total assets minus total liabilities. If the
net is less than the total of stated capital and capital surplus (for tax
purposes), the latter is treated as net equity for the purposes of this rule.

Amount to be Disallowed
The amount to be disallowed under the thin capitalization regime iscalculated as follows:
Cases

Disallowed amount{ (A) + (B) + (C) - (D) }{ (A) + (B) } < (D)(c)’ x{ (A) + (B) } > (D)(c)’ + { (a) + (b) + (b)’ } x

(C)

152

{ (A) + (B) - (D) }{ (A) + (B) }The letters used in the above formula refer to the following amounts:(A)

Debt due to Overseas Controlling Shareholders(where interest is not subject to income tax/corporation tax in Japan)(B)

Debt due to Specified Third Parties(where interest is not subject to income tax/corporation tax in Japan)(C)

Debt due to Specified Third Parties(where interest is subject to income tax/corporation tax in Japan)(D)

Net Equity owned by Overseas Controlling Shareholders x 3(or comparable ratio)(a) Interest on (A)(b) Interest on (B)(b)’

Guarantee fees/bond borrowing fees relating to (B)(where they are not subject to income tax/corporation tax in Japan)(c)’Guarantee fees/bond borrowing fees relating to (C)(where they are not subject to income tax/corporation tax in Japan) ‘Subject to income tax/corporation tax in Japan’ broadly means
declared as taxable income in a Japanese tax return. Thus, interest
paid to a non-resident individual/foreign company not having a PE in
Japan should be ‘not subject to income tax/corporation tax in Japan’,
regardless of whether Japanese withholding tax is imposed on theinterest.
 Interest includes discounts on bills/notes, redemption losses onbonds and other payments whose economic characteristics areequivalent to interest.

Miscellaneous The amount to be disallowed for corporation tax purposes is nottreated as a dividend for withholding income tax purposes.
 Where bonds borrowed under a cash-secured bond lendingtransaction (genkin-tanpotsuki-saiken-taishaku-torihiki) or purchased
under a bond gensaki transaction (saiken-gensaki-torihiki) are lent153

under another cash-secured bond lending transaction or sold underanother bond gensaki transaction to Overseas Controlling
Shareholders or Specified Third Parties, the 2:1 threshold with
exclusion of the debts related to such transactions is applicable
instead of the 3:1 threshold.
 If both the thin capitalization regime and the earnings stripping
regime described in 4.5 are applicable in a fiscal year, only the largerof the disallowed amounts (after applying the de minimis rule
discussed in 4.5.3) under either of the regimes will be applied.

4.5

Earnings Stripping Regime
Limitation on Deductions for Excessive Interest Payments

When a Japanese company’s Net Interest Payments (including interest
payments to third parties) exceed 20 percent of Adjusted Taxable
Income in a fiscal year, the excess portion (i.e., the following amount) is
disallowed:
Net Interest Payments-

Adjusted Taxable Income
x 20%

Definitions of Keywords
The definitions of the keywords under the Japanese earnings stripping
regime are as follows:(1) Net Interest Payments
Net Interest Payments means Covered Interest Payments less Eligible
Interest Income.
(2) Adjusted Taxable Income
Adjusted Taxable Income means taxable income (calculated by not
applying the provisions described in (i) below and treating all donations
paid as tax deductible expenses) with an add back of items described in154

(ii) and a deduction of items described in (iii) below. Note that while‘taxable income’ can be negative, ‘Adjusted Taxable Income’ cannot.
(i) Main provisions not applied in calculating Adjusted Taxable Income
 certain valuation losses
 disallowance of deductions for foreign tax credited against
corporation tax
 deduction of carried-forward tax losses (discussed in 1.7.1)
 deduction of dividends paid by tax qualified special purpose
companies thin capitalization regime (discussed in 4.4)
 earnings stripping regime(ii) Items to be added back in calculating Adjusted Taxable Income
 Net Interest Payments
 tax deductible depreciation
 tax deductible bad debt expenses (discussed in 1.8.4)
 tax deductible distribution payment to partners under silent
partnership agreements (Tokumei Kumiai (TK) agreement discussed
in 2.2)(iii) Items to be deducted in calculating Adjusted Taxable Income Adjustments related to the controlled foreign company (CFC) regime(discussed in 4.6)
 Allocated tax losses to partners under silent partnership agreements(Tokumei Kumiai (TK) agreement discussed in 2.2)

155

(3) Covered Interest Payments
The Covered Interest Payments means interest payments less ExemptedInterest Payments.
Exempted Interest Payments for a company are defined as follows:(Interest payments to a third party who provides a loan to a company
under a back-to-back loan arrangement with a Related Person of thecompany, etc. are excluded.)(i) Interest payments
other than those in (ii)(a) Interest payments subject towithholding taxation when paid,
income tax/corporation tax in thehands of the recipients in Japan(b) Interest payments to certain publicbenefit companies(c) Certain amount among interest
payments under life insurance
contracts and casualty insurance
contracts(ii) Interest on specified
bonds(Interest on bonds
issued by thecompany and paid tothird parties,
excluding the casewhere the number ofowners of the bonds
is not large)

Either of the following:(This rule is applied for each class of
specified bonds.)(a) Interest payments subject towithholding taxation when paid,
income tax/corporation tax in thehands of the recipients in Japan, orinterest paid to certain public benefit
companies(b) Either of the following, depending on
the place of issuance of the bonds:
 Bonds issued in Japan:
95% of interest payments
 Bonds issued outside of Japan:
25% of interest payments

156

(4) Eligible Interest Income
Eligible Interest Income for a fiscal year is calculated as follows:

Total Interest Incomex

Total Covered Interest Payments
Total Interest Payments

If a Japanese company receives interest from a Domestic Related Person(a Related Person who is a Japanese resident individual/Japanesecompany or a non-resident individual/foreign company having a PE in
Japan), the lower of the following is deemed to be the interest received
from that Domestic Related Person and included in the Total Interest
Income in the above formula:- Interest Income of the Japanese company from that Domestic Related
Person- Interest Income of that Domestic Related Person from a person who isneither the Japanese company nor another Domestic Related Person
The purpose of this rule is to close a loophole whereby a Japanesecompany provides a loan to a Domestic Related Person for the purposesof: (i) reducing its Net Interest Payments amount; and (ii) reducing
taxable income for the Domestic Related Person.
(5) Related Person
If a person (both an individual and a company) has a specified
relationship with a Japanese company, that person is treated as a
Related Person of the Japanese company. The criteria for determining
whether there is a specified relationship for both individuals andcompanies are very similar. Where the person is a company, a specified
relationship is defined as follows: a relationship between two companies in which one company owns
directly or indirectly 50 percent or more of the total outstanding
shares in the other company
157

 a relationship between two companies in which the same person
owns directly or indirectly 50 percent or more of the total
outstanding shares in both companies
 a relationship between two companies in which one company can, in
substance, engage in decision making regarding the other company’sbusiness affairs due to shared directors, substantial business
transactions, financing, etc.
(6) Interest Payments and Interest Income
The scope of Interest Payments and Interest Income for the purposes ofthe earnings stripping regime is as follows:(i) Interest Payments
 interest payments
 discounts on bills/notes the interest portion of finance lease payments (where total lease
payments under the arrangement are JPY10 million or more) redemption losses on bonds
 guarantee fees and bond borrowing fees paid in the following cases:-a third party who provides a loan to a Japanese company
guaranteed by a Related Person of the Japanese company-

a third party who provides a loan to a Japanese company bytaking bonds the Japanese company has borrowed from a Related
Person of the Japanese company as collateral-a third party (A) who lends bonds to a Japanese company which
are guaranteed by a Related Person of the Japanese company,
and a third party (B) who provides a loan to the Japanesecompany by taking the above bonds as collateral158 amortization of premiums on securities having a maturity date or a
fixed redemption price other payments whose economic characteristics are equivalent tointerest(ii) Interest Income
 interest income
 discounts on bills/notes the interest portion of finance lease income accumulation of discounts on securities having a maturity date or a
fixed redemption price other income whose economic characteristics are equivalent tointerest

De Minimis Rules
A Japanese company falling under either of the following cases in a given
fiscal year will not have disallowed interest pursuant to the earnings
stripping regime in such fiscal year provided the relevant schedules areattached to its tax returns and documents relating to the calculation are
retained.
(i)

Net Interest Payments(ii)

Net Interest Paymentsof a Japanese company andits Japanese Related
Companies(1)<JPY20 million<

Adjusted Taxable Income of aJapanese company and its
Japanese Related Companies(2) x
20%

A Japanese Related Company means a Japanese company having one of
the following specified relationships with the Japanese company (A):159 a relationship between two companies in which one company owns
directly or indirectly more than 50 percent of the total outstanding
shares in the other company
 a relationship between two companies in which the same person
owns directly or indirectly more than 50 percent of the total
outstanding shares in both companies
Note that the beginning and the end of the fiscal year of a Japanese
Related Company must be the same as the beginning and the end of the
fiscal year of the Japanese company (A), respectively.
(1)

Where Eligible Interest Income exceeds Covered Interest Payments ofa Japanese company or its Japanese Related Companies, the total of
Net Interest Payments will be calculated by deducting such excess
amount.

(2)

Where Adjusted Taxable Income of a Japanese company or its
Japanese Related Companies results in a negative amount, the totalof Adjusted Taxable Income will be calculated by netting suchnegative amount.

Deductions of Disallowed Interest Payments
When a Japanese company’s Net Interest Payments are less than 20
percent of Adjusted Taxable Income for a given fiscal year, disallowedinterest payments incurred in the past 7 years are deductible in such
fiscal year up to the 20 percent threshold provided certain conditions are
satisfied, e.g., filing of the tax returns for all fiscal years from the fiscal
year in which the oldest disallowed interest payments were incurred.

Miscellaneous If both the earnings stripping regime and the thin capitalization
regime described in 4.4 are applicable in a fiscal year, only the largerof the disallowed amounts (after applying the de minimis rule
discussed in 4.5.3) under either of the regimes will be applied. As
there is no carry forward of the disallowed amount under the thincapitalization regime, recognizing disallowed interest under the160earnings stripping regime may be preferential for taxpayers, as they
may be eligible to take a deduction for the disallowed amounts in the
future.
 Where bonds borrowed under a cash-secured bond lendingtransaction (genkin-tanpotsuki-saiken-taishaku-torihiki) or purchased
under a bond gensaki transaction (saiken-gensaki-torihiki) are lent
under another cash-secured bond lending transaction or sold underanother bond gensaki transaction, interest income and interest
payments through these transactions will be excluded in calculating
the extent of deductible interest payments.
 This section covers only the tax treatment for Japanese companies. A
foreign company generating Japanese source income attributable toa PE in Japan was subject to the earnings stripping regime. By virtueof the 2022 tax reform, a foreign company generating Japanesesource income is subject to the earnings stripping regime, regardlessof whether it has a PE in Japan or not, for fiscal years beginning on orafter 1 April 2022.

4.6

Controlled Foreign Company (CFC) Regime

Please note that although the CFC regime is applicable to Japaneseindividual residents as well, this section mainly covers the tax treatment
for Japanese companies.

Overall Picture of the CFC Regime
The CFC regime is a mechanism to include income generated by a CFC in
its Japanese parent company’s income and tax it in Japan under certain
conditions in order to deter tax avoidance by utilizing CFCs.

161

The overall picture of the CFC regime is shown as follows:
Effective Tax Rate(ETR)Classificationof CFCSpecified CFC(Paper Company, etc.)

Under
20%

20% ormore &
under 30%

30%
or moreFullinclusion

Full-Inclusion CFC
At least one of the ‘Economic
Activity Tests’ is not satisfied
Partial-Inclusion CFC
All of the ‘Economic Activity Tests’
are satisfied

No income inclusion
Partialinclusion

Corresponding to the introduction of the new tax measures of the
Income Inclusion Rule, which is one of the parts of the Global Anti-Base
Erosion Rule of ‘Pillar 2’ agreed by the OECD/G20 Inclusive Framework
on BEPS under the 2023 tax reform (discussed in 4.8), the threshold
effective tax rate for full-inclusion rules of a Specified CFC was amended
taking into account the additional administrative burden for companies
subject to the new tax measures as follows:
Effective Tax Rate
(ETR)

Under
20%

Classificationof CFCSpecified CFC(Paper Company, etc.)

20% ormore &
under 27%

27%
or moreFullinclusion

Full-Inclusion CFC
At least one of the ‘Economic
Activity Tests’ is not satisfied
Partial-Inclusion CFC
All of the ‘Economic Activity Tests’
are satisfied

162

No income inclusion
Partialinclusion

The above amendments are applied for fiscal years beginning on or after
1 April 2024 for the Japanese shareholder company.
When the full-inclusion rules or the partial-inclusion rules are applied toa CFC, income of the CFC for a fiscal year should be taxable for the fiscal
year of its Japanese shareholder company which includes the day 2
months after the end of the fiscal year of the CFC.

Definitions of Keywords(1) Controlled Foreign Company (CFC)A ‘CFC’ is defined as follows: A foreign company more than 50 percent of which is directly or
indirectly (through foreign companies) owned by Japanesecompanies, Japanese resident individuals, related non-resident
individuals(*) and De Facto CFCs
 A foreign company which has a De Facto Control Relationship with aJapanese company or a Japanese resident individual (De Facto CFC)(*)

A ‘related non-resident individual’ means a non-resident individual
who is a director of Japanese companies or who has special
relationships with Japanese resident individuals.

(2) De Facto Control RelationshipA ‘De Facto Control Relationship’ means, in principle, a relationshipbetween a Japanese company (or a Japanese resident individual) and aforeign company where either of the following facts exists:
 The Japanese company (or the Japanese resident individual) has theright to claim almost all of the residual property of the foreigncompany.
 There is a contract that provides that the Japanese company (or theJapanese resident individual) has the right to determine how todispose of almost all of the properties of the foreign company.
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(3) Specified CFC
A ‘Specified CFC’ consists of the following three types of CFC: Paper Company
A ‘Paper Company’ is a CFC that does not fall under any of the following:(i)

The CFC maintains an office, store, factory or other fixed place ofbusiness necessary to conduct its primary business.
(Substance Test)(ii) The CFC functions with its own administration, control andmanagement in the jurisdiction where its head office is located.
(Administration and Control Test)(iii) Shareholding
CFC(iv) Real estaterelated CFC(a) CFC holding shares in Foreign Subsidiaries(b) CFC holding shares in Specified Subsidiaries(a) CFC holding real estate(b) CFC holding real estate used by Management
Controlling Company(v) Resources development project-related CFC(There are special rules applied to insurance companies.)(iii) is the case of a CFC whose income is mostly dividends from its
subsidiaries, which are excluded from the Full-Inclusion Income
discussed in 4.6.3 or the Partial-Inclusion Income discussed in 4.6.4.
(iv) or (v) are the cases of a CFC whose income is mostly generated froma substantial real estate business or resources business in the jurisdiction
where its head office is located.
Where the tax authorities request a Japanese company to show themevidence proving that a CFC falls under any of the above cases, if theJapanese company does not show them the evidence by the deadline, itwill be presumed that the CFC is a Paper Company.
164 Cash Box
A ‘Cash Box’ is a CFC that meets both of the following conditions:
Passive Income
Test

Passive Income(from (i) to (vii) and from (ix) to (xi)discussed in 4.6.4)> 30%

Total assets (B/S)
Asset Test

Securities + Loan receivables +Tangible assets for leasing +Intangibles (B/S)
Total assets (B/S)> 50%(There are special rules applied to certain foreign financial institutions,foreign financial holding companies and insurance companies.) Black-List Company
A ‘Black-List Company’ is a CFC whose head office is located in ajurisdiction designated by the Minister of Finance of Japan as a noncooperative jurisdiction with respect to the exchange of tax information.
At the time of writing, the Minister of Finance of Japan has notdesignated any jurisdictions.
(4) Effective Tax Rate (ETR)
The ETR for a CFC is calculated by (i)/(ii)(i) = Foreign corporate taxes imposed on income in the jurisdiction where
its head office is located and other jurisdictions(ii) = (a) + (b) ± (c):(a) Taxable income calculated in accordance with the tax laws of thejurisdiction where its head office is located165

(b) Non-taxable income calculated in accordance with the tax laws of thejurisdiction where its head office is located (it is not necessary to add
back received domestic/foreign dividends even if these are not taxed
in the jurisdiction where its head office is located.)(c) Other adjustments
Note that if the jurisdiction of the head office of a CFC does not impose
tax on income, (ii) is calculated based on income for accounting purposeswith similar adjustments as discussed above.
Where a CFC is a member of a tax consolidated group or applies passthrough taxation under the tax laws of the jurisdiction where its head
office is located, the above (a) and (b) are calculated based on theprovisions of the tax laws given the assumption that the following
provisions are not applied:-

Provisions for the tax-consolidation system
Provisions pertaining to pass-through entities(5) Economic Activity Tests
The ‘Economic Activity Tests’ consist of four tests to determine whether a
CFC has economic substance.
(i) Primary Business
Test

The primary business of the CFC is not any of thefollowing businesses:- Holding of shares or bonds- Licensing of intangibles- Leasing of vessels or aircraft(ii) Substance Test

The CFC maintains an office, store, factory orother fixed place of business necessary to
conduct its primary business in the jurisdiction
where its head office is located.

(iii) Administration and The CFC functions with its own administration,
Control Test
control and management in the jurisdiction
where its head office is located.
166

(iv) A. Unrelated Party The CFC conducts its primary business primarily
Test(more than 50%) with unrelated parties.
(Businesses covered under this test: wholesale,banking business, trust business, financial
instrument business, insurance business, oceantransport business, air transport business andaircraft leasing business)
B. Country of
Location Test

The CFC conducts its primary business primarily
in the jurisdiction where its head office islocated.
(Businesses covered under this test: businesses
not covered under the Unrelated Party Test)(There are special rules applied to regional holding companies, regional
logistics management companies, foreign financial holding companies,
aircraft leasing companies, insurance companies and toll-manufacturing
companies.)
Where the tax authorities request a Japanese company to show themevidence for meeting the Economic Activity Tests, if the Japanesecompany does not show them the evidence by the deadline, it will be
presumed that the Economic Activity Tests are not satisfied.
(6) Taxpayer
Where a Japanese company falls under one of the following cases andthe full-inclusion rules or the partial-inclusion rules are applied to the
CFC described in each case (the second-mentioned CFC for (iv)), theJapanese company has to include income of the CFC in its taxable
income. The amount of income to be included is calculated bymultiplying the Full-Inclusion Income (discussed in 4.6.3) or the PartialInclusion Income (discussed in 4.6.4) by the holding ratio shown below
for each case, respectively.

167

CasesHolding ratio(i) Where a Japanese company holds directly or
indirectly (through foreign companies) at
Direct and indirect
least 10% of a CFC
holding ratio of the CFC(ii) Where a Japanese company belongs to aby the Japanesefamily company group holding directly orcompany
indirectly (through foreign companies) atleast 10% of a CFC(iii) Where a Japanese company has a De Facto
Control Relationship with a CFC

100%(iv) Where a Japanese company has a De Facto
Control Relationship with a CFC (De Facto
CFC) which holds directly or indirectly(through foreign companies) at least 10% of
another CFC

Direct and indirect
holding ratio of the CFC(the second-mentioned
CFC) by the De Facto
CFC

Full-Inclusion Rules(1) Full-Inclusion Income
The Full-Inclusion Income subject to the full-inclusion rules for aSpecified CFC and a Full-Inclusion CFC is calculated as follows:
Profits for a fiscal year↓

- Adjustments of income by using provisions of the Japanese tax
laws or tax laws of the jurisdiction where its head office islocated(1)- Deduction of dividends from its subsidiaries(2)- Deduction of certain dividends from other CFCs
- Deduction of qualified capital gains from shares(3)Base Income↓- Deduction of tax loss carry-forwards (7 years)(4)- Deduction of corporate income taxes(1)Full-Inclusion Income

168

(1)

Adjustments of income by using provisions of the tax laws of thejurisdiction where its head office is located and corporate income
taxes
Where a CFC is a member of a tax consolidated group or applies passthrough taxation under the tax laws of the jurisdiction where its head
office is located, income and corporate income taxes are calculated
based on the provisions of the tax laws given the assumption that thefollowing provisions are not applied:-(2)

Provisions for the tax-consolidation system
Provisions pertaining to pass-through entities

Dividends from subsidiaries
As shown above, in the process of calculating the Full-Inclusion
Income for a CFC, dividends received from its subsidiaries meetingthe shareholding requirements (i.e., 25 percent and 6 months) are
generally deductible. The shareholding threshold is relaxed from 25
percent to 10 percent if the dividend paying company is a fossil fuelinvestment company meeting certain conditions.

(3)

Qualified capital gains from shares
Where a Japanese company acquires a foreign company group,transfers of shares by a Specified CFC or a Full-Inclusion CFC within
the group lead by the Japanese company may be required in the
post-acquisition restructuring process in order to streamline theirbusiness flow. Such capital gains are excludable from the FullInclusion Income provided that certain conditions (e.g., the transfers
are made based on a relevant business plan for post-acquisition
restructuring) are met.

169

(4)

Tax loss carry-forwards (7 years)
Only tax losses incurred in fiscal years in which the full-inclusion rule
was applied are deductible in principle.

(2) Exemption Thresholds
The full-inclusion rules will not apply to fiscal years in which the ETR(discussed in 4.6.2 (4)) of a Specified CFC is at least 30 percent(*) or fiscal
years in which the ETR of a Full-Inclusion CFC is at least 20 percent.
(*)

27 percent for fiscal years beginning on or after 1 April 2024 for theJapanese shareholder company

Partial-Inclusion Rules
This section covers a general explanation of the partial-inclusion rules
and does not cover special rules applied to certain foreign financial
institutions and foreign financial holding companies.
(1) Passive Income
Passive Income subject to the partial-inclusion rules for a PartialInclusion CFC consists of the following twelve items:
Passive Income

Excludable income(main items)

Deductible
costs/expenses(i)

Dividends

Dividends received from its
subsidiaries meeting theshareholding requirements (i.e.,
25% (10% for a fossil fuelinvestment company) and 6
months)- Direct
expenses- Interest
expenses(ii)

Interest• Bank interest earned in the- Direct
expensesordinary course of business• Interest on installment sales170• Interest received by a CFC having
a money-lending license• Interest received by/from agroup-financing company• Interest incurred from the salesof inventories to third parties(that means ‘interest on usancebills’)(iii) Securitieslending fees

- Direct
expenses(iv) Capitalgains/losses
fromtransfers of
securities

Capital gains/losses from transfers - Acquisitionof shares in a company 25% or
costs
more of which is owned by the CFC - Direct
expenses(v)• Profits/losses derived from

Profits/losse
s derivedfromderivatives
transactions(vi) Foreignexchange
gains/losses•

certain derivatives transactions
for hedging purposes
Profits/losses derived fromcertain commodity futurestransactions conducted bycertain commodity futurestransaction dealers

Foreign exchange gains/losses
generated in the ordinary courseof business unless the purpose of
the business is to earn income
from fluctuations in foreignexchange rates(vii) Income
Income derived from certain
derivedtransactions for hedging purposes
from assetsthat could
generate
income from(i) to (vi)171

(viii) Insuranceincome(1)(ix) Leasing feesof tangible
assets• Leasing fees of tangible assets
•
•

(x)

Royalties
fromintangibles

primarily used in the jurisdiction
where its head office is locatedLeasing fees of real estate
located in the jurisdiction where
its head office is locatedLeasing fees of tangible assets
where certain conditions aremet• Royalties from self-developed
intangibles• Royalties from intangibles

purchased/licensed foradequate consideration that are
utilized for certain business(xi) Capitalgains/losses
fromtransfers ofintangibles• Capital gains/losses from selfdeveloped intangibles• Capital gains/losses from

intangibles purchased foradequate consideration that are
utilized for certain business- Direct
expenses(including
depreciation)- Direct
expenses(including
deprecation)- Acquisition
costs- Direct
expenses(xii) Abnormal
income(2)(1)

Insurance income = (a) - (b)(a)

Insurance premium receipts - Reinsurance premium payments(b) Insurance claims payments - Reinsurance claims receipts

172

(2)

Abnormal income = (a) - (b) x 50%(a)Profits for a fiscal year of a CFC calculated on the assumption that
income discussed from (i) to (xi) above (to be calculated without
excluding the excludable income and without deductions forcosts/expenses except for acquisition costs) did not exist(b) Total assets (B/S) + Labor costs + Accumulated depreciation (B/S)(2) Partial-Inclusion Income
Partial-Inclusion Income of a Partial-Inclusion CFC that is included intaxable income of its Japanese parent companies is calculated as (a) +
(b).
(a)

Total of Passive Income of (i)(ii)(iii)(ix)(x) and (xii) for the CFC(b) Total of Passive Income of (iv)(v)(vi)(vii)(viii) and (xi) for the CFC(The minimum amount is zero. Where the amount of (b) is negative,
such amount will be carried forward for 7 years to offset future
income categorized in (b) for the CFC in principle.)(3) Exemption Thresholds
Where a Partial-Inclusion CFC meets one of the following thresholds, thepartial-inclusion rules are not applied to the Partial-Inclusion CFC for the
fiscal year:(i)

ETR (discussed in 4.6.2 (4)) > 20%(ii) Partial-Inclusion Income < JPY20 million(iii)

Partial-Inclusion Income
Profits before tax

173

< 5%

Tax Credits
Foreign taxes and Japanese taxes levied on a CFC’s income that is also
taxed in the hands of its Japanese shareholder company under the fullinclusion rules or the partial-inclusion rules are subject to tax credits inJapan.
Where a CFC is a member of a tax consolidated group or applies passthrough taxation under the tax laws of the jurisdiction where its head
office is located, foreign corporate taxes subject to tax credits arecalculated based on the provisions of the tax laws given the assumptionthat the following provisions are not applied:-

Provisions for the tax-consolidation system
Provisions pertaining to pass-through entities

Tax Treatment of Dividends Received by a JapaneseCompany
There are rules to prevent double taxation where a CFC’s income taxed
under the full-inclusion rules or the partial-inclusion rules is taxed again
when the CFC distributes the income to its Japanese shareholder
company.
(1) Dividends from a First Tier Foreign Company
When a Japanese company receives dividends from a foreign company,
such dividends are fully exempt from tax for the Japanese company tothe extent of the amount of the income of the foreign company having
been included in the taxable income of the Japanese company under the
full-inclusion rules or the partial-inclusion rules in the fiscal year when
the Japanese company received the dividends (the dividend receivingyear) and fiscal years beginning within 10 years before thecommencement of the dividend receiving year.
The foreign withholding tax on the dividends from a First Tier Foreign
Company is treated as follows:174 Where a First Tier Foreign Company is a Foreign Subsidiary defined in
4.1.2
Foreignwithholding tax
on thedividends

Dividends from Foreign Subsidiary
To the extent of the amount of theincome of the foreign company having
been included in the taxable income of
the Japanese company under the fullinclusion rules or the partial-inclusion
rules

100% tax
exemptDeductible but
non-creditable

The amount exceeding above amountor
Whole amount where there is no
above amount95%
tax
exemptNon-deductible
and noncreditable Where a First Tier Foreign Company is not a Foreign Subsidiarydefined in 4.1.2
Foreignwithholding tax
on thedividends

Dividends from subsidiary
To the extent of the amount of theincome of the foreign company having
been included in the taxable income of
the Japanese company under the fullinclusion rules or the partial-inclusion
rules
The amount exceeding above amountor Whole amount where there is no
above amount(*)

100% tax
exemptDeductible but
non-creditable

TaxableDeductible andcreditable(＊)

Where a Japanese company applies a foreign tax credit discussed in
4.2, the foreign withholding tax is not deductible.
175

(2) Dividends from a Second Tier Foreign Company
When a Japanese company receives dividends from a foreign company(the first tier foreign company) which has received dividends fromanother foreign company (the second tier foreign company), such
dividends received from the first tier foreign company are fully exempt
from tax for the Japanese company to the extent of the smaller amountof the following: The Japanese company’s proportionate share of the dividends thatthe first tier foreign company received from the second tier foreigncompany within the past 3 years
 The amount of the income of the second tier foreign company having
been included in the taxable income of the Japanese company under
the full-inclusion rules or the partial-inclusion rules within the past 3
years
The ‘past 3 years’ above means the fiscal year in which the Japanesecompany received the dividends from the first tier foreign company (thedividend receiving year) and fiscal years beginning within 2 years before
the commencement of the dividend receiving year.

4.7

Corporate Inversion

Triangular mergers may enable a Japanese company to become asubsidiary of a foreign company located in a low-tax jurisdiction and to
reduce the global ETR (discussed in 4.6.2 (4)) of the group. This is a socalled corporate inversion.
If certain conditions are met, such reorganization is treated as a nonqualified reorganization and the deferral of the recognition of capitalgains from the transfer of shares is not applicable.
Moreover, under certain circumstances, a Japanese shareholder of theforeign parent company may be required to include in its taxable income
an appropriate portion of the taxable income of the foreign parent
company, even if the ownership of the foreign parent company by theJapanese shareholder is less than 10 percent.
176

4.8

GloBE Rule – Income Inclusion Rule

By virtue of the 2023 tax reform, the Income Inclusion Rule (‘IIR’), which
is one of the parts of the Global Anti-Base Erosion Rule (‘GloBE Rule’) of‘Pillar 2’ agreed by the OECD/G20 Inclusive Framework on BEPS, wasenacted in light of the progress of international discussions on the detailsof the rules and trends toward its implementation in other countries,
etc. (The Undertaxed Profits Rule (‘UTPR’) and Qualified Domestic
Minimum Top-up Tax (‘QDMTT’) are scheduled to be enacted by the2024 tax reform or after.)

Outline
The new measures related to ‘IIR’ enacted in the 2023 tax reform are the‘corporation tax on international minimum tax amount for eachapplicable fiscal year’ (national tax), information declaration system andthe ‘local corporation tax on specified standard corporation tax amount’(national tax), which will be applied to Japanese companies forapplicable fiscal years beginning on or after 1 April 2024.
The ‘corporation tax on international minimum tax amount for eachapplicable fiscal year’ is basically the same as the top-up tax under the
IIR put forward by the OECD.

Corporation Tax on International Minimum Tax Amountfor Each Applicable Fiscal Year
(1) Taxpayers
Japanese companies (excluding public interest companies) belonging to
the Specified Multinational Enterprise (MNE) Groups, etc. will be subject
to the ‘corporation tax on international minimum tax amount for eachapplicable fiscal year’ (hereinafter referred to as ‘Japanese IIR’).

177

(2) Calculation Method of the Tax Base
The tax base under the Japanese IIR is ‘international minimum tax
amount’. The below shows the summary of the calculation of‘international minimum tax amount’:(A) Calculate GloBE income or loss and adjusted covered tax amount by
each constituent company, etc. of the Specified MNE Group, etc.,
except for the constituent companies whose jurisdiction is Japan,
based on the amounts in the income statements used in the
consolidated financial statements of ultimate parent entity withcertain adjustments.
↓(B) Calculate Effective Tax Rate (ETR) on a country basis by dividing thetotal amounts of the adjusted covered tax in (A) above by net total
amounts of GloBE income or loss in the above (A) of constituent
companies, etc. in the country.
↓(C) Calculate ‘international minimum tax amount for the country’.
For example, where the constituent companies, etc. have a total
amount of net GloBE income and the ETR in the country is less than
the 15%, ‘international minimum tax amount for the country’ iscalculated as follows:([X] – [Y]) x [Z] – QDMTT[X] Total amount of net GloBE income in the country[Y] Total amount of certain percentage of tangible assets andcertain salaries paid in the country (i.e., ‘substance-based
Income exclusion amount’)[Z] Difference between the 15% and the ETR of the country↓(D) Calculate ‘international minimum tax amount of a constituent
company, etc.’ by allocating ‘international minimum tax amount forthe country’ based on the amount of GloBE income of eachconstituent company, etc.
↓
178

(E) Calculate ‘international minimum tax amount’ that is the total
amount of ‘international minimum tax amount of a constituent
company, etc. in (D) above multiplied by each attribution ratio, whichis calculated based on the ownership interest, etc. after deduction of
attributable amount of taxes equivalent to ‘international minimum
tax amount’ imposed under the GloBE rules in the country whereintermediate parent entities, etc. or partially-owned parent entities,
etc. are located.
<Note>‘International minimum tax amount for the country’ (C) above of joint
ventures is calculated separately from that of constituent companies,
etc. In addition, ‘international minimum tax amount for the country in(C) above of minority-owned constituent companies, etc./minorityowned joint ventures and various investment entities, etc. is also
calculated separately from that of constituent companies, etc./joint
ventures.
(3) Exemption
 De minimis rule
Where constituent companies, etc. (excluding various investment
entities, etc.) in the Specified MNE Group, etc. satisfy all of the following
conditions for each applicable fiscal year, the ‘international minimum tax
amount for the country for applicable fiscal year’ in (2)(C) above will betreated as zero:(i)

The average of income of constituent companies, etc. in theSpecified MNE Group, etc. for the applicable fiscal year and the two
applicable fiscal years immediately preceding the first mentioned
applicable fiscal year in the country, where those constituent
companies, etc. are located, is less than the amount equivalent to
EUR10 million.

179

(ii)

The average profit or loss of constituent companies, etc. in theSpecified MNE Group, etc. for the applicable fiscal year and the two
applicable fiscal years immediately preceding the first mentioned
applicable fiscal year in the country, where those constituent
companies, etc. are located, is less than the amount equivalent to
EUR1 million.

The de minimis rule is applied only where the Specified MNE Group, etc.
provides certain information related to the Specified MNE Group, etc. forthe fiscal year, etc.
(The de minimis rule also applies to joint ventures.) Transitional CbC reports safe harbor
Where constituent companies, etc. in the Specified MNE Group, etc.
satisfy either of the following conditions during the transition period(*),
the ‘international minimum tax amount for the country’ in (2)(C) above
for the applicable fiscal year will be treated as zero:(i)

The constituent companies, etc. in the Specified MNE Group, etc.
satisfy both of the following conditions:• The Specified MNE Group, etc. reports that the total revenue ofthe constituent companies, etc. in the country, where those
constituent companies, etc. are located, is less than the amountequivalent to EUR 10 million in its CbC reports for the fiscal Year.

• The Specified MNE Group, etc. reports that the profit before

income tax of the constituent companies, etc. in the country,
where those constituent companies, etc. are located, is less than
the amount equivalent to EUR 1 million in its CbC reports for the
fiscal year.

(ii)

A Simplified ETR(*1) of the Specified MNE Group, etc. in the country
is equal to or greater than the transitional rate(*2) for the fiscal year(*1)
Simplified ETR is calculated by dividing the simplified coveredtaxes in the country, which are used for the preparation for the
consolidated financial statements etc., by profit before income
tax in that country, which are reported in the Specified MNEGroup’s CbC reports.
180

(*2)

(iii)

(*)

Transitional rate means:(a) 15% for fiscal years beginning in 2023 and 2024(b) 16% for fiscal Years beginning in 2025 and(c) 17% for fiscal years beginning in 2026.

The amount of profit before income tax of the constituent
companies, etc. in the country reported by the Specified MNEGroup, etc. in the CbC reports is less than the amount of thesubstance-based Income exclusion amount in (2)(C)[Y] above in the
country.

The Transitional period covers all of the fiscal years beginning
between 1 April 2024 and 31 December 2026 but not including afiscal year that ends after 30 June 2028.

The Transitional CbC reports safe harbor is applied only where theSpecified MNE Group, etc. provides certain information related to theSpecified MNE Group, etc. for the fiscal year, etc.
(A similar safe harbor is also provided for joint ventures.)(4) Calculation of tax amount, filing and tax payment
 Calculation of tax amountThe ‘corporation tax on international minimum tax amount for eachapplicable fiscal year’ will be calculated as follows:[‘international minimum tax amount’ in (2)(E) above for each applicablefiscal year] x 90.7%
 Filing and tax payment
A Japanese company belonging to the Specified MNE Group, etc. isrequired to file a tax return via e-Tax and pay the ‘corporation tax oninternational minimum tax amount for each applicable fiscal year’ within
one year and three months (one year and six months for the first yearthat the Specified MNE Group, etc. comes within the scope of the IIR in
respect of Japan) from the day following the end of each applicable fiscal
181

year. (However, if there is no ‘international minimum tax amount’, thefiling is not required.)(5) Definitions of Keywords
 Specified MNE Group, etc.
An enterprise group, etc. (limited to those that fall under the MNEGroup, etc.) that has annual revenue equivalent to EUR750 million ormore in at least two of the latest four applicable fiscal years immediately
preceding the tested applicable fiscal year.

• Applicable fiscal year
The period of the consolidated financial statements prepared by theultimate parent companies, etc. of a Specified MNE Group, etc.

• Constituent companies, etc.
Companies, etc. in an enterprise group, etc. and their permanentestablishments, etc.

• CbC reports
Country-by-country reports discussed in 4.3.5 (1)Information Declaration System(1) Outline
A Japanese company which is a constituent company, etc. of theSpecified MNE Group, etc. must provide certain information related to
the Specified MNE Group, etc. (e.g., the name of the constituent
companies, etc. of the Specified MNE Group, etc., and the ETR bycountry where the constituent companies, etc. are located, etc.) in
English via e-Tax to the competent tax office within one year and threemonths (one year and six months for the first year that the Specified
MNE Group, etc. comes within the scope of the information declaration
182

system in respect of Japan) from the day after the end of each applicablefiscal year.
If there are two or more Japanese companies that are required toprovide certain information related to the Specified MNE Group, etc., itwill be sufficient that one company representing such Japanesecompanies provides such information.
(2) Exemption from Filing Obligation
Where the tax authority of the country where the ultimate parent
company, etc. of the Specified MNE Group, etc. (in cases where one
constituent company, etc. is designated by the ultimate parent company,
etc., the designated company will be substituted) is located is able toprovide Japan with the information regarding the Specified MNE Group,etc., the Japanese company that is obligated to provide such information
will be exempted from such obligation.
However, a Japanese company which is exempted from the obligation toprovide such information must provide the notification regarding theultimate parent company, etc. to the competent tax office via e-Tax
within one year and three months (one year and six months for the firstyear that the Specified MNE Group, etc. comes within the scope of theinformation declaration system in respect of Japan) from the day
following the end of each applicable fiscal year.
If there are two or more Japanese companies that are required toprovide the notification regarding the ultimate parent company, etc., itwill be sufficient that one Japanese company representing such Japanesecompanies provides such notification.

Local Corporation Tax on Specified Standard Corporation
Tax AmountIn line with the introduction of the ‘corporation tax on international
minimum tax amount for each applicable fiscal year’, the ‘local
corporation tax on specified standard corporation tax amount’ (nationaltax) will also be imposed for each applicable fiscal year on Japanese183

companies (excluding public interest companies) belonging to theSpecified MNE Groups, etc.
(1) Tax Base
The tax base under rule is the ‘specified standard corporation tax
amount’, which is defined as the amount of ‘corporation tax oninternational minimum tax amount’ for each applicable fiscal year
(excluding penalty taxes).
(2) Calculation of Tax Amount, Filing and Tax Payment
 Calculation of tax amountThe ‘local corporation tax on specified standard corporation tax amountfor each applicable fiscal year’ will be calculated as follows:[‘Specified standard corporation tax amount’ for the applicable fiscalyear] x 93 / 907
 Filing and tax payment
A Japanese company belonging to the Specified MNE Group, etc. isrequired to file a tax return via e-Tax and pay the ‘local corporation tax
on specified standard corporation tax amount’ (national tax) for eachapplicable fiscal year’ within one year and three months (one year andsix months for the first year that the Specified MNE Group, etc. comes
within the scope of the IIR in respect of Japan) from the day following
the end of each applicable fiscal year.

184

4.9

Taxation of Foreign Companies and Individuals /Tax
Treaties

This section covers the main items of the tax treatment of foreigncompanies and non-resident individuals not having a PE in Japan and theeffect of relevant tax treaties.
Chapter 2 covers the taxation of income derived through a partnershipand Chapter 3 covers the short-term visitor rule for non-resident
individuals. Also, with regard to the taxation of a foreign company having
a PE in Japan, please see Chapter 1.

Tax Treaties
Japan has concluded tax treaties with the following countries/regions as
at the time of writing:
Algeria(*)
Argentina(*)
Australia
Austria
Azerbaijan(*)
Bangladesh
BelgiumBrazilBrunei Darussalam
Bulgaria
CanadaChile
China (PRC)
Colombia
Croatia
Czechoslovakia(1)Denmark
Ecuador
Egypt

EstoniaFiji
FinlandFranceGeorgia
Germany
Hong Kong
Hungary
Iceland
India
Indonesia
IrelandIsraelItaly
JamaicaKazakhstan
KuwaitLatviaLithuania

185

Luxembourg
Malaysia
MexicoMoroccoNetherlands
New Zealand
NorwayOman
Pakistan
Peru
Philippines
PolandPortugal
Qatar
Romania
Russia(2)Saudi Arabia
SerbiaSingapore

Slovenia
South Africa
South Korea
Spain
Sri Lanka
SwedenSwitzerland
ThailandTaiwan(3)TurkeyUAE
UK
UruguayUS
USSR(4)
Uzbekistan
Viet Nam
ZambiaAgreements centered on the exchange of information are not included in
the above.
(1)

This treaty covers Czech Republic and Slovak Republic.

(2)

The tax treaty with Russia is not applied to the 8 jurisdictions
discussed in note (4) to which the tax treaty with the ex-USSR isapplied.

(3)This is not a tax treaty concluded by the Japanese government but
the ‘Agreement between the Interchange Association and the
Association of East Asian Relations for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes
on Income’ concluded between the Japan-Taiwan Exchange
Association (Japanese side) and the Taiwan-Japan Relations
Association (Taiwanese side). Japan has maintained its relationshipwith Taiwan on the basis of non-governmental, working-level
relations through these associations. Under the 2016 tax reform, aspecial domestic tax law was introduced in order to implement theprovisions provided for in the agreement.

(4)This treaty covers 8 jurisdictions that constituted the ex-USSR(Armenia, Azerbaijan, Belarus, Kyrgyz, Moldova, Tajikistan,
Turkmenistan and Ukraine).

(*)

Concluded but not yet applicable as at the time of writing.

The current status of the tax treaties recently amended or newly
concluded is as follows:

186

Country

StatusColombia

Tax treaty — signed in
December 2018

Argentina

Tax treaty — signed inJune 2019

MoroccoTax treaty — signed in
January 2020

Tunisia

Negotiation to conclude
a tax treaty — started
in March 2019

GreeceAgreement in principle
on a tax treaty —reached in January2023

Finland

Negotiation to revise
the tax treaty — started
in May 2019

Nigeria

Negotiation to conclude
a tax treaty — started
in June 2019187

General effective dates of
the amendments forJapanese taxes- Taxes levied on the basisof a taxable year: Taxes
for any taxable years
beginning on or after 1
January 2023
- Taxes levied not on thebasis of a taxable year:
Taxes levied on or after 1
January 2023

- Taxes levied on the basisof a taxable year: Taxes
for any taxable years
beginning on or after 1
January 2023
- Taxes levied not on thebasis of a taxable year:
Taxes levied on or after 1
January 2023

Switzerland

Revised tax treaty —signed in July 2021

UkraineNegotiation to conclude
a tax treaty — started
in March 2021

Azerbaijan

Tax treaty — signed in
December 2022

Algeria

Tax treaty — signed in
February 2023

Turkmenistan

Agreement in principle
on a tax treaty —reached in October
2023- Taxes levied on the basisof a taxable year: Taxes
for any taxable years
beginning on or after 1
January 2023
- Taxes levied not on thebasis of a taxable year:
Taxes levied on or after 1
January 2023

- Taxes levied on the basisof a taxable year: Taxes
for any taxable years
beginning on or after 1
January 2024
- Taxes levied not on thebasis of a taxable year:
Taxes levied on or after 1
January 2024

The tax treaties entered into by Japan generally accord with theprinciples of the OECD Model Tax Convention and tax treaties recently
signed tend to include provisions dealing with hybrid/transparent
entities and anti-treaty shopping provisions (e.g., the Limitation on
Benefits provision and the Principal Purpose Test provisions).
Japan deposited its instrument of acceptance for the Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent Base
Erosion and Profit Shifting (MLI: Multilateral Instrument) with the OECD188

on 26 September 2018. As a result, the MLI entered into force on 1
January 2019 for Japan. The MLI is a mechanism to amend
simultaneously and efficiently existing tax treaties to be in line with therecommendations made under the BEPS project.
Japan has chosen 43 tax treaties concluded with the following
jurisdictions to be covered by the MLI:
Australia, Bulgaria, Canada, China, Czech Republic, Egypt, Fiji, Finland,
France, Germany, Hong Kong, Hungary, India, Indonesia, Ireland, Israel,
Italy, Kazakhstan, Korea, Kuwait, Luxembourg, Malaysia, Mexico,
Netherlands, New Zealand, Norway, Oman, Pakistan, Poland, Portugal,
Qatar, Romania, Saudi Arabia, Singapore, Slovak Republic, South Africa,
Sweden, Thailand, Turkey, Ukraine, UAE, UK, Viet Nam
In addition, Japan has concluded the Convention on Mutual
Administrative Assistance in Tax Matters (effective on 1 October 2013)
and agreements centered on the exchange of information which
generally include provisions on the allocation of taking rights withrespect to certain income of individuals with the following
countries/regions:












The Bahamas
BermudaThe British Virgin Islands
The Cayman Islands
Guernsey
The Isle of Man
JerseyMacao
PanamaPrincipality of Liechtenstein
Samoa

189

Dividends, Interest and Royalties
Japanese withholding income tax is ordinarily imposed on dividend,interest and royalty payments to non-resident individuals and foreigncompanies. The normal withholding tax rate is 20.42 percent (income taxof 20 percent and special reconstruction income tax that is imposed on
income tax at 2.1 percent from 2013 to 2037) and 15.315 percent(income tax of 15 percent and special reconstruction income tax
thereon) is applied to dividends from listed shares and certain types ofinterest. However reduced tax rates may be available under Japan’s tax
treaties for foreign investors not having a PE in Japan. In order to obtain
the reduction (or exemption) of Japanese withholding tax under a tax
treaty, the foreign investor or the investor’s agent should, before thedate of payment, submit an application form for relief from Japaneseincome tax to the chief of the relevant district tax office through thepayer of the income.
The rates of withholding tax under the respective tax treaties (including
non-governmental agreement with Taiwan) are as set out below. Notethat these are general rates applied in Japan and different rates or
exemptions may apply to specific cases. The percentages in parentheses
under the dividends heading represent the minimum ownership ratio of
the parent company in, broadly, the capital stock of the subsidiary toqualify for the reduced parent/subsidiary tax rate.
Where a reduced withholding tax rate or exemption is applied under atax treaty, the special reconstruction income tax will not be imposed.
Name of country
Algeria
Argentina
Australia
Austria
Azerbaijan
Bangladesh
Belgium

Dividends
Between Parent andSubsidiary
5%
(25%)
10%
(25%)
0%
(80%)
5%
(10%)
0%
(10%)
7%
10%
(25%)
0%
(10%)
190

Interest

Royalties

10%
15%
10%

7%
12%
0-10%

10%
3-10%
5%

10%
7%
15%
10%

0%
7%
10%
0-10%

0%
7%
10%
0%

Other

Brazil
Brunei Darussalam
Bulgaria
CanadaChile
China (PRC)
Colombia
Croatia
Czechoslovakia(1)Denmark
Ecuador
Egypt
Estonia
Fiji(2)FinlandFrance

12.5%
5%
10%
5%
5%
10%
5%
0%
10%
0%
5%
15%
0%
10%
0%

Georgia5%5%Germany
Hong Kong
Hungary
Iceland
India
Indonesia
IrelandIsraelItaly
JamaicaKazakhstan
KuwaitLatviaLithuania
Luxembourg
Malaysia
MexicoMorocco

0%
5%
5%
10%
0%
5%
10%
10%
10%
5%
10%
5%
5%
5%
0%
0%
5%
5%
0-5%
5%

(10%)
(25%)
(25%)
(25%)
(20%)
(25%)
(25%)
(10%)

(10%)
(25%)
(15% directlyor- 25%
directly or
indirectly)
(10%)
(25%)
(10%)
(10%)
(25%)
(10%)
(25%)
(25%)
(25%)
(25%)
(20%)
(10%)
(10%)
(25%)
(25%)
(25%)
(10%)
191

12.5%
10%
15%
15%
15%
10%
10%
5%
15%
15%
5%
15%
10%
15%
10%

12.5%
10%
10%
10%
4-10%
10%
0-10%
5%
10%
0%
0-10%
10%
10%
0-10%

12.5-25%
10%
10%
10%
2-10%
10%
2-10%
5%
0-10%(5)
0%
10%
15%
5%
10%
10%
0%

5%

5%

0%

15%

0%

0%

10%
10%
15%

10%
10%
0%

5%
0-10%(5)
0%

10%
15%
15%
15%
15%
10%
15%
10%
0-10%
0-10%
15%
15%
15%
10%

10%
10%
10%
10%
10%
10%
10%
10%
0-10%
0-10%
10%
10%
10-15%
10%

10%
10%
10%
10%
10%
2-10%
5%
10%
0%
0%
10%
10%
10%
5-10%

Netherlands

Peru
Philippines
PolandPortugal
Qatar
Romania
Russia(3)Saudi Arabia
Serbia

0%
5%
0%
5%
5%
5%
7.5%
10%
10%
10%
5%
5%
10%
5%
5%
5%

(50%)
(10%)
(10%)
(25%)
(10%)
(50%)
(25%)

Singapore

5%

Slovenia
South Africa
South Korea
Spain
Sri Lanka
SwedenSwitzerland(current)
Switzerland(revised)
TaiwanThailandTurkeyUAE
UK
Uruguay
US

5%
5%
5%
0%
20%
0%
0%
5%
0&

New Zealand
NorwayOman
Pakistan

USSR(4)
Uzbekistan
Viet Nam
Zambia10%
15-20%
10%
5%
0%
5%
0%
5%
15%
5%
10%
0%

10%

0-10%

0%

15%
15%
10%
10%

0-10%
10%
10%
10%

5%
10%
10%
10%

(15%)
(10%)
(25%)

10%
15%
10%
10%
10%
10%
10%
10%
10%

10%
10%
10%
5-10%
0-10%
10%
0%
10%
10%

15%
10-15%
0-10%(5)5%5%10-15%
0%
5-10%
5-10%

(25%)

15%

10%

10%

5%
15%
15%
5%
20%
10%
10%

5%
10%
10%
0%
0%
0-10%

5%
10%
10%
0%
0-10%(6)
0%
0%

10%

0%

0%

10%
15%
10%
10%
10%
10%

10%
10-25%
10-15%
10%
0%
0-10%
0%

10%
15%
10%
10%
0%
10%
0%

15%
10%
10%
0%

10%
5%
10%
10%

0-10%(5)0-5%(5)
10%
10%

(10%)
(10%)
(10%)

(25%)
(25%)
(10%)
(10%)
(50%)
(10%)
(10%)

(25%)
(25%)
(10%)
(10%)
(10%)
(50%)
(10%)
(25%)

192

(1)

This treaty covers Czech Republic and Slovak Republic.

(2)

The original tax treaty with the UK is eligible for Fiji, with exceptions
for dividends and interest, to which domestic tax rates are applied.

(3)

The tax treaty with Russia is not applied to the 8 jurisdictions
discussed in note (4) to which the tax treaty with the ex-USSR isapplied.

(4)This treaty covers 8 jurisdictions that constituted the ex-USSR(Armenia, Azerbaijan, Belarus, Kyrgyz, Moldova, Tajikistan,
Turkmenistan and Ukraine).

(5)

Cultural royalties are exempt.

(6)50 percent of certain royalties are exempt and royalties for copyrightor cinema films are fully exempt.

Real Estate
Capital gains from the transfer of real estate located in Japan by a nonresident individual or a foreign company are subject to individual income
tax or national corporation tax and local corporation tax, respectively.
The law also provides for a surtax on such gains from land for companies
at a rate in the range 5-10 percent. However, this surtax is currently
suspended until 31 March 2026.
Withholding tax at 10.21 percent (income tax of 10 percent and special
reconstruction income tax that is imposed on income tax at 2.1 percent
from 2013 to 2037) is generally assessed on the proceeds from a transfer
of real estate by a non-resident individual or a foreign company and final
settlement of the tax liability on any capital gain arising from transfers ofreal estate is computed on an individual or corporation tax return. The
income tax withheld from the sale proceeds is creditable on this returnin calculating the final tax liability, or is refundable to the extent that thewithholding tax amount is greater than the tax on the capital gain.
Japan’s tax treaties have no provisions to reduce the tax burden under
the domestic tax law as detailed above.
193

Shares(1) Shares in a Real Estate Holding Company - Taxation under Japanese
Tax Law
Capital gains from a disposition of shares in real estate holding
companies by a non-resident individual or a foreign company are subject
to individual income tax or national corporation tax and local
corporation tax, respectively.
• Real estate holding company
A real estate holding company is defined as a company where the fairmarket value of its real property interests prescribed below equals or
exceeds 50 percent of the fair market value of its total assets at any
time during 365 days preceding the sale of the shares. Either
Japanese companies or foreign companies can be real estate holding
companies.
(i) land, buildings, attachments to buildings and structures situatedin Japan(ii) shares in other real estate holding companies• Safe harbor rule
There is a safe harbor rule which excludes minority shareholders
from this taxation system. Where the aggregate shareholding in thereal estate holding company of a foreign investor and its related
persons as of the day prior to the beginning of the fiscal year
including the disposal day was 5 percent or less (2 percent or less forunlisted companies) of the total issued shares of the company, theforeign investor is not taxed on capital gains on a disposal of shares inreal estate holding companies.

194• Related persons‘Related persons’ of a foreign investor in the above are as follows:(i)family relatives of the foreign investor (if the investor is anindividual)(ii)

a company directly or indirectly controlled(1) by the foreign
investor(iii) a company directly or indirectly controlled by a person which
controls the foreign investor
Where a foreign investor holds shares in a real estate holding company
through an NK-type partnership(2), any other partners of the partnership
are treated as related persons of the foreign investor.
(1)

If a company holds more than 50 percent of the total outstanding
shares or more than 50 percent of the voting rights in anothercompany, the latter company is treated as being ‘controlled’ by theformer company.

(2)

The definition of NK-type partnerships for the purposes of this rule isthe same as that described in 2.1.1.
If the foreign investor owns shares in a real estate holding company
through two or more partnerships, all partners of those partnerships
are treated as ‘related persons’ for the foreign investor. Note thatthe aggregate shareholding in a real estate holding company does
not include shares that these other partners hold not through thosepartnerships.

(2) Shares in a Japanese Company - Taxation under Japanese Tax Law
Capital gains from the sale of shares in a Japanese company by a nonresident individual or a foreign company are subject to individual income
tax or national corporation tax and local corporation tax, respectively inthe circumstances described below:

195

(i) gains arising from the sale of forestalled shares (shares acquired forthe purposes of a takeover of a company or a demand sale of suchshares) in a Japanese company(ii) gains arising from the sale of a substantial interest in a Japanesecompany, being a sale made by a foreign shareholder of 5 percent ormore of the outstanding shares of a Japanese company within 1
fiscal year, where the foreign shareholder has held 25 percent ormore of such outstanding shares at any time during the fiscal year ofsale or during the 2 preceding fiscal years (25%/5% test)
When judging the threshold of 25 percent and 5 percent in (ii) above, thejudgment should be made by looking at the aggregate shareholding in
the Japanese company of the foreign shareholder and related persons of
the foreign shareholder.
‘Related persons’ of the foreign shareholder in the above are as follows:(i) family relatives of a foreign shareholder (if the shareholder is anindividual)(ii) a company directly or indirectly controlled(1) by the foreign
shareholder(iii) a company directly or indirectly controlled by a person which
controls the foreign shareholder
Where a foreign shareholder holds shares in a Japanese company
through an NK-type partnership(2), any other partners of the partnership
are treated as related persons of the foreign shareholder.
(1)

If a company holds more than 50 percent of the total outstanding
shares or more than 50 percent of the voting rights in anothercompany, the latter company is treated as being ‘controlled’ by theformer company.

(2)

The definition of NK-type partnerships for the purposes of this rule isthe same as that described in 2.1.1.

196

If the foreign shareholder owns shares in a Japanese company
through two or more partnerships, all partners of those partnerships
are treated as ‘related persons’ for the foreign shareholder. Notethat the aggregate shareholding in a Japanese company does notinclude shares that these other partners hold not through thosepartnerships.
However, in either of the following cases, ‘related persons’ of aforeign shareholder do not include other partners of the partnershipin determining the shareholding ratio, except for cases where theholding period of the shares is less than 1 year, or where shares in abankrupt financial institution are transferred:(a) disposals of shares by a Specified Foreign Partner(*) through an
Investment Fund(*)(b) disposals of shares by a foreign partner of an Investment Fund(*)
through the Investment Fund, provided that the foreign partner
has been a limited partner of the Investment Fund and has notbeen involved in the operation of the Investment Fund for theyear of disposal and the past 3 years(*)

Please see 2.1.2 for the definition of the ‘Specified Foreign
Partner’ and ‘Investment Fund.’(3) Taxation under Tax Treaties
The tax treatment of capital gains from the sale of shares in a real estateholding company/a Japanese company in tax treaties concluded by Japandepends on the treaty.
Some tax treaties give Japan the taxing rights in the same way as theJapanese tax laws, while some tax treaties give taxpayers full protection
from Japanese tax on capital gains from the sale of shares.
Also, there are capital gain provisions in tax treaties including one ormore of the following clauses:

197 Clause to give Japan the taxing rights on the sale of shares in a realestate holding company
 Clause to give Japan the taxing rights on the sale of shares in a realestate holding company which is a Japanese company
 Clause to give Japan the taxing rights on the sale of shares in a
Japanese company meeting a test that is similar to the 25%/5% test
discussed in (2) Clause to give Japan the taxing rights on capital gains from shares of
distressed financial institutions

198

5

Indirect Tax

5.1

Consumption Tax

Japanese consumption tax is a sales based tax applied on supplies ofcertain goods and services within Japan. It is similar in nature toEuropean VAT and Australian GST.

Taxable Transactions
Taxable transactions for consumption tax purposes are the following
transactions when carried out for consideration as part of a businesscarried on by an individual or a company:(i)the sale or lease of an asset located in Japan(ii)

the supply of services (excluding digital services) provided in Japan(iii) the supply of digital services provided to individual residents ofJapan or Japanese companies (please see 5.1.3 (1) for exceptionalrules.)
However, there are a number of transactions which are specifically
excluded from being taxable transactions as non-taxable transactions.
The main non-taxable transactions are as follows:- sales or leases of land
- sales of securities and similar instruments (not including golf-clubmembership rights and other similar items, but including foreign
securities)- monetary transactions including loans, guarantees, distributions fromjoint operation trusts or other investment trusts and insurance
premiums- transfers of postage stamps, revenue stamps, etc. by the national andlocal governments (including foreign postage stamps, etc.)
199

- specified activities carried out by the national and local governments,
such as registration and certification activities, as well as handlingcharges for foreign-exchange transactions- medical treatment under public medical insurance law- social welfare activities- school tuition and examination services- rental of housing- services related to childbirth, burial, home help and welfare centers
for aged and handicapped persons
From the perspective of the vendor/service supplier in a domestic
taxable transaction, the transaction is a ‘domestic taxable sales
transaction’ whilst from the perspective of the purchaser/service
recipient, the transaction is a ‘domestic taxable purchase transaction.’
Consumption tax imposed on a taxable transaction is called ‘output tax’for the vender/service supplier and ‘input tax’ for the purchaser/service
recipient.
In addition to the taxable transactions identified above (domestic
taxable transactions), the removal of foreign goods from a bonded area
(i.e., import of goods) also represents a taxable transaction for
consumption tax purposes (import taxable transactions).
Consumption tax imposed on importation is called ‘import input tax’ forthe importer.

Export Transactions
Export transactions, including the transfer or lease of goods representing
an export from Japan as well as other export-related activities such as
international transportation are treated as export exempt transactions,to which an effective zero percent consumption tax rate is applied. It is
not necessary to collect or account to the government for consumption
tax on such transactions.
200Services provided to a non-resident will also be treated as exporttransactions, except in the case of transport or storage of assets inJapan, provision of accommodation and food in Japan, or provision ofservices of a similar nature in Japan.

Digital Services(1) Digital Services and Place of Taxation Therefor
Digital services are defined as ‘services supplied throughtelecommunications lines such as supplies of copyrighted works throughtelecommunications lines’ and include neither ‘services that merely
enable customers to use communication lines (e.g., telephone)’ nor‘supplemental services incidental to non-digital services.’
Examples of digital services indicated by the Japanese tax authorities are
as follows:- provision of e-books, digital newspapers, music, videos, and software(including various applications such as games) via the internet- services that allow customers to use software and databases in thecloud- services that provide customers with storage space to save theirelectronic data in the cloud- distribution of advertisements via the internet- services that allow customers to access shopping and auction sites on
the internet (e.g., charges for posting goods for sale, etc.)- services that allow customers to access places to sell game softwareand other products on the internet- provision via the internet of reservation website for accommodation
and restaurants (those who charge for posting on the website fromthe businesses that provide accommodation and operate restaurants)
201

- English lessons provided via the internet- consulting services provided continuously via telephone and e-mailAs the place of taxation for digital services is to be determined by theplace of the service recipient, digital services provided to individual
residents of Japan or Japanese companies are treated as domestictransactions, which are generally taxable for consumption tax purposes.
There are the following exceptional rules:
 B2B digital services received by a foreign permanent establishment(PE) of a domestic business customer, which are exclusively required
for their supplies conducted outside Japan, are treated as foreigntransactions (i.e., out-of-scope from Japanese consumption tax)
 B2B digital services received by a PE in Japan of a foreign businesscustomer, which are required for their supplies conducted in Japan,
are treated as domestic transactions.
Please see (2) below for the definition of ‘B2B digital services.’(2) Classification of Digital Services Provided by Foreign Suppliers
Digital services provided by foreign suppliers (non-resident individuals or
foreign companies) are classified into B2B (business to business) digital
services and B2C (business to consumers) digital services based on thecharacteristics of the services or the terms and conditions of thetransactions as indicated below:

B2B digital
services

Digital services supplied by foreign suppliers
where the recipients of the services are normallylimited to business customers based on thecharacteristics of the services or the terms andconditions of the transactions

B2C digital
services

Digital services supplied by foreign suppliers not fallingunder the above B2B digital services

202

(3) Tax Treatment of B2B Digital Services (Reverse Charge Mechanism)
Where a foreign supplier provides B2B digital services to a domestic
business customer or a PE in Japan of a foreign business customer(*), theobligation to declare/pay consumption tax on the services is imposed on
the business customer under the reverse charge mechanism. Thus,
consideration of such supplies paid by the business customer does notinclude consumption tax.
(*)

Limited to B2B digital services to a PE in Japan of a foreign businesscustomer which are required for their supplies conducted in Japan

If the taxable sales ratio (discussed in 5.1.8) for a taxable period of abusiness customer is greater than or equal to 95 percent or if thesimplified tax credit system (discussed in 5.1.9) is elected for a taxable
period of a business customer, reverse charge purchases(*) will beignored for the taxable period for the time being. This is a transitional
measure to take into account the administrative burden for businesscustomers.
(*)

Reverse charge sales/purchases means sales/purchases subject to thereverse charge mechanism. In addition to B2B digital services, specificentertainment services are also subject to the reverse charge
mechanism. When a foreign supplier provides business customers
with services performed by entertainers or professional athletes inJapan, such services are treated as specific entertainment services.

(4) Tax Treatment of B2C Digital Services
A foreign supplier has an obligation to file a consumption tax return andpay consumption tax to the Japanese government with respect to B2C
digital services in the same way as that for ordinary domestic taxable
transactions.
As discussed in (2), digital services provided by foreign suppliers areclassified into B2B or B2C based on the characteristics of the services or
the terms and conditions of the transactions. Thus, there could be cases
where a domestic business customer receives B2C digital services fromforeign suppliers. In such cases, a domestic business customer receiving203

B2C digital services is able to take a credit for the consumption tax on
the B2C digital services only when it is provided from a registered foreign
supplier (please see details in (5) below). This is because it is uncertainthat the Japanese government is able to collect consumption tax on B2C
digital services from non-registered foreign suppliers.
(5) Registration of Foreign Suppliers
Before introducing the invoicing system discussed in 5.1.12, a foreign
supplier having consumption taxable person status was able to become aregistered foreign supplier by submitting an application form together
with certain documents to the National Tax Agency (NTA) through thecompetent tax office. The NTA made public basic information (e.g.,name, address, registration number and date of registration) ofregistered foreign suppliers on its website once registered so thatdomestic business customers of B2C digital services could confirm if theircounterparties were registered or not.
Corresponding to the introduction of the invoicing system, the above
registration system was abolished on 1 October 2023 and integrated into
the invoicing system. As a result, registered foreign suppliers areautomatically treated as registered suppliers under the invoicing systemon 1 October 2023.
A registered supplier is required to issue ‘tax-qualified invoices’ including
relevant information (e.g., the registration number) upon customers’
requests and preserve copies of such invoices for 7 years.
Moreover, a registered supplier is not be able to have tax exempt status
unless its registration is canceled.

Taxable Persons
Whilst broadly anyone, whether a consumer or a business operator,acquiring goods and services in Japan will suffer a consumption tax
charge on those transactions, the concept of a ‘taxable person’ for
consumption tax purposes specifically relates only to those companies orindividuals which are required to file a consumption tax return to theJapanese government.
204

(1) Principle Rules for Taxable Persons
In principle, whether a business operator is a taxable person isdetermined depending on the amount of taxable sales (domestic taxable
sales (excluding reverse charge sales) and export exempt sales) in thepast as follows:
Taxable sales
in the base period(1)Taxable sales
in the specified period(2)Taxable person

over JPY10 million-

Yesover JPY10 million

Yes

JPY10 million or less

No

JPY10 million or less(1)

The base period generally means the fiscal year 2 years prior to thecurrent fiscal year for a company. Where the base period is not 1
year, the annualized value of the taxable sales in the base period isused. For an individual, the base period means the calendar year 2
years prior to the current year.

(2)

The specified period generally means the first 6 months of theprevious fiscal year for a company. For an individual, it means theperiod from January to June of the previous year.

(2) Election to be a Taxable Person
Regardless of the rules described in (1), a business operator is able tobecome a taxable person by an election.
An application form must ordinarily be submitted prior to thecommencement of the first taxable period for which it will apply.
However, in the first taxable period of a business operator, the election
can apply from the commencement of business where the election ismade prior to the end of that taxable period. An election is irrevocablegenerally for a period of 2 years.
If a taxable person who made an election for such status acquires
specified fixed assets(*) within this 2-year period (excluding taxable
205periods in which the simplified tax credit system (discussed in 5.1.9) has
been applied), the person must continue to be a taxable person for 3
years beginning from the taxable period in which the specified fixed
assets are acquired. Note that the simplified tax credit system is notapplicable for such 3-year period as well.
(*)‘Specified fixed assets’ means certain assets other than inventories
such as buildings, machinery, and equipment whose purchase cost(excluding consumption tax) is JPY1 million or more per unit. The
creditable amount of the input tax thereon is subject to an
adjustment depending on the fluctuation of taxable sales ratios for 3
years from the purchase of the assets.

(3) Newly Established Companies
Even if a business operator is not treated as a taxable person under therules described in (1) or (2), if it is a newly established company fallingunder either of the following tests, the company will be treated as ataxable person in fiscal years with no base period (generally, for the first
2 fiscal years).
(i) The newly established company’s stated capital at the beginning of
the fiscal year is JPY10 million or more.
(ii) The newly established company other than the company in (i) meetsboth of the following:-

The newly established company is controlled (e.g., the majority ofthe outstanding shares of which are directly or indirectly held) bya person (including individuals and companies) as of the
beginning of the fiscal year.

-

The amount of the taxable sales for the person who is treated ascontrolling the newly established company or the amount of thetaxable sales for a company related to that person exceeds
JPY500 million in the period corresponding to the theoretical baseperiod of the fiscal year of the newly established company.

206

If a company being treated as a taxable person under the above tests
acquires specified fixed assets in fiscal years with no base period(excluding taxable periods in which the simplified tax credit system has
been applied), the company must continue to be a taxable person for 3
years beginning from the taxable period in which the specified fixed
assets are acquired. Note that the simplified tax credit system is notapplicable for such 3-year period as well.
(4) Special Measures for Purchases of High-Value Assets
Where a taxable person purchases a high-value asset(*) in Japan in a
taxable period in which the simplified tax credit system has not been
applied, the taxable person will continuously be a taxable person foreach taxable period from (i) to (ii):(i) taxable period in which the high-value asset is purchased(ii) taxable period with the day 3 years from the commencement dateof the taxable period (i)Note that the simplified tax credit system is not applicable for such 3year period as well.
(*)‘High-value assets’ means inventories and specified fixed assets,
whose purchase cost (excluding consumption tax) is JPY10 million ormore per unit.

The above rules will also be applicable where a taxable person constructs
an asset in Japan under certain conditions. In this case, the above
restrictions will be applied for each taxable period from (i) to (ii):(i) taxable period in which the construction costs (excluding
consumption tax) for the asset reach JPY10 million(ii) taxable period with the day 3 years from the commencement dateof the taxable period in which the construction of the asset iscompleted207

(5) Registered Supplier under the Invoicing System
As a transitional measure for the introduction of the invoicing system(discussed in 5.1.12), a non-taxable person is able to become a taxable
person from the date of registration as a registered supplier based on
the submission of an application form for a registered supplier given thecondition that the application form is submitted during the taxable
period including the day from 1 October 2023 to 30 September 2029.
The submission of an application form to be a taxable person is not
required .
The registration as a registered supplier made after the above taxable
period requires the submission of an application form to be a taxable
person.

Taxpayers as an Importer
For the purposes of import taxable transactions, an importer (anyindividual or company importing goods into Japan) must pay
consumption tax to the government (Customs Office) unless theimportation is tax-exempt under a threshold rule.
Consumption tax on importation is imposed on any importer regardlessof whether the importation is carried out for business purposes. Thus,
individuals importing goods as consumers can be an import input
taxpayer. Where an individual or company pays consumption tax on its
importation, that individual or company does not automatically becomea taxable person required to file a consumption tax return.

Taxable Base
The taxable base for a domestic taxable transaction is the consideration
for the transaction.
In the case of import taxable transactions, the taxable base is the valueof the imported goods for customs duty purposes (i.e., normally, the CIF
price) plus the amount of any customs duties and other excise taxes.

208

Tax Rate
The consumption tax rate is 10 percent in principle and a reduced tax
rate of 8 percent is applied to sales of food/beverages (excluding
alcoholic beverages) and certain newspapers under subscription
contracts.

Computation of Consumption Tax to be Paid
(1) General Rule
Unless a taxable person elects for the simplified tax credit system(discussed in 5.1.9), consumption tax to be declared in a consumption
tax return and to be paid over to the government by a taxable person
should be calculated based on the net of (i) and (ii), but to the extent of
the creditable amount.
(i) consumption tax received on domestic taxable sales transactions forthe taxable period (output tax)(ii) consumption tax suffered on domestic taxable purchase transactions
and import taxable transactions for the same taxable period (input
tax)
When the creditable input tax suffered in a taxable period exceeds theoutput tax in the same period, a refund of the difference will be made.
Note that input tax on rental residential buildings(1) is not creditable.
(1)’Rental residential buildings’ means buildings that fall under highvalue assets (please see 5.1.4 (4)) or high-value self-constructed
specified assets(2), excluding buildings that are clearly not used forrental of housing.

(2)‘High-value self-constructed specified assets’ means self-constructedinventories which were constructed pursuant to a contract with athird party or constructed for the business operator’s own inventory(where the construction costs for assets reach JPY10 million).
209

If a taxable person receives services subject to the reverse charge
mechanism in a taxable period, the consumption tax on the reverse
charge purchases will be added to both (i) output tax and (ii) input tax,
unless the taxable sales ratio for the taxable period is greater than orequal to 95 percent.
The creditable input tax is calculated depending on the taxable sales
ratio and the taxable sales as follows:
Taxable sales
ratio
95% or more

Taxable sales
for the taxable period
JPY500 million or lessover JPY500 million

less than 95%-

Creditable input tax
Total input tax(i.e., fully creditable)
Creditable input tax is
calculated by[1] Individual method, or[2] Pro-rata method

 Taxable sales ratio
Domestic taxable sales+
Domestic
Export+taxable sales
exempt sales

Export exempt sales
Domestic+
non-taxable sales(*)

Domestic taxable sales do not include reverse charge sales and theamounts of sales do not include output tax.
(*)

As for sales proceeds of certain securities/monetary claims, only 5
percent of the proceeds should be included.

 Taxable sales for the taxable period
Taxable sales means domestic taxable sales (excluding reverse charge
sales) and export exempt sales. Where the taxable period is shorter than
1 year, the annualized value of the amount of the taxable sales will be
used.

210

• Total input tax
Total gross value of domestic
taxable purchase transactions(including input tax)(*)

x

10/110(*)+

Input tax on
importtransactions

8/108 is applied to transactions subject to the reduced tax rate of 8
percent.

When a taxable person receives services subject to the reverse charge
mechanism, total input tax should include consumption tax on such
reverse charge purchases (i.e., total gross value of reverse chargepurchases x 10/100).
• Individual method(i) + (iii) x Taxable sales ratio(*)(i) input tax relating to the acquisition of goods/services solely
attributable to sales transactions other than domestic non-taxable
sales transactions(ii) input tax relating to the acquisition of goods/services solely
attributable to domestic non-taxable sales transactions(iii) input tax other than above(*)

An appropriate alternative ratio may be utilized where this isapproved in advance by the tax authorities.

• Pro-rata method
Total input tax

x Taxable sales ratio

If this method is chosen, it should be used for at least 2 years.

211

(2) Special Measure for Small Business Operators
At the introduction of the invoicing system (discussed in 5.1.12) from 1
October 2023, a 3-year special measure, which makes the calculation of
the consumption tax payable easier, was established in order to reduce
the tax and administrative burden of small business operators in the casewhere small business operators choose to become a registered supplier(i.e., a taxable person).
Under this measure, the consumption tax payable for each taxable
period(*) including the day from 1 October 2023 to 30 September 2026 iscalculated as follows:
Total output tax - Total output tax x 80%(*)

Except for taxable periods in which taxable sales in the base period
are over JPY10 million

This measure is applicable by stating the application of this measure in
the final consumption tax return and no notification is required inadvance of the filing of the tax returns. In addition, this measure does
not require continuous application and an applicable person is able tochoose the general rule discussed in (1) (or the simplified tax credit
system discussed in 5.1.9 where an application form for the system issubmitted) at the time of filing.

Simplified Tax Credit System
A simplified tax credit system, as described below, is applicable toindividual and corporate taxable persons the annualized value of whose
taxable sales (domestic taxable sales and export exempt sales) for thebase period was JPY50 million or less. The taxable persons must submit
an application form to the competent tax office in order to utilize thismethod and once applied, this method must be used for at least 2 years.

212

Under the simplified tax credit system, the consumption tax payable iscalculated by using the following formula:
Domestic taxable
sales

x

Assumed profit
marginx

Consumption tax
rate

The assumed profit margin differs depending on the taxable person’sbusiness as follows:
Taxable person’s business

Assumed profit
marginWholesale10%

Retail20%

Manufacturing, construction, mining, agriculture,
fishing, electricity/gas industry, etc.

30%Service, etc.

Other thanabove

Transportation, communicationand services

50%

Real estate

60%

Food services, etc.

40%

Financial or insurance services

50%

Taxable Period
The taxable period is the respective fiscal year for a corporate taxable
person and the calendar year for an individual taxable person.
However, upon election, the taxable period may be on a quarterly basis
rather than on an annual basis (i.e., every 3 months starting from thecommencement date of the respective fiscal year for a corporate taxable
person and the periods from January to March, April to June, July to
September, and October to December for an individual taxable person).
A monthly taxable period is also available upon election.

213

Tax Returns and Tax Payments(1) Final Tax Return and Tax Payments
A taxable person is required to file its final consumption tax return andpay tax due within 2 months after the end of the taxable period.
Where a company who applies a filing extension of final corporation tax
return (please see 1.12.1 (1)), the filing due date of the final
consumption tax return will be extended for 1 month by submitting anapplication form to the tax office. Note that the payment due date will
not be extended regardless of whether a filing extension has beenobtained.
(2) Interim Tax Returns and Tax Payments
A taxable person who has not elected for a quarterly or monthly taxable
period may be required to make interim payments depending on theamount of the consumption tax payable for the previous taxable period(the annualized value if the previous taxable period is shorter than 1year) described as follows within 2 months after the end of each interim
period:Amount of the consumption tax payablefor the previous taxable period

Interim payments

over JPY61,538,400

Monthly basis

over JPY5,128,200 but JPY61,538,400 or lessQuarterly basis

over JPY615,300 but JPY5,128,200 or lessSemi-annual basis

Interim consumption tax payable is calculated on a pro-rata basis (i.e.,
calculated by dividing the consumption tax payable for the previous
taxable period by the number of the months of the previous taxable
period and multiplied by the number of the months of the interim
period) or on a provisional basis (i.e., calculated based on actual
operating results for each interim period).
Interim tax returns should be filed within 2 months after the end of eachinterim period. However, if interim consumption tax payable is214calculated on a pro-rata basis, filing can be skipped.

Invoicing System
An invoicing system was introduced on 1 October 2023.
In principle, preservation of ‘tax-qualified invoices’ issued by registeredsuppliers(*) is one of the requirements for tax credits under this system.
For the first 6 years, the transitional measures will allow a partial tax
credit of consumption tax equivalent on taxable purchases from nonregistered suppliers under certain conditions as follows:
Applicable periods
From 1 October 2023
to 30 September 2026
From 1 October 2026
to 30 September 2029(*)

Amount of applicable tax credits
80% of consumption tax equivalent on taxable
purchases
50% of consumption tax equivalent on taxable
purchases

An application form must be submitted to the competent tax office inorder to be a registered supplier who is eligible to issue ‘tax-qualified
invoices.’ Basically, a taxable person can be a registered supplier. The
NTA makes basic information (e.g., name, address, registration
number and date of registration) of registered suppliers public on its
website once registered.

A registered supplier is required to issue ‘tax-qualified invoices’ including
relevant information (e.g., the registration number) upon customers’
requests and preserve copies of such invoices for 7 years.

5.2

Customs and Tariffs

All merchandise being imported from foreign countries must beprocessed through the applicable government agencies as well ascomply with the Japanese Customs laws and regulations related toimportation. The Customs and Tariff Bureau (CTB), an internal bureau ofJapan’s Ministry of Finance, is the primary contact for importers entering
merchandise into Japan. Importers in Japan are responsible for using
reasonable care to enter, classify and value imported merchandise, as
well as provide any other information necessary enabling the CTB to215

properly assess duties, collect accurate statistics, and determine whether
any other applicable legal requirements are met.

Customs Clearance and Importers of Record
The importer of record is the party legally responsible for fulfilling importformalities and complying with all Customs laws and regulations relating
to the subject imported goods. For most imports, the buyer of the goodsin the destination country is also the importer of record on the customs
entry. When merchandise arrives in Japan, it must be entered by theimporter or its agent (e.g., customs broker, freight forwarder, etc.)
In principle, there are no specific requirements to become an importer ofrecord. Therefore, anyone, including a foreign company (i.e., nonresident importer) may act as an importer of record. When a nonresident person or a foreign company clears goods through Customs, theimporter must appoint a Customs representative to carry out the workby proxy. The Customs representative must be a person who has anaddress or residency in Japan, or a company which has a businesspresence in Japan. A form must be submitted to the Customs office inadvance of importation to notify the CTB of the appointment of a
Customs Representative.

Customs Duty Rate
All merchandise imported into Japan is subject to, or free of duty inaccordance with the Harmonized Tariff Schedule of Japan. Duty rates
vary based on the type of product being imported and the country oforigin of the product. Duties may be assessed in a variety of ways such as‘Ad Valorem’, ‘Specific’ or ‘Compound’. An Ad Valorem Rate is apercentage of value of the merchandise (e.g., 5 percent Ad Valorem). A
Specific Rate is a specified amount per unit of weight or other quantity(e.g., JPY4,800 per pair). A Compound Rate is a combination of both an
ad valorem rate and a specific rate (e.g., JPY0.70 per kilo plus 10 percent
ad valorem).

216

Tariff Quota
Japan’s Tariff Quota system is designed to control the amount or volume
of various commodities that can be imported into Japan during a
specified period of time. It permits for a specified quantity of imported
merchandise to be imported at a reduced rate of duty during the quota
time period. Once the tariff-rate quota limit is reached, goods may still
be imported but at a higher rate of duty. Products which are subject totariff quota in Japan include leather, leather shoes, corn, certain cheeseand dairy, etc.

Customs Valuation
As a World Trade Organization (WTO) signatory country, Japan’s
Customs valuation related laws and practices are similar to thoseprescribed in the WTO Customs Valuation Agreement and its
appraisement hierarchy. Transaction Value is the valuation method
preferred by the CTB and it is also the easiest to determine. The Customs
laws define Transaction Value to be the price actually paid or payable forimported merchandise when it is sold for exportation to Japan.
Transaction Value is usually the contract or invoice price paid by theimporter to an unrelated foreign seller, plus or minus certain statutory
additions and exclusions.
When Transaction Value is inapplicable (e.g., no actual sale between
foreign seller and Japanese importer), appraisement of the imported
merchandise is made in accordance with the remaining methods ofvaluation applied in sequential order. The alternative methods ofappraisement are in order of precedence: Transaction value of identicalor similar merchandise, deductive value, computed value and the‘fallback’ method.
 Additions to Transaction Value-

The value of ‘assists’. An assist is any material (e.g., tools, dies, molds,etc.) or service (e.g., research and development, etc.) provided by thebuyer of imported merchandise, directly or indirectly, free of charge
or at a reduced cost for use in connection with imported
merchandise;217

-Selling commissions incurred by the buyer (Buying commissions are
not considered dutiable);-

Packaging costs incurred by the buyer;-

Royalties and licensing fees that the buyer is required to pay a
condition of the sale of the imported merchandise;-

The proceeds of any subsequent resale, disposal, or use of theimported merchandise that accrue to the seller; and-The cost of transport and insurance and other expenses associatedwith the transport of the imported goods to the port of importation.

 Customs Related Party Pricing
The CTB will accept related party pricing as the Transaction Value only if
an examination of the circumstances of the sale of the imported
merchandise shows that the relationship between the buyer and theseller did not influence the price or that the transaction value
approximates one of the several alternative valuation standards.
Acceptable product valuation in transactions involving related parties is
crucial, because the CTB generally gives greater scrutiny to pricing ofsuch transactions.
 Transfer Price and Valuation
Transfer price adjustments generally occur in order to bring the intercompany prices within an arm’s-length range for income tax purposes.
When these transfer price adjustments occur retroactively, postimportation, Japanese customs laws and regulations do not prescribe
how they should be treated from a Customs Valuation perspective.
In July 2017 the CTB published a customs valuation opinion in response
to a specific importer inquiry to serve as guidance on how retroactive
transfer price are to be addressed from a customs valuation perspective.
Within the customs valuation opinion, the CTB determined that the
specific transfer price adjustments they reviewed were considered partof the value declared to the CTB. The determination was based on
218

provisions contained within the sales contract and related supplier andan advanced pricing agreement (APA) between the importer and thebilateral tax authority (that stipulates, in part, that the sales prices forthe products to be imported are subject to review and adjustment after
payment is made). The CTB further stated that the adjustments would beconsidered part of the customs value, whether the adjustments were
upward or downward.
However, it has not become clear how the CTB will address these issues
in practice. As such, obtaining an advance agreement with the Valuation
Division of CTB regarding the treatment of the transfer price adjustment
for customs valuation purposes can resolve uncertainty in such asituation.
 Commissionaire Model and Valuation
In a typical commissionaire model, the commissionaire carries out therole of the importer of record for Customs requirement purposes. The
CTB generally considers these ‘import’ transactions as intra-company
movements of goods by the principal, rather than a buy-and-sell modeland would therefore deny the use of Transaction Value as the method ofappraisement. In such cases, the CTB would often require the applicationof deductive or computed value. In such cases, submitting a blanket
value application and obtaining advance agreement with the Valuation
Division of CTB would also be recommended for determining theappropriate method of appraisement and method of in which it iscalculated.

Classification
All merchandise imported into Japan is either subject to, or free of duty
in accordance with the Harmonized Tariff Schedule of Japan (HS). HS‘Classification’ is the term used to designate the ten digit HS assignmentthat most specifically describes the products under consideration.
Classification of merchandise is typically determined based on thecommon, commercial, or technical name in an article or productdescription, along with certain considerations for function and material
composition. The classification system is based on the HS operated by
the WCO. The HS code consists of a six digit HS code, a three digit219

domestic code, and a final digit which is the NACCS number. NACCS is
the Nippon Automated Cargo and Port Consolidated System which is an
automated web-based system utilized by the CTB and importers tofacilitate the clearance and declaration of merchandise imported into
Japan.

Rules of Origin
Rules of origin (ROO) are the rules to determine the country of origin ofgoods. Since the application of certain Customs and tariff policy (e.g.,
Economic Partnership Agreements, anti-dumping, etc.) depends on theorigin of goods, ROO is necessary so that the origin of goods isdetermined in an objective manner.
In Japan, non-preferential rules of origin are determined according towhere the product was “wholly obtained,” or where the “last substantial
transformation” of the product occurred.
Under the relevant Customs law, “substantial transformation” in Japan isdefined as “such manufacturing process that leads to a change of HS
heading (i.e., HS 4 digit) between the tariff classification of the nonoriginating materials and the tariff classification of the good produced.
For ROO specific to preferential tariff treatment under Economic
Partnership Agreements (EPA) and Free Trade Agreements (FTA), each
Agreement should be reviewed closely for to understand their respective
general requirements and product specific rules.

Anti-dumping Duty
In principle, anti-dumping duties are assessed on items that areimported into Japan and are sold at less than a fair market value (i.e., theprice the goods are normally sold in the home country) to help prevent
harm to the domestic industry. Japan has three laws and ordinances thatcover anti-dumping: Article 8 of the Customs Tariff Law, the Cabinet
Order on Anti-dumping Duties and the Guidelines on Procedures forCountervailing and Anti-dumping Duties. Up to September 30, 2021,
Japan has imposed Anti-dumping Duties on 10 import products its
history since 1993.
220

Recordkeeping
Customs laws require importers to maintain the book for records for aperiod of 7 years and import/export permission for a period of 5 years
from the day after the date of import/export for information anddocumentation required for the entry of merchandise. If legal
requirements of Customs laws are met, these information anddocuments may be stored electronically.

Advance Rulings
 Advance rulings and informal inquiries
Advance rulings can be utilized by importers and other interested parties
to seek advice from the CTB on tariff classification, country of origin,
FTA’s and EPA’s, and valuation methods for imported goods andtransaction respectively, prior to importation. Although determinations
under this system can be provided either orally or in writing, it isgenerally advisable to seek clarification in writing for use as confirmationof CTBs’ position. Informal inquiries to CTB may also be made via e-mail.
In principle, all written/issued rulings are made publicly available on the
CTB website to serve as a reference to the trade community and otherinterested parties. Any confidential or sensitive information pertaining to
specific parties/individuals is not disclosed within an advance ruling.
Although the general timeline for receiving a response may varydependent on the specific circumstances of each request,
determinations are generally not given in less than a month’s time.
The CTB will generally provide their responses either orally or via email
for any informal inquiries made orally or via e-mail. The benefit of an
informal oral inquiry is that importers may expect relatively shorter
turnaround times to obtain guidance from the CTB.
 Value declaration/application
There are two categories of value declaration/applications which
importers may utilize:221-

Individual Value Application: The individual value application is valid
for a single duty-payable import declaration.

-

Blanket Value Application: The blanket value application covers
several duty-payable import declarations for a specific importtransaction scenario for a specified period of time. Blanket value
applications are valid for a maximum period of two years.

As part of the blanket value application process, it is typical thatimporters would need to participate in a series of face-to-face meetings
with the Valuation Division of CTB to discuss the specific transactional
circumstances and to review supporting documentation andinformation. In practice, once these reviews are concluded and if the CTB
approves the blanket value application, it is likely that the CTB would
respect the agreed upon determination. However, these determinations
should not be regarded as an official position of the CTB for the methodof valuation for imported goods.

Post Entry Customs Audit and Related Administration
The Post Clearance Audit, Investigation and Intelligence Division (PCAII)of the CTB is responsible for auditing importers and other entities
involved in international trade compliance with Customs law, other laws
and regulations. Typically, importers are selected by the PCAII Division
every 3 to 5 years to undergo an audit and in certain instances are
selected based on anomalies or ‘red flags’ identified within theinformation declared at the time of import through NACCS.
Generally, the audit process will begin with the PCAII Division making arequest for information to obtain an understanding of a Company’sorganization, trade compliance environment and internal controls.
Typical documentation requested includes but is not limited toimport/export permissions, invoices, contracts and transportation
documents. Following the information request, the PCAII Division willschedule onsite visits to meet with Company personnel and to conduct
interviews and to review any additional documentation or informationthat may be necessary. The time period for completing an audit may
range from two to six months and upon concluding an audit the PCAII
will issue a final report outlining the results. If any errors are identified
222

that result in a loss of revenue, the CTB will calculate the amount owed
and instruct the importer to remit payment.

Penalty Process and Statute of Limitations
Under current Customs laws and regulations, the CTB may impose an‘Additional Tax’ of 10 percent on any underpaid taxes resulting from anincorrect declaration identified by the CTB. In addition, interest is also
imposed on any underpaid taxes. If an amended return is filed by theimporter without prior knowledge of the correction by inspection, no
additional tax is imposed.
The CTB may also impose a 5 percent penalty even on importers who filevoluntary disclosures after the advanced audit notice is issued.
In investigations conducted and penalties assessed under Japanese
Customs law, the statute of limitations is five years from the date ofimport.

Authorized Economic Operator Program
The Authorized Economic Operator (AEO) Program was developed by the
CTB and designed to strengthen the security of the supply chain process.
The AEO Program is voluntary and calls for companies to implement
improved security practices throughout the supply chain to help ensure asecure society and to prevent terrorism. AEO is open to importers,
exporters, warehouse operators, Customs brokers, logistics operatorsand manufacturers. Benefits of AEO importers include reduced
examinations and inspections by Customs, pre-arrival lodgment ofimport declaration and permission, release of cargo before duty/tax
payment declaration and periodic lodgment of duty/tax payment
declaration. Japan has also instituted a formal mutual recognition withother countries that have similar AEO programs such as New Zealand,
the United States of America, the European Union, Canada, Korea,
Singapore, Malaysia, and Hong Kong, China and Australia.

223

Import Duty Savings Considerations
Companies moving goods across borders have a lot to gain fromreducing their tariff costs and streamlining their international tradeoperations. A strategic approach to trade and customs issues can help
importers and exporters to decrease their overhead, optimize their
supply chains, increase cash flow and better position themselves for newmarkets.
(1) Free Trade Agreements and Economic Partnership Agreements
FTAs and EPAs may grant lower or eliminate duties to goods that areclassified in an allowable HS and that satisfy the ROO established in anagreement. Japan currently has twenty EPAs / FTAs in force and threethat are under negotiations. In addition, under its Generalized System ofPreferences (‘GSP’) scheme, Japan applies reduced tariffs to designatedimport products originating from developing countries/territories,
aiming to help them increase export income, advance industrializationand promote economic development.
 EPAs in force or signed
The following FTAs and EPAs are in force:-

Japan-Singapore EPA (2002.11 in force)
Japan-Mexico EPA (2005.04 in force)
Japan-Malaysia EPA (2006.07 in force)
Japan-Chile EPA (2007.09 in force)
Japan-Thailand EPA (2007.11 in force)
Japan-Indonesia EPA (2008.07 in force)
Japan-Brunei EPA (2008.07 in force)
Japan-ASEAN EPA (2008.12 in force)
Japan-Philippine EPA (2008.12 in force)
Japan-Switzerland FTA & EPA (2009.09 in force)
Japan-Viet Nam EPA (2009.10 in force)
Japan-India EPA (2011.08 in force)
Japan-Peru EPA (2012.03 in force)
Japan-Australia EPA (2015.01 in force)
Japan-Mongol EPA (2016.06 in force)224-Comprehensive Progressive Agreement for the Trans-PacificPartnership (CPTPP) (2018.12 in force)
Japan-EU EPA (2019.02 in force)
Japan-U.S. Trade Agreement (2020.01 in force)
Japan-UK EPA (2021.01 in force)
Regional Comprehensive Economic Partnership (‘RCEP’) (2022.1 inforce)

 EPAs under negotiation and others-

Japan-Columbia EPA
Japan-China-Korea FTA
Japan-Turkey EPA

Both EPAs and FTAs will generally require that evidence of eligibility(e.g., Certificate of Origin) be presented at the time of entry. Thisevidence will typically include documentation obtain from the producer /exporter / government authority attesting due diligence in ensuring all
program requirements have been met.
(2) Customs Bonded System
Use of ‘Customs Areas’ and ‘Bonded’ facilities may allow for importers toimport goods for storage, processing or manufacturing or display
without payment of duties or taxes, unless and until the foreign
merchandise enters the Customs territory for domestic consumption.
Such bonded facilities must be approved by the head of the customs
office and must various administrative conditions.
(3) Duty Exemption for Re-export
The re-export duty exemption applies to articles which have been
imported into Japan and will later be re-exported. In order to utilize thisexemption, importers must satisfy certain procedural requirements atthe time of import.

225

(4) Non-Dutiable Cost Elements
Certain costs elements included in the price could potentially beremoved and deducted for customs purposes since they might not be
subject to duties or indirect taxes.
To give one example, non-dutiable cost elements may include after-salesor post-implementation services such as training, assembly, maintenanceand warranty services. Other cost elements such as finance charges,
inspection fees, sales and marketing costs, and certain types ofcommissions could also potentially be deducted based on a review of the
supplier agreements and payment structure.
(5) HS Classification Engineering
It may be possible to change the state in which certain goods areimported to obtain a more favorable tariff classification. For example,
breaking down a fully assembled product into components,
subassemblies, or individual parts could subject the goods to different
HS classification numbers that may be subject to a lower duty rate.
It may also be possible to proactively engineer products at thedevelopment stage so that they fall into a HS classification with apotentially lower duty rate. In addition, one country may classify aproduct differently than another country. In such cases, it may bepossible to use one country’s more favorable product classification
decision to influence another country’s product classification decision.

Import and Export Data Access
The Japan Customs Brokers Association (JCBA) provides Japanese
importers and exporters access to their company specific import andexport data through the Customs Clearance Information System (CCIS).
Utilizing the CCIS, importers and exporters have on-demand access todownload their import and export data.

226

5.3

Excise Duty

Excise duty is imposed on gasoline, tobacco, and liquor, etc. and is
calculated based on the quantity of imported goods.

227

6

Other Taxes and Surcharges

6.1

Social Security and Payroll Taxes

Contributions to the national social and labor insurance systems are
required in respect of employees in Japan.
Premiums are borne by employers and employees at the time of writing,as shown below.
(JPY)
Employee
Employer
Maximumshare
share
premium(1)
Health Insurance
On salaries(2)5.000%
5.000%
139,000/month
On bonuses
5.000%
5.000%
573,000/year(1)
Health Insurance(including nursing carepremium)(3)On salaries(2)5.910%
5.910%
164,298/month
On bonuses
5.910%
5.910%
677,286/year
Welfare pension
insurance
On salaries(2)9.150%
9.150%
118,950/month
On bonuses
9.150%
9.150%
274,500/month
Labor insurance(4)Employment
insurance
Workman’s accident
compensation:- Nonmanufacturing- Manufacturing(1)

0.6-0.7%

0.95-1.15%--

0.25-0.3%(generally)--

Variable-

A variable premium rate (total employee/employer shares — in therange of 9.33 percent to 10.51 percent for people under 40 years old
and in the range of 11.15 percent to 12.33 percent for people aged228

40 or above) is set in each prefecture depending on the domicile ofthe employer’s office. Rates and maximum monthly/annual
premiums above are those for offices located in Tokyo.
(2)

Applied to standard monthly remuneration amount(3)

Contributors who are 40 years of age or older are required to join asupplementary health insurance system, the nursing care insurance
system (Kaigo Hoken), to support elderly residents.

(4)

Applied to total salary, bonus and other compensation paid to
employees

6.2

Stamp Duty

Stamp duty is imposed on certain taxable documents such as deeds andcontracts. The levy is either based on the value involved or a flat rate.
The maximum stamp duty liability is generally JPY600,000.

6.3

Fixed Assets Tax and City Planning Tax

Fixed assets tax is assessable on both real estate and depreciable assets
which are in use in a business at 1.4 percent of the assessed value as at 1
January each year.
In addition, city planning tax is assessable on real estate at 0.3 percent of
the assessed value.

6.4

Business Occupancy Tax

This tax is assessable by ‘designated cities’ (determined from among
those having a population of 300,000 or more), as follows:

Taxpayer
Taxpayers for business occupancy tax purposes are companies orindividuals operating a business at a place of business in a designated
city.
229

Taxable Basis and Tax Rate
Taxable basis
Size of premises forbusiness use
Gross payroll

Tax rate
JPY600 per square meter(not assessable where the total space is
1,000 square meters or less)0.25%(not assessable where the total number ofstaff members, including officers, is 100 or
less)

Method of Collection of Business Occupancy Tax(1) Companies
A return is required to be filed within 2 months after the end of eachfiscal year and the tax paid thereon.
(2) Individuals
A return is required to be filed for each calendar year by 15 March of thefollowing year and the tax paid thereon.

6.5

Registration and Real Estate Acquisition Tax

When certain information is legally registered, this is subject to aregistration tax. Key registration events giving rise to such tax include theregistration of a Japanese company or a branch of a foreign company
and registration of a change in the legal ownership of real estate.
The following registration tax is levied on the establishment of an
ordinary Japanese company or a branch of a foreign company:
 Kabushiki Kaisha－0.7 percent of stated capital(minimum JPY150,000)
 Godo Kaisha－0.7 percent of stated capital(minimum JPY60,000)
230 Branch of a foreign company－JPY90,000 (or JPY60,000 in certain
limited circumstances)
On the transfer of real estate, the rate of registration tax depends upon
the nature of the transfer. The tax rates applied to the assessed value ofthe real estate at the time of writing are summarized below.
Transfer of ownership by sale

1.5% (Land)(1)
2% (Buildings)

Transfer of ownership by merger

0.4%

Entrusting of real estate

0.3% (Land)(2)0.4% (Buildings)(1)

Applicable for the period through 31 March 2026 (It will be increased
to 2 percent from 1 April 2026 onwards.)(2)

Applicable for the period through 31 March 2026 (It will be increased
to 0.4 percent from 1 April 2026 onwards.)

On the acquisition of real estate, real estate acquisition tax (local tax), is
also levied at 4 percent of the assessed value of the real estate, however
this tax rate has been reduced to 3 percent until 31 March 2024 for land
and residential buildings. Furthermore, when land is acquired by 31
March 2024, the tax base of such land is reduced by 50 percent.

231

6.6

Inheritance and Gift Taxes

Inheritance tax and gift tax are levied on an heir who acquires assets byinheritance and an individual (donee) who acquires assets from anotherindividual (donor) as a gift, respectively. Rates for both taxes range from
10 percent to 55 percent.

Scope of Taxable Assets
The following table represents the scope of taxable assets of inheritance
tax/gift tax:
Domicile in
Japan

Heir
Donee
Decedent
Donor

(E)

No domicile in Japan

Domicile inJapan
Domicilein Japanwithinpast 10years
No
domicilein Japanwithinpast 10years(F)

No domicile in Japan
Japanese national
NonDomicile in No domicile
JapaneseJapan within
in Japannational
past 10within past
(I)
years
10 years
(G)
(H)

(A)
(B)
(C)
(D)
-1

(D)
-2

[Scope of taxable assets]
Both domestic and overseas assets
Limited to domestic assets

232

(B)

Decedent/donor• who has domicile in Japan and ‘resident status’ when an event
occurs causing the inheritance/gift(D)-1

Decedent/donor• who does not have domicile in Japan when an event occurs
causing the inheritance/gift,• who had been domiciled in Japan at a point in time within 10
years before an event occurs causing the inheritance/gift and• who does not have Japanese nationality at any time of having
domicile in Japan(D)-2

Decedent/donor• who does not have domicile in Japan when an event occurs
causing the inheritance/gift and• who had never been domiciled in Japan within 10 years before
an event occurs causing the inheritance/gift(F)

Heir/donee• who has domicile in Japan and a ‘resident status’ when an
event occurs causing the inheritance/gift and• whose total period of having domicile in Japan is 10 years orless within the past 15 years before an event occurs causing
the inheritance/gift.

233

[‘Resident status’ under the Immigration Control and Refugee
Recognition Act]
‘Resident status’ in (B) and (F) above are from (i) to (v) of the Table 1
below.
Diplomat, Official, Professor, Artist, Religious Activities,
Journalist
Highly Skilled Professional, Business Manager,
Legal/Accounting Services, Medical Services, Researcher,
Instructor, Engineer/Specialist in Humanities/International(ii)
Services, Intra-company Transferee, Nursing Care,Entertainer, Skilled Labor, Specified Skilled Worker,
Technical Intern Training(i)

Table 1(iii) Cultural Activities, Temporary Visitor(iv) Student, Trainee, Dependent(v)
Table 2

Designated Activities
Permanent Resident, Spouse or Child of Japanese National,
Spouse or Child of Permanent Resident, Long-Term
Resident234

Tokyo Office
Izumi Garden Tower
1-6-1 Roppongi, Minato-ku

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Hiroshima Kogin Building 7F
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Tokyo 106-6012

Hiroshima 730-0031

Tel: +81 (3) 6229 8000
Fax: +81 (3) 5575 0766

Tel: +81 (82) 241 2810
Fax: +81 (82) 241 2811

Osaka Office

Fukuoka OfficeKamiyo Watanabe Building 8F
1-12-14 Tenjin, Chuo-ku
Fukuoka 810-0001
Tel: +81 (92) 712 6300
Fax: +81 (92) 712 6301

Osaka Nakanoshima Building 15F
2-2-2 Nakanoshima, Kita-ku
Osaka 530-0005
Tel: +81 (6) 4708 5150
Fax: +81 (6) 4706 3881
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Dainagoya Building 26F
3-28-12 Meieki, Nakamura-ku
Nagoya 450-6426
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Kyoto OfficeNihon Seimei Kyoto Yasaka Building 7F
843-2 Higashi Shiokoji-cho,
Shiokoji-dori Nishinotoin-higashiiru,
Shimogyo-ku
Kyoto 600-8216
Tel: +81 (75) 353 1270
Fax: +81 (75) 353 1271
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