Japan Tax BulletinGroup Tax Relief
February 2021
The group tax relief system will be introduced for businessyears beginning after March 31, 2022, replacing the current
consolidated tax return system. Corporate taxpayers that elect tofile consolidated tax returns are deemed to elect for the group tax
relief system automatically unless they notify the tax officeotherwise. Under the consolidated tax return system, aconsolidation parent company files a consolidated tax return forcorporations included in the consolidation. Under the grouprelief system, each corporation in the group files a tax return after
transferring losses within the group corporations.

3.

1.

3.2
Non-specified tax losses
Non-specified tax losses are transferred to group corporations
based on the deductible limits of non-specified tax losses, being
100% (where the group corporation is a Small- or Medium-sizedEnterprise) or 50% (where the group corporation is a largecorporation ) of taxable income after the deduction of specified
tax losses.

Groups that qualify for group tax relief

Corporations within a 100% ownership group are allowed toelect for group tax relief. Where a foreign corporation isinterposed in the 100% ownership, a 100%-owned subsidiary
does not qualify for group tax relief. In the diagram below, where
S1, S2 and S3 are 100%-owned subsidiaries of P, S3 does not
qualify for group tax relief.

3.1
Specified tax losses
Specified tax losses are tax losses incurred in a group
corporation which are not subject to mark-to-market valuation
for certain assets when joining the group tax relief system, within
10 business years before the group tax relief is utilized. “Specifiedtax losses” is a SRLY (Separate-Return-Limitation-Year) rule
where specified tax losses are deducted from the income of thegroup corporation which incurred the tax losses.

3.3
Tax losses of a group corporation which is not tosubject mark-to-market valuation
Tax losses of a group corporation, which is not to subject
mark-to-market valuation, incurred in business years before thecommencement of the group taxation relief or joining the groupare disregarded.

PS1

Foreign Co.

4.

S2
2.

S3

Pro-rata loss transfer

Losses generated by group corporations are transferred toprofit-making corporations based on the profit amounts. The
example below illustrates the transfer of losses within a group ofqualifying companies.

Income (loss)
before transfer
Loss transfer
Income after losstransfer

P

S(i)

S(ii)

S(iii)

500100(50)(250)(250)*1(50)*250*3

250*4250

5000*1 300 x 500/(500+100)*2 300 x 100/(500+100)*3 300 x 50/(50+250)*4 300 x 250/(50+250)

Utilization of tax losses carried forward in group corporations

Mark-to-market valuation

Certain assets of group corporations will be evaluated at markto market when the group taxation relief commences or a group
corporation joins the group. Assets subject to mark-to-market
valuation are fixed assets, land held as inventory, securities,
monetary claims and deferred assets. Assets with book value ofbelow JPY10M are not subject to mark-to-market valuation.
When the group taxation relief commences, the group parent
corporation and group subsidiary corporations which are 100%
owned by the parent and are expected to continue as such, are notsubject to mark-to-market valuation. A newly incorporated 100%
subsidiary and a 100% subsidiary that joined the group by aqualified share for share exchange transaction are not subject tomark-to-market valuation. A group subsidiary which is expectedto satisfy conditions for qualified corporate reorganizations (A:continuation of 100% ownership, continuation of employmentof employees and, continuation of principal businesses, or B:
joint business with another group corporation.) is not subject tomark to market valuation.

5.

Application

A group parent corporation and all group 100%-owned
subsidiary corporations are required to file an application forgroup tax relief 3 months before the first day of the business year
when the group taxation relief is utilized.
6.

Business year

The business year of the group parent corporation is applied
to all group subsidiaries even if the business year of a groupsubsidiary corporation is different from that of the group parentcorporation.

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