Japan Tax Bulletin
Tax credit for promotion of securing human resources
November 2021
1.

Overview

The credit is capped at 20% of the corporation tax liability.

Under the 2021 tax reform, a tax credit for new employee payroll
expenses will be available for corporations that actively recruit
human resources through new graduates and mid-career hires andinvest in human resource development for fiscal years beginning
between April 1, 2021 and March 31, 2023. This new tax credit is arevamp of the tax system for the promotion of wage increase andinvestment, which expired on March 31, 2021 and is intended tosupport corporations that engage in new hiring and human resource
development.

(iv) Additional tax credit amountCorporations filing a blue tax return can benefit from the tax credit
if the amount of new employment payroll costs meets certain
requirements. The amount of the tax credit is 15% to 20% of theincrease in the amount of new employee salaries paid in the previous
year, up to a maximum of 20% of the corporate tax amount.

3.

In addition, the requirements for application of the "IncomeExpansion Promotion Tax credit for SMEs(*1)" applicable on andafter April 1, 2021 to SMEs, have also been revised as discussedbelow.

(a) At least a 1.5% increase in salary paid to employees(*5) fromthe previous fiscal year(ii) Tax credit amount2.

Tax Credit for Promotion of Securing Human Resources

If a SME satisfies the requirement above,15% of increase in salary
payments is deductible from its corporate tax liability.

(i)

Application period

The credit is capped at 20% of the corporation tax liability.

The credit is increased by an additional 5% (up to 20%) if anadditional requirement related to education and training costs is met.
In order to benefit from the additional credit, education and training
costs(*6) must increase by at least 20%, compared to the educationand training costs incurred in the previous fiscal year.
The credit remains capped at 20% of the corporation tax liability.
Tax credit for Income Expansion Promotion for a SME(i) Requirements
For fiscal years beginning between April 1, 2021 and March 31,
2023, in order to benefit from this tax credit, a SME needs tosatisfy the requirement below.

Fiscal years beginning on or after April 1, 2021 and ending on orafter March 31, 2023 (excluding the fiscal year of incorporation,
the fiscal year including the date of dissolution (excluding
dissolution due to merger), and each fiscal year in liquidation)(iii) Additional tax credit amount(ii)(a) There is at least a 2.5% increase in salary paid to employees(*5)
from the previous fiscal year; andRequirements

In order to benefit from this tax credit, a corporation needs tosatisfy the requirements below:(a) Provide salaries to new domestic employees(*2); and(b) At least a 2% increase in salary paid to new employees(*3)
from the previous fiscal year.

The credit is increased by an additional 10% (up to 25%) if theSME satisfies the following 2 additional requirements:(b) Education and training costs increase by at least 10%,compared to the costs incurred during the previous fiscalyear.
The credit is still capped at 20% of the corporation tax liability.

(iii) Tax credit amountFor an SME, both the Income Expansion Tax Credit and the Tax
Credit for Securing Human Resources cannot be used together.

Corporations that meet all of the above requirements can deduct
15% of the creditable new employee salary payment (*4) from theircorporate income tax.

Therefore, the taxpayer can choose the one with the larger tax
credit amount.

However, since the maximum amount of the credit is calculated bysubtracting the amount of salary payment (*5) in the previous fiscal
year from the amount of salary payment in the current fiscal year,
if the overall amount of payroll including new employees has notincreased from the previous year, the maximum amount of thecredit will be zero, and as a result, the tax credit cannot be taken.

(*1) SME
In this case, a “SME” is a corporation whose paid in capital is
JPY100M or less and whose average taxable income in the previous
three fiscal years is less than JPY1,500M. However, if one of thebelow applies, the corporation is not treated as an SME,
irrespective of its paid in capital amount.
1. When a large-sized corporation owns more than half of theSME’s shares;
2. When multiple large-sized corporations own more than twothirds of the SME’s shares; or3. When the number of regular employees of the SME exceeds
1,000.
(*2) New domestic employees
A domestic employee who has been working at the domestic officeof the corporation for less than one year. A person who wasemployed by a corporation in the past, left the corporation, but wasemployed by the same corporation again after a certain period oftime is also included as a new domestic employee.
(*3) New employee salary payments
Salaries and wages paid to newly-hired employees in Japan who
are covered by employment insurance within one year from thedate of employment.
(*4) Creditable new employee salary payment
The amount of salary to be paid to a new domestic employee
within one year from the date of employment. The difference
between this and the amount for (*3) is that new employees are notlimited to those who are generally covered by employment
insurance.
(*5) Salary payment
Salary paid to employees but excluding executives, directors andtheir relatives. An employee is defined as an individual who works
in Japan and is listed on the corporation’s payroll.
(*6) Education and training costs“Education and training costs” is the cost incurred in employees
acquiring new skills or knowledge necessary for domestic
employment duties or to improve their current skills andknowledge.

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