Japan Tax Bulletin
Bad debt loss and bad debt allowance
April 2021
Under the Corporation Tax Acts, where monetary claims suchas account receivables, loan receivables etc. become uncollectible,losses on such monetary claims are tax deductible subject tocertain conditions. Further, SME1 and certain other corporate
taxpayers are allowed to make a tax-deductible provision for baddebt allowance subject to the deductible limitation.
1.

Bad debt loss

Bad debt losses are treated as tax-deductible losses where thefollowing conditions are satisfied:
1.1

Legal cancellation of monetary claimsthe amount of monetary claims is cancelled by a decision
to approve a corporate rehabilitation plan or decision toapprove a civil rehabilitation plan,
the amount of monetary claims is cancelled by a decision
to approve an agreement of a special liquidation under
the Company Law,
the amount of monetary claims is cancelled by anarrangement among relevant parties not based on legal
proceedings such as
 an arrangement of a reasonable debt consolidation
by creditors meetings,
 an agreement of relevant parties with mediation by
an administrative organization or financialinstitution.
The amount of monetary claims forgiven is notified inwriting where a debtor has been insolvent and collection
cannot be expected.



Where a company has forgiven monetary claims to a relatedcompany in financial difficulty and deducted the amount ofmonetary claim forgiven, the deductibility is sometimes
scrutinized and challenged as a non tax-deductible gift to therelated company. In order to avoid this, the forgiveness of arelated company’s debt needs to be based on a reasonable
rehabilitation plan to avoid the bankruptcy of the debtor
company.
1.2

1.3 No collection after termination of transactions withdebtors
If the following facts apply to a debtor, a creditor company isallowed to record a bad debt loss for trading account receivables,by deduction of note value in its accounting ledgers and treating
it as a deductible loss for tax purposes.
Termination of transactions means termination of continuoustransactions due to deterioration of a debtor’s financial conditions
and solvency.
2.

Bad debt allowance

The provision of a bad debt allowance is not tax deductible
unless a company is an SME, financial institutions, public interests
corporation etc.. The corporate taxpayers listed above are allowed
to provide for tax-deductible bad debt allowances on thecondition that bad debt allowance is recorded in the accounting
ledger, subject to the deductible limitation.
2.1

Monetary claims subject to individual evaluation

For the following monetary claims, the amount that is expected
to be uncollectible is tax deductible.


Debtor’s economic conditions

Where it is evident that all of the monetary claims areuncollectible judging from the debtor’s assets and solvency, thecreditor company is allowed to record a bad debt loss in its
accounting ledgers and treat it as deductible loss for tax purposes.

1 year or more has passed after termination oftransactions with a debtor; andTravelling costs to debtors’ locations are larger than the
total amounts of debtors in the area.

The amount of monetary claims to be repaid after 5 years
or later from the end of a business year whenpostponement of payments or installment payments aredecided by approval of corporate rehabilitation plan orfor similar reasons;
The amount of monetary claims expected to beuncollectible for reasons of debtors’ insolvency for areasonably long period and there is no expectation ofrecovery, significant damage by natural disasters or rapid
and significant changes in economic conditions, or similar
factors; or
50% of monetary claims of the end of a business year
when a commencement of proceedings of corporate
rehabilitation plan is filed for the debtor or other similarreasons.

An SME is a company whose stated capital is JPY 100M or less. However, where a company is wholly owned by a company whose stated capital is JPY
500 M or more, the company does not qualified as an SME even though its stated capital is JPY 100 M or less.
12.2

Monetary claims subject to overall evaluation

For monetary claims excluding those at 2.1 at the end of abusiness year, the tax deductible limit is calculated as the total
amount of monetary claims x bad debt loss ratio.
The bad debt loss ratio is A/B.
A = (bad debt losses + provision of bad debt allowance forindividual evaluation – reversal of bad debt allowance forindividual evaluation in business years that commenced 3 years
prior to the beginning of the business year) x 12/total number ofmonths in the period.
B = (the total amount of monetary claims at the end of
business years that commenced 3 years prior to the beginning ofa business year)/ the number of business years in the period.
For an SME, the following bad debt loss ratio instead of actual
bad debt loss ratio above can be utilized depending on type ofindustries.
Retail or wholesale
Manufacturing
Finance or insurance
Installment retail sale etc.
Others

1%
0.8%
0.3%
1.3%
0.6%

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