Tokyo
EY
Tokyo Midtown Hibiya
Hibiya Mitsui Tower 1-1-2 Yurakucho
Chiyoda-ku
Tokyo 100-0006
Japan
Principal Tax Contact
Kazuiro Ebina
ey.com/globaltaxguides
+81 (3) 3506-2411
Fax: +81 (3) 3506-2412
Mobile: +81 (90) 5203-3989
Email: kazuhiro.ebina@jp.ey.com
International Tax and Transaction Services Leader
Ichiro Suto
Mobile: +81 (90) 2142-5190
Email: ichiro.suto@jp.ey.com
International Tax and Transaction Services – International Corporate Tax Advisory
Manabu Nakamori
Mark Brandon
Mikihito Kuraya
Mitsunori Ota
Makiko Kawamura
Chieko Yonemura
Mari Murata
Ryuta Tosaki
Tobias Lintvelt
Mobile: +81 (70) 7485-6533
Email: manabu.nakamori@jp.ey.com
Mobile: +81 (70) 3549-0967
Email: mark.brandon@jp.ey.com
Mobile: +81 (80) 6414-8381
Email: mikihito.kuraya @jp.ey.com
Mobile: +81 (80) 2003-8582
Email: mitsunori.ota@jp.ey.com
Mobile: +81 (70) 8684-9217
Email: makiko.kawamura@jp.ey.com
Mobile: +81 (90) 2743-5793
Email: chieko.yonemura@jp.ey.com
Mobile: +81 (70) 3873-4870
Email: mari.murata@jp.ey.com
Mobile: +81 (90) 1200-9445
Email: ryuta.tosaki @jp.ey.com
Mobile: +81 (70) 7539-0657
Email: tobias.lintvelt@jp.ey.com
International Tax and Transaction Services – Global Tax Desk Network
Richard Johnston,
Mobile: +81 (90) 6170-2472 United Kingdom
Email: richard.johnston@jp.ey.com
Rebecca Mckavanagh, Mobile: +81 (90) 4407-2893 United Kingdom
Email: rebecca.mckavanagh@jp.ey.com
Xiao Wu,
Mobile: +81 (90) 1283-3918 China Mainland
Shinjini H. Srivastava,
Email: xiao.wu2@jp.ey.com
Mobile: +81 (90) 3894-2007 India
Email: shinjini.srivastava@jp.ey.com
Raul Moreno,
Mobile: +81 (70) 4550-6154 Latin America
Joris van Huijstee,
Email: raul.moreno@jp.ey.com
Mobile: +81 (90) 4444-8245 Netherlands
Max Hata,
United States
Akira Oka,
Email: joris.van.huijstee@jp.ey.com
Mobile: +81 (70) 2276-7855
Email: max.hata@jp.ey.com
Mobile: +81 (80) 9026-3890 United States
Email: akira.oka@jp.ey.com
Dan Matsuda
A. At a glance
Mobile: +81 (90) 9266-4508
Email: dan.matsuda@jp.ey.com
(a) Local income taxes (see Section D) are also imposed. The resulting effective corporate income tax rate is approximately 31% (35% for corporations with stated capital of JPY100 million or less).
(b) Except for the withholding taxes on royalties and certain interest (see footnote [d] below), these withholding taxes are imposed on both residents and nonresidents. For nonresidents, these are final taxes, unless the income is effectively connected with a permanent establishment in Japan. Royalties paid to residents are not subject to withholding tax.
(c) Under the special law to secure funds for reconstruction related to the 11 March 2011 disasters, a special additional income tax (2.1% of the normal withholding tax due) is imposed for a 25-year period running from 1 January 2013 through 31 December 2037. As a result, the 20% withholding tax rate is increased to 20.42%, and the 15% rate is increased to 15.315%. However, this special additional income tax does not affect reduced withholding taxes under existing income tax treaties.
(d) Interest paid to residents on bonds, debentures or bank deposits is subject to a 20% withholding tax, which consists of a national tax of 15% and a local tax of 5%. Other interest paid to residents is not subject to a withholding tax. Interest paid to nonresidents on bonds, debentures or bank deposits is subject to a 15% withholding tax. Interest paid to nonresidents on national and local government bonds under the Book-Entry Transfer System is exempt from withholding tax if certain requirements are met.
(e) The loss carryback is temporarily suspended (see Section C).
B. Taxes on corporate income and gains
Corporate tax. Japanese domestic companies are subject to tax on their worldwide income, but nonresident companies pay taxes only on Japanese-source income. A domestic corporation is a corporation that is incorporated or has its head office in Japan. Japan does not use the “central management and control” criteria for determining the residence of a company.
Rates of corporate tax. The basic rate of national corporation tax is 23.2% for fiscal years beginning on or after 1 April 2018. For corporations with stated capital of JPY100 million or less, a tax rate of 15% applies to the first JPY8 million of taxable income. The tax rate of 15% applies for fiscal years beginning between 1 April 2012 and 31 March 2025.
Local income taxes, which are local inhabitant tax and enterprise tax, are also imposed on corporate income (see Section D). The resulting effective corporate income tax rate for companies subject to the 23.2% rate is approximately 35%. Under Business Scale Taxation (Gaikei Hyojun Kazei; see Section D), for certain corporations, the effective rate is reduced to approximately 31%.
incurred in the conduct of the business, except as otherwise provided by the law, are allowed as deductions from gross income.
Remuneration paid to directors cannot be deducted as an expense unless it is fixed compensation, remuneration determined and reported in advance or performance-based remuneration. The deductibility of entertainment expenses is restricted according to the size (capitalization) of the corporation (see Entertainment expenses). Deductions of donations, except for those to national or local governments or similar organizations, are limited.
Entertainment expenses. Entertainment expenses cannot be deducted from taxable income. However, all corporations (corporations with stated capital in excess of JPY10 billion are excluded) may deduct 50% of entertainment expenses related to meal and drink from taxable income for fiscal years beginning on or after 1 April 2014 until 31 March 2024. Small or medium-sized corporations can choose the 50% deduction or the fixed deduction of up to JPY8 million.
Inventories. A corporation may value inventory at cost under methods such as the following:
• Actual cost
• First-in, first-out (FIFO)
• Weighted average
• Moving average
• Most recent purchase
• Retail Alternatively, inventory may be valued at the lower of cost or market value. If a corporation fails to report the valuation method to the tax office, it is deemed to have adopted the most recent purchase price method.
Depreciation. The cost of tangible fixed assets, excluding land, may be recovered using statutory depreciation methods, such as straight-line or declining-balance. Depreciation rates are stipulated in the Japanese tax law, which provides a range of rates for each asset category based on the useful life. Depreciation for tax purposes may not exceed the amount of depreciation recorded for accounting purposes. Revised depreciation rates apply to assets acquired on or after 1 April 2007. In addition, statutory salvage value and limit of depreciation are abolished in conjunction with the introduction of the revised depreciation rates. The following are the ranges of the revised depreciation rates for the straight-line and declining-balance methods for selected asset categories.
In the year of acquisition of specified machinery or equipment, a corporation may take additional depreciation. A corporation has the option of taking such additional depreciation or claiming the investment tax credit (see Investment tax credit
In addition, tax credits relating to special open innovation R&D expenses (such as R&D expenses arising from joint research with special R&D institutions or universities) is available. The tax credit rate is 20%, 25% or 30% depending on the types of expenses. The maximum credit is 10% of corporation tax liability in the applicable fiscal year.
If a business company or a person specified by the Minister of Economy, Trade and Industry as a stock company or other similar entity that engages in certain specified business activities jointly with a certain startup company invests in a startup company that meets certain criteria through the acquisition of shares in the startup company between the period 1 April 2020 to 31 March 2024, that company is allowed to deduct 25% or less of the acquisition cost of the shares on the condition that it records that portion in its own special account. The amount invested must be at least JPY100 million (or at least JPY500 million in the case of investment in a foreign entity). There is a limit on the amount invested to which the incentive applies.
If a business company or person applies this tax incentive and later transfers the shares or fulfills certain other criteria (for example, receives dividends in the case of the dissolution of corporation that issues certain shares), an amount stipulated in relation to the corresponding criteria in the special account must be reversed and included in taxable income. However, this does not apply if the shares have been owned for a period of five years (three years in certain cases).
Tax credits for other investments in certain fields, such as job development and environmental operation, or specific facilities are also available for certain periods. Some of these credits apply to small or medium-sized corporations only.
A digital transformation investment promotion can be applied for companies that conduct digital transformation activities, such as cloud system implementations, which constitute digital capital investments to transform a business pursuant to a business plan approved by the national government. These companies can choose between a 30% special depreciation or a 3% tax credit (5% if sharing data with a non-group company) of the relevant acquisition costs. This is a temporary measure that is only applicable from 2 August 2021 to 31 March 2025. The maximum capital investment eligible for this tax incentive is JPY30 billion.
Companies that invest in facilities and equipment contributing to the reduction of greenhouse gas emissions pursuant to a business plan approved by the national government may choose between a 50% special depreciation or a tax credit of 5% (10% if certain requirements are fulfilled) of the relevant acquisition costs. This is a temporary measure that is only applicable from 2 August 2021 to 31 March 2024.
However, if this tax credit is used together with the tax credit offered by the digital transformation investment promotion tax incentive, the total tax credit is capped at 20% of corporate tax liability for a relevant fiscal year. The maximum facility or equipment investment amount eligible for this tax incentive is JPY50 billion.
Net operating losses. Net operating losses of certain corporations may be carried forward for 10 years (9 years for losses arising until 31 March 2018), and may be carried back 1 year. Except for certain small or medium-sized corporations, the deductible amount is limited to 50% of taxable income. The loss carryback is suspended for fiscal years ending from 1 April 1992 through 31 March 2024. However, this suspension does not apply to specified small or medium-sized corporations.
Groups of companies. Replacing the former consolidated taxation regime, a new group income and loss-sharing regime was introduced by the 2020 tax reform and is applicable to fiscal years beginning on or after 1 April 2022. The new regime maintains the basic framework of the former consolidated taxation regime (for example, applicability of the regime to a domestic parent corporation and its 100% domestic subsidiaries, the offsetting of profits and losses, and the election to apply the regime being subject to the approval of the National Tax Agency [NTA]) while also reflecting the consideration given to reducing the administrative workload of companies. The design of a new regime that is better aligned with the tax rules governing corporate reorganizations, in terms of market value taxation and the restriction on utilization of net operating losses on an initial tax consolidation or entry into an existing tax group, will reduce both the number of entities subject to market value taxation and the number of entities subject to the restriction on the utilization of net operating losses.
Corporate tax law also contains special taxation for intragroup transactions in 100% groups, under which certain gains and losses are tax deferred. This taxation is separate from the Consolidated Tax Return System or the new group income and loss-sharing regime.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax
Consumption tax; on a broad range of goods and services
Enterprise tax
Companies that are subject to Business Scale Taxation; Business Scale Taxation (Gaikei Hyojun Kazei) applies to companies with stated capital of more than JPY100 million; under Business Scale Taxation, a company is subject to tax on the basis of its added value, its capital amount and its taxable income
Companies that are not subject to Business Scale Taxation; rates
Special enterprise tax; a national tax, which is levied on companies that are subject to enterprise tax; imposed on local enterprise tax liability with respect to taxable income
to 7.48%
Nature of tax
Companies subject to business scale enterprise tax
not subject to business scale enterprise tax
Local inhabitant tax, which consists of an income levy and a capital levy
Income levy; computed as a percentage of national income tax; rate depends on the company’s capitalization and amount of national income tax
Capital levy; based on the company’s capitalization and number of employees; annual assessments vary depending on the cities and prefectures in which the company’s offices are located
JPY70,000 to JPY3,800,000
Local corporate tax; a national tax, imposed on standard corporate tax liability
Social insurance contributions, on monthly standard remuneration and bonuses
or
E. Miscellaneous matters
Foreign-exchange controls. The Bank of Japan controls inbound and outbound investments and transfers of money. Effective from 1 April 1998, the reporting requirements were simplified.
Transfer pricing. The transfer-pricing law stipulates that pricing between internationally affiliated entities should be determined at arm’s length. Entities are considered to be internationally affiliated entities if a direct or indirect relationship involving 50% or more ownership or substantial control exists. The law provides that the burden of proof as to the reasonableness of the pricing is passed to the taxpayer, and if the taxpayer fails to provide proof or to disclose pertinent information to the tax authorities, taxable income is increased at the discretion of the tax authorities. The 2011 revision of the law eliminated the hierarchy-based selection of transfer-pricing methods and allows the selection of the most appropriate transfer-pricing method in each specific case.
Under the 2019 tax reform, the discounted cash flow recognized under the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines was added as a new transfer-pricing methodology.
It is possible to apply for advance-pricing arrangements with the tax authorities. In cases in which a taxpayer has received a transferpricing assessment as a result of an examination, a taxpayer applying for a Mutual Agreement Procedure between Japan and the relevant treaty partner country may be granted a grace period for the payment of taxes due by assessment, including penalty taxes.
If the tax liability ratio of a foreign related company’s fiscal year is 20% or more, the foreign related company is exempt from the application of partial income inclusion. The materiality threshold related to partial income inclusion is JPY20 million or less; that is, the foreign related company is exempt if its partial income inclusion is JPY20 million or less.
Income inclusion on an entity-wide basis for certain foreign related companies. Paper companies, cashbox companies and prohibited list territory companies are subject to income inclusion on an entity-wide basis. If the tax liability ratio of a foreign related company mentioned above is 30% (27% or more for fiscal years beginning on or after 1 April 2024) or more for the fiscal year, the company is exempt from the application of income inclusion on an entity-wide basis.
Dividends distributed by a foreign related company cannot generally be excluded from the income inclusion added back to the Japanese parent company’s taxable income. However, the following dividends received by a foreign related company can be excluded from the apportionment to the Japanese parent company’s income:
• Dividends from a foreign subsidiary in which the foreign related company has held 25% or more of the total issued shares or the total voting shares for a period of at least six months. The equity ratio requirement relating to dividends excluded from the inclusion amount is 10% or more for dividends received from foreign subsidiaries whose primary business is the extraction of crude oil, oil gas, combustible natural gas or coal (collectively, fossil fuels), including businesses closely related to such extracted fossil fuels, and that possess an extraction site in a jurisdiction that has entered into a tax treaty with Japan.
• Dividends that have already been added to the Japanese parent company’s taxable income as another foreign related company’s income under the foreign subsidiary income inclusion taxation rules
The 2019 tax reform clarifies that local tax laws of the foreign related companies, such as those relating to tax consolidation and distributive share of partnership income, are disregarded in determining the tax liability ratio test, income inclusion or indirect foreign tax credit with respect to foreign related companies.
Debt-to-equity rules. Thin-capitalization rules limit the deduction for interest expense for companies with foreign related-party debt if the debt-to-equity ratio exceeds 3:1.
Earnings-stripping rules. Earnings-stripping rules limit the deductibility of interest paid by corporations to foreign related persons. These rules apply to domestic-source income generated by foreign entities. Net interest paid to foreign related persons by a corporation in excess of 20% of its adjusted taxable income is disallowed as a tax deduction. Interest deductions disallowed under this provision are carried forward for up to seven years. If earnings-stripping rules and thin-capitalization rules both apply, the rule that results in a larger disallowance is applied.
Global minimum tax. Income inclusion rule will be introduced for fiscal years beginning on or after 1 April 2024. For more details,
please see the BEPS 2.0 – Pillar Two Developments Tracker (https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/ tax/tax-pdfs/ey-beps-2-0-pillar-two-developments-tracker.pdf).
F. Treaty withholding tax rates
For treaty jurisdictions, the rates reflect the lower of the treaty rate and the rate under domestic tax laws on outbound payments.
(a)
(ff)
(a)
(ee)
(l)
(a)
(ii)
(gg)
(c)
(pp)
(jj)
(c)
(yy) 2/10 (r)
0/5 (qq) 0/5 (rr)
Czechoslovakia (n) 10/15 (a) 0/10 (c) 0/10 (i)
(u)
(d)
(l)
(nn)
10/15 (a)
(a)
(a)
5/10 (ss)
(c)
(c)
(c)
(i)
(rr) 2/10 (tt)
5/15 (a) 0/10 (c) 5 (w) Korea (South) 5/15 (a)
5/10 (l)
0/10 (ll)
(c)
(c)
(ll)
0/10 (ll) 0/10 (ll)
5/15 (a) 0/10 (c)
5/15 (a) 0/10 (c)
Mexico 0/5/15 (o) 0/10/15 (c)(p)
Morocco 5/10 (xx) 0/10 (rr) 5/10 (r) Netherlands 0/5/10 (y) 0/10 (z) 0 (aa) New
0/15 (x) 0/10 (c)
5/15 (a) 0/10 (c)
5/10 (l) 0/10 (c)
5/7.5/10 (v) 0/10 (c)
(c)
Philippines 10/15 (l) 0/10 (c) 10/15 (g) Poland
0/10 (c) 0/10 (i)
and Saudi Arabia, or the total shares) of the distributing corporation during the six-month (Saudi Arabia, 183-day, Portugal, 12-month) period ending on the date on which entitlement to the dividends is determined (Philippines, the day immediately preceding the date of payment of the dividends).
(m) Dividends are exempt from withholding tax if the beneficial owner of the dividends owns directly at least 80% of the voting shares of the company paying the dividends for a period of 12 months ending on the date on which entitlement to the dividends is determined and if certain other conditions are met. The 5% rate applies to dividends paid to a company owning directly at least 10% of the voting shares of the payer. The 10% rate applies to other dividends.
(n) The Czechoslovakia treaty applies to the Czech and Slovak Republics.
(o) The 5% rate applies if the recipient of the dividends is a corporation owning at least 25% of the payer during the 6-month period immediately before the end of the accounting period for which the distribution of profits takes place. The 0% rate applies if the recipient of the dividends is a “specified parent company,” as defined in the treaty. The 15% rate applies to other dividends.
(p) The general rate is 15%. The 10% rate applies to certain types of interest payments such as interest paid to or by banks.
(q) Loan interest paid to nonresidents is subject to a 20% withholding tax. Interest paid to nonresidents on bonds, debentures or bank deposits is subject to a 15% withholding tax.
(r) The withholding rate for the use of, or the right to use, industrial, commercial or scientific equipment is 5% (Colombia, 2%). A 10% rate applies to other royalties.
(s) The 15% rate applies if the dividends are paid by a company engaged in an industrial undertaking to a company owning at least 25% of the payer of the dividends. The 20% rate applies to other dividends.
(t) Dividends are exempt from withholding tax if the company receiving the dividends owns at least 10% of the voting shares of the payer (if paid by a company of Switzerland, capital or voting power of the payer) for the sixmonth period (Switzerland, 365-day period) ending on the date on which entitlement to the dividends is determined and if certain other conditions are met. The 10% rate applies in other cases.
(u) The 0% rate applies if the beneficial owner of the dividends owns directly at least 15%, or owns at least 25% (regardless of whether ownership is direct or indirect), of the voting shares of the payer of the dividends for the sixmonth period ending on the date on which the entitlement to dividends is determined and if certain other conditions are met. The 5% rate applies to dividends paid to a company owning directly or indirectly at least 10% of the voting shares of the payer for the six-month period ending on the date on which the entitlement to dividends is determined. The 10% rate applies to other dividends.
(v) The 5% rate applies if the beneficial owner of dividends owns directly or indirectly at least 50% of the voting shares of the payer of the dividends for the 6-month period ending on the date on which the entitlement to dividends is determined. The 7.5% rate applies to dividends paid to a company owning directly or indirectly at least 25% of the voting shares of the payer for the 6-month period ending on the date on which the entitlement to dividends is determined. The 10% rate applies to other dividends.
(w) The withholding tax rate on royalties is 10% under the treaty. However, the reduced rate of 5% provided in the protocol dated 19 December 2008 applies.
(x) Dividends are exempt from withholding tax if the company receiving the dividends owns at least 10% of the voting shares of the payer for the sixmonth period ending on the date on which entitlement to the dividends is determined and if certain other conditions are met.
(y) Dividends are exempt from withholding tax if the company receiving the dividends owns at least 50% of the voting shares of the payer for the sixmonth period ending on the date on which entitlement to the dividends is determined and if certain other conditions are met. The 5% rate applies to dividends paid to a company owning at least 10% of the voting shares of the payer for the six-month period ending on the date on which entitlement to the dividends is determined. The 10% rate applies to other dividends.
(z) Interest paid to a contracting state, subdivision or certain financial institutions is exempt. The 10% rate applies to other interest payments.
(aa) Royalties are exempt from withholding tax if certain conditions are met.
(bb) Interest is exempt from withholding tax if certain conditions are met.
(cc) Interest paid to a contracting state or subdivision is exempt. A 5% rate applies to interest paid to banks. The 10% rate applies to other interest payments.
(dd) Interest is exempt from withholding tax if certain conditions are met.
(ee) Dividends are exempt from withholding tax if the company receiving the dividends owns at least 10% of the voting shares of the payer for the sixmonth period ending on the date on which entitlement to the dividends is determined or if the beneficial owner of the dividends is a pension fund. A 10% rate applies to other dividends.
(ff) Dividends are exempt from withholding tax if the company receiving the dividends owns directly or indirectly at least 10% of the voting shares of the payer for the six-month period ending on the date on which entitlement to the dividends is determined or if the beneficial owner of the dividends is a pension fund.
(gg) Dividends are exempt from withholding tax if the beneficial owner of the dividends is a pension fund. A 5% rate applies to dividends paid to a company owning directly at least 15% of the voting shares (Colombia, 20%) of the payer for a 365-day period (Colombia, six-month period) ending on the date on which entitlement to the dividends is determined. Except for Colombia, a 15% rate applies to dividends on shares of companies that derive at least 50% of their value directly or indirectly from immovable property. A 10% rate applies to other dividends.
(hh) Dividends are exempt from withholding tax if any of the following circumstances exist:
• The company receiving the dividends owns directly at least 10% of the voting shares of the payer for a six-month period if the payer is a resident of Japan.
• The company receiving the dividends owns 10% of the capital of the payer for a six-month period if the payer is a resident of Denmark.
• The beneficial owner of the dividends is a pension fund. A 15% rate applies to other dividends.
(ii) Dividends are exempt from withholding tax if the beneficial owner of the dividends is a pension fund and if such dividends are not derived from the carrying on of a business by such pension fund. A 5% rate applies to dividends paid to a company owning at least 25% of the voting shares of the payer for the six-month period ending on the date on which entitlement to the dividends is determined. A 15% rate applies to other dividends. The above provisions do not limit the application of the additional tax payable in Chile.
(jj) A 4% withholding tax rate applies to interest paid to banks and certain other recipients. A 10% rate applies to other interest payments.
(kk) Royalties for the use of, or the right to use, industrial, commercial or scientific equipment are subject to withholding tax at a rate of 2%. A 10% rate applies to other royalties.
(ll) Dividends and interest payments (excluding interest payment linked to performance) are exempt from withholding tax if the beneficial owner is a person other than an individual. A 10% rate applies to other dividend and interest payments.
(mm) Dividends are exempt from withholding tax if the company receiving the dividends owns directly or indirectly at least 10% of voting shares of the payer for the six-month period ending on the date on which entitlement to the dividends is determined. A 10% rate applies to other dividends. Interest paid to a contracting state, subdivision or certain financial institutions is exempt from withholding tax. A 10% rate applies to other interest payments.
(nn) Dividends are exempt from withholding tax if the company receiving the dividends owns at least 25% of the voting shares of the payer for the sixmonth period ending on the date on which entitlement to the dividends is determined or if the beneficial owner of the dividends is a pension fund. A 5% rate applies to dividends paid to a company owning at least 10% of the voting shares of the payer for the six-month period ending on the date on which entitlement to the dividends is determined. A 15% rate applies to other dividends.
(oo) Dividends are exempt from withholding tax if the company receiving the dividends owns at least 10% of the voting shares of the payer for the 12month period ending on the date on which entitlement to the dividends is determined or if the beneficial owner of the dividends is a pension fund. A 5% rate applies to other dividends.
(pp) Interest is exempt from withholding tax if certain conditions are met. A 10% rate applies to other interest payments.
(qq) Dividends are exempt from withholding tax if the company receiving the dividends owns at least 25% (Switzerland, 10%) of the voting shares of the payer for the 365-day period ending on the date on which entitlement to