Taxation in Japan 201410

Taxation
in Japan 2014
KPMG TAX CORPORATION

Taxation in Japan Preface
This booklet is intended to provide a general overview of the taxation

system in Japan. The contents reflect the information available up to
1 September 2014.
While the information contained in this booklet may assist in gaining a

better understanding of the tax system in Japan, it is recommended
that specific 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 the contact details shown below.
KPMG Tax Corporation

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 Nakanoshima Building 15F, 2-2-2 Nakanoshima, Kita-ku,

Osaka 530-0005, Japan
Tel: +81 (6) 4708 5150 Fax: +81 (6) 4706 3881
Nagoya Lucent Tower 30F, 6-1 Ushijima-cho, Nishi-ku,

Nagoya 451-6030, Japan
Tel: +81 (52) 569 5420 Fax: +81 (52) 551 0580
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavor to provide
accurate and timely information, there can be no guarantee that such information is
accurate as of the date it is received 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

1.2.1 Residence ................................................................................ 1
1.2.2 Branch of a Foreign Company vs. Japanese Company ........... 1
1.2.3 Permanent Establishment (PE)................................................ 2
1.3 Tax Rates ......................................................................... 5

1.3.1 Corporation Tax ....................................................................... 5
1.3.2 Business Tax ........................................................................... 6
1.3.3 Prefectural and Municipal Inhabitant Taxes .......................... 10
1.3.4 Special Tax Due by Specified Family Company .................... 11
1.3.5 Effective Statutory Corporate Income Tax Rate.................... 13
1.4 Taxable Year of Companies ............................................ 14

1.5 Taxable Income .............................................................. 14
1.5.1 Japanese Companies ............................................................ 14
1.5.2 Foreign Companies having a PE in Japan ............................. 14
1.6 Capital Gains .................................................................. 16

1.6.1 Capital Gain Rollover Rules ................................................... 16
i
1.6.2 Special Rules for Land Acquired in 2009 and 2010 ............... 17
1.7 Treatment of Excess Tax Losses.................................... 18

1.7.1 Tax Losses Carry-forward...................................................... 18
1.7.2 Tax Losses Carry-back........................................................... 19
1.7.3 Change of Control ................................................................. 19
1.8 Deduction of Expenses .................................................. 20

1.8.1 Valuation of Inventories ......................................................... 20
1.8.2 Valuation of Marketable and Investment Securities.............. 21
1.8.3 Provision for Bad Debts ......................................................... 21
1.8.4 Bad Debt Expenses ............................................................... 23
1.8.5 Provision for Retirement Allowance ...................................... 24
1.8.6 Directors Compensation....................................................... 24
1.8.7 Stock Option Expenses ......................................................... 27
1.8.8 Devaluation Loss ................................................................... 27
1.8.9 Corporate Taxes, etc. ............................................................ 27
1.8.10 Donations/Contributions ........................................................ 28
1.8.11 Entertainment Expenses ....................................................... 29
1.8.12 Interest Thin Capitalization Rules/Earnings Stripping
Rules...................................................................................... 30
1.8.13 Translation into Japanese Currency (Yen) of
Assets/Liabilities in Foreign Currencies ................................ 30
1.8.14 Management Service Fees ................................................... 31
1.8.15 Allocation of Head Office Expenses ...................................... 32
1.9 Tax Depreciation............................................................. 33

1.9.1 Fixed Assets and Depreciation .............................................. 33
1.9.2 Deferred Charges .................................................................. 39
ii
1.10 Revenue to be excluded from Taxable Income ............... 40
1.10.1 Dividends Received from Japanese Companies ................... 40
1.10.2 Revaluation Gain on Assets................................................... 40
1.10.3 Refunds of Corporate Tax, etc. ............................................. 40
1.11 Tax Credits ..................................................................... 41

1.11.1 Withholding Income Tax Credits ........................................... 41
1.11.2 Foreign Tax Credits ............................................................... 42
1.11.3 Tax Credits for Research and Development (R&D)
Expenditure ........................................................................... 42
1.11.4 Tax Credits for Job Creation .................................................. 44
1.11.5 Tax Credits for Salary Growth ............................................... 45
1.11.6 Tax Incentives for Investment in Production Facilities .......... 46
1.11.7 Tax Incentives for Investment in Productivity
Improvement Facilities .......................................................... 47
1.12 Administrative Overview ................................................ 48

1.12.1 Tax Returns and Tax Payment............................................... 48
1.12.2 Tax Audits and the Statute of Limitation ............................... 49
1.13 Group Taxation Regime .................................................. 50

1.13.1 100 Percent Group ................................................................ 50
1.13.2 Dividends Received Deduction (DRD) ................................... 51
1.13.3 Deferral of Capital Gains/Losses ........................................... 52
1.13.4 Donations .............................................................................. 54
1.13.5 Tax Qualified Dividends-in-Kind ............................................. 55
1.13.6 Non-Recognition of Capital Gains/Losses from Transfers
of Shares to the Share Issuing Company .............................. 56
1.13.7 Valuation Losses of Liquidating Companies/Merged
Companies............................................................................. 57
iii
1.14 Tax Consolidation ........................................................... 57
1.14.1 Tax Consolidated Group ........................................................ 57
1.14.2 Tax Consolidation Rules ........................................................ 58
1.15 Corporate Reorganizations ............................................. 60

1.15.1 Tax Qualified Reorganizations vs. Non Tax Qualified
Reorganizations ..................................................................... 60
1.15.2 Pre-Reorganization Losses .................................................... 64
1.15.3 Taxation of Shareholders ....................................................... 66
2 Taxation of Partnerships ................................................. 68

2.1 NK-type Partnerships ...................................................... 68
2.1.1 Definition of NK-type Partnerships ........................................ 68
2.1.2 Taxation of Partners .............................................................. 69
2.2 Tokumei Kumiai .............................................................. 71

2.2.1 Tokumei Kumiai (TK) .............................................................. 71
2.2.2 Taxation of the Operator ....................................................... 71
2.2.3 Taxation of Silent Partners .................................................... 72
2.3 Limitation on Utilization of Losses Derived from

Partnerships ................................................................... 73
2.3.1 Corporate Partners of Partnerships other than Japanese
LLP - At-Risk Rule (AR rule) ................................................... 73
2.3.2 Individual Partners of Partnerships other than Japanese
LLP ........................................................................................ 74
2.3.3 Corporate Partners of Japanese LLP .................................... 75
2.3.4 Individual Partners of Japanese LLP ..................................... 75
3 Taxation of Individuals .................................................... 76
iv
3.1 Introduction .................................................................... 76
3.2 Taxpayers ....................................................................... 76

3.2.1 Classification of Individual Taxpayers .................................... 76
3.2.2 Domicile................................................................................. 77
3.2.3 Short-Term Visitors ................................................................ 78
3.3 Tax Rates ....................................................................... 78

3.3.1 Tax Rates on Ordinary Income .............................................. 78
3.3.2 Tax Rates on Capital Gains from Sales of Real Estate .......... 79
3.3.3 Tax Rates on Investment Income until 2015 ........................ 80
3.3.4 Tax Rates on Investment Income from 2016........................ 82
3.3.5 Withholding Tax Rates on Investment Income ..................... 84
3.3.6 Tax Rates Imposed on Non-Residents .................................. 85
3.3.7 Special Reconstruction Income Tax ...................................... 85
3.4 Assessable Income ........................................................ 85

3.4.1 Remuneration ........................................................................ 86
3.4.2 Treatment of Benefits ........................................................... 87
3.4.3 Exemptions and Concessions ............................................... 90
3.5 Allowable Deductions ..................................................... 91

3.5.1 Standard Deductions ............................................................. 91
3.5.2 Specific Deductions ............................................................... 93
3.6 Personal Reliefs.............................................................. 96

3.7 Tax Credits ..................................................................... 97
3.7.1 Credit for Dividends ............................................................... 97
3.7.2 Credit for Withholding Income Tax ....................................... 98
3.7.3 Credit for Foreign Taxes ........................................................ 98
v
3.7.4 Credit for Donations .............................................................. 99
3.8 Remuneration Paid Outside Japan ............................... 101

3.9 Filing Tax Returns and Tax Payments ........................... 102
3.9.1 National Income Taxes ........................................................ 102
3.9.2 Inhabitant Taxes .................................................................. 103
3.10 Employers Obligations................................................. 103

3.10.1 National Income Taxes ........................................................ 103
3.10.2 Inhabitant Tax ...................................................................... 105
4 International Tax ........................................................... 106

4.1 Foreign Dividend Exclusion .......................................... 106
4.1.1 Outline ................................................................................. 106
4.1.2 Foreign Subsidiary ............................................................... 106
4.2 Foreign Tax Credits ...................................................... 107

4.2.1 Basic Rules .......................................................................... 107
4.2.2 Creditable Limit ................................................................... 108
4.2.3 Carry-Forward Systems ....................................................... 109
4.2.4 Tax Sparing Credits ............................................................. 110
4.3 Transfer Pricing ............................................................ 110

4.3.1 Transactions subject to Transfer Pricing Legislation ........... 110
4.3.2 Related Overseas Companies ............................................. 110
4.3.3 Arms-Length Price .............................................................. 111
4.3.4 Submission of Information and Documents ........................ 112
4.3.5 Miscellaneous ..................................................................... 114
4.4 Thin-Capitalization Rules ............................................... 115
vi
4.4.1 Safe Harbor of Debt-Equity Ratio ........................................ 115
4.4.2 Definitions of Keywords ...................................................... 115
4.4.3 Amount to be Disallowed .................................................... 117
4.4.4 Miscellaneous ..................................................................... 118
4.5 Earnings Stripping Rules............................................... 119

4.5.1 Limitation on Deductions for Excessive Interest
Payments............................................................................. 119
4.5.2 Definitions of Keywords ...................................................... 119
4.5.3 De Minimis Rules ................................................................ 123
4.5.4 Deductions of Disallowed Interest Payments ..................... 124
4.5.5 Miscellaneous ..................................................................... 124
4.6 Anti-Tax Haven (CFC) Rules .......................................... 125

4.6.1 Outline of Aggregate Tax Rules .......................................... 125
4.6.2 Scope of Specified Foreign Subsidiary (SFS) ...................... 125
4.6.3 Scope of Taxpayers ............................................................. 127
4.6.4 Taxable Income under Aggregate Tax Rule on an Entity
Basis .................................................................................... 127
4.6.5 Exception Conditions ........................................................... 127
4.6.6 Exception Conditions for Regional Headquarters
Companies........................................................................... 129
4.6.7 Scope of Passive Income .................................................... 131
4.6.8 Foreign Tax Credits for Foreign Taxes on Aggregate
Income................................................................................. 132
4.6.9 Tax Treatment of Dividends Received by a Japanese
Company ............................................................................. 132
4.7 Corporate Inversion ...................................................... 134
vii
4.8 Taxation of Foreign Companies and Individuals / Tax
Treaties ........................................................................ 134
4.8.1 Tax Treaties ......................................................................... 135
4.8.2 Dividends, Interest and Royalties ........................................ 138
4.8.3 Real Estate .......................................................................... 141
4.8.4 Shares in a Real Estate Holding Company .......................... 141
4.8.5 Shares in a Japanese Company .......................................... 144
5 Indirect Tax................................................................... 148

5.1 Consumption Tax ......................................................... 148
5.1.1 Taxable Transactions ........................................................... 148
5.1.2 Export Transactions ............................................................. 149
5.1.3 Taxpayers Required to File a Consumption Tax Return ...... 149
5.1.4 Taxpayers as an Importer .................................................... 152
5.1.5 Taxable Base ....................................................................... 152
5.1.6 Tax Rate............................................................................... 152
5.1.7 Computation of Consumption Tax to be Paid ..................... 153
5.1.8 Simplified Calculation Method............................................. 155
5.1.9 Taxable Period ..................................................................... 156
5.1.10 Tax Returns and Tax Payments ........................................... 156
5.2 Customs Duty .............................................................. 157

5.3 Excise Duty .................................................................. 157
6 Other Taxes and Surcharges ........................................ 158

6.1 Social Security and Payroll Taxes .................................. 158
6.2 Stamp Duty .................................................................. 159
viii
6.3 Fixed Assets Tax and City Planning Tax........................ 159
6.4 Business Occupancy Tax.............................................. 159

6.4.1 Taxpayer .............................................................................. 160
6.4.2 Taxable Basis and Tax Rate ................................................. 160
6.4.3 Method of Collection of Business Occupancy Tax ............. 160
6.5 Registration and Real Property Acquisition Tax ............ 160

6.6 Inheritance and Gift Taxes ............................................ 162
ix
1 Taxation of Companies
1.1 Introduction
Japanese corporate income taxes consist of:
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

held companies known as Specified Family Companies can be
subject to additional taxation on undistributed retained earnings.
Furthermore, a special reconstruction corporation tax is imposed for

fiscal years beginning between April 2012 and March 2014 for
reconstruction funding after the 11 March 2011 earthquake.
1.2 Tax Status of Companies
1.2.1 Residence
In determining the residency of a company for tax purposes, Japan

utilizes 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.
1.2.2 Branch of a Foreign Company vs. Japanese

Company
Generally, there is no material difference between a branch of a

foreign company and a Japanese company when computing taxable
1
income. Tax deductible provisions and reserves, the limitation of
certain allowable expenses such as entertainment expenses and
donations, and the corporate income tax rates are the same for both
a branch and a Japanese company.
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): not applied to a branch of a foreign company
Tax Consolidation (discussed in 1.14): not applied to a branch of
a foreign company
Foreign Dividend Exclusion (discussed in 4.1): not applied to a
branch of a foreign company
Foreign Tax Credits (discussed in 4.2): not applied to a branch of
a foreign company for fiscal years beginning before 31 March
2016(*)
Thin-Capitalization Rules (discussed in 4.4): not applied to a
branch of a foreign company for fiscal years beginning on or after
1 April 2016(*)
Anti-Tax Haven (CFC) Rules (discussed in 4.6): not applied to a
branch of a foreign company
(*)
The tax treatment of a branch of a foreign company was
amended under the 2014 tax reform. The amendments will be
applied to a branch for its fiscal years beginning on or after 1
April 2016. See 1.5.2 (taxable income), 4.2 (foreign tax credits)
and 4.4 (thin-capitalization rules) for more details.
1.2.3 Permanent Establishment (PE)
Even where a foreign company has not established a registered

branch in Japan it can be treated as having a de facto branch, or PE,
in Japan in certain circumstances. The Japanese Corporation Tax
Law provides the following definition of a PE for Japanese tax
purposes:
2
(1) Fixed Place PE
Branch, factory or other fixed place of business in Japan including

the following facilities:
a branch, sub-branch, a place of business or office, factory or

warehouse (where operating a warehouse is the main business)
a mine, quarry or other place of extracting natural resources
any other fixed place of business which is similar in nature
However, the following exemptions from treatment as a PE exist:
a fixed place of business solely for the purpose of purchasing

goods or merchandise for the foreign company
a fixed place of business solely for the purpose of storage of
goods or merchandise for the foreign company
a fixed place of business solely for the purpose of advertising,
promotion, supply of information, market surveys, basic research
or other activities having an auxiliary function in carrying on the
business of the foreign company
(2) Construction PE
Construction, installation or assembly projects or similar activities or

services in the supervising or superintending of such projects or
activities in Japan, which a foreign company carries on for a period
of over 1 year
(3) Agent PE
A person who has an authority to conclude contracts in Japan for or

on behalf of the foreign company, including the following:
contract concluding agent (a person having and habitually

exercising an authority to conclude contracts in Japan for or on
behalf of the foreign company, unless the activities of such
person are limited exclusively to the purchase of goods or
merchandise)
3
order-fulfilling agent (a person habitually maintaining in Japan a
stock of goods or merchandise from which it regularly fills orders
and delivers goods or merchandise on behalf of the foreign
company)
order-securing agent (a person habitually securing orders,

negotiating or performing other important activities in Japan for
concluding contracts, exclusively or almost exclusively, for or on
behalf of the foreign company)
An agent of independent status is excluded from the definition of an

agent that constitutes a PE.
***
If the country of residence of a foreign company has concluded a
tax treaty with Japan, the definition of a PE in the treaty generally
overrides that under Japanese domestic tax laws. In the typical PE
provision of tax treaties with Japan, neither an order-fulfilling agent
nor an order-securing agent is explicitly described.
4
1.3 Tax Rates
1.3.1 Corporation Tax
The corporation tax is imposed on taxable income of a company at

the following tax rates:
Other than small and

Small and medium-
Tax base medium-sized
sized companies(1)
companies
Taxable income up
19%
to JPY8 million
(15%(2))
in a year
25.5%
Taxable income
in excess of 25.5%
JPY8 million
(1)
A small and medium-sized company is a company whose paid-in
capital 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 sized company (a company
whose paid-in capital is JPY500 million or more).
where 100 percent of the shares of the company are directly
or indirectly held by two or more large sized companies in a
100 Percent Group defined in 1.13.1.
(2)
15 percent is applied to fiscal years beginning between 1 April
2012 and 31 March 2015.
Note that a 10-percent special reconstruction corporation tax is

imposed on the corporation tax liability (before taking
income/foreign tax credits, etc.) generally for fiscal years beginning
in the period from 1 April 2012 to 31 March 2014 for reconstruction
funding after the 11 March 2011 earthquake.
5
1.3.2 Business Tax
Business tax is basically imposed on taxable income of a company.

However, if the amount of capital is over JPY100 million, size-based
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 income/adjusted gross revenue is

collected as special 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.
The tax rates will be amended for fiscal years beginning on or
after 1 October 2014.
Both business tax and special local corporation tax are tax
deductible expenses when tax returns for such taxes are filed.
Specific rates applied are determined by the local tax jurisdiction.
(1) Companies with Paid in Capital in excess of JPY100 million

(other than companies indicated in (3))
Business tax levied on income
[For fiscal years beginning before 1 October 2014]
Business tax Special local

(Income component) corporation tax
Taxable base
(taxable income) Tax Tax
Taxable base
rate rate
In excess of Up to
- JPY4 million 1.5% Taxable income
JPY4 million JPY8 million 2.2% x Standard rate of 148%
JPY8 million - 2.9% Business Tax
6
Only the highest rate is applicable where a company has offices in
at least three different prefectures and capital of at least JPY10
million.
[For fiscal years beginning on or after 1 October 2014]

Taxable base
Taxable base
rate rate
In excess of Up to
JPY4 million JPY8 million 3.2% x Standard rate of 67.4%

million.
Size-based business tax
Standard Max.
Tax base
rate rate
Labour costs
Added +) Net interest payment
value +) Net rent payment 0.48% 0.576%
component +) Income/loss for current
year
Capital Capital plus capital surplus for
0.2% 0.24%
component tax purposes
7
(2) Companies with Paid in Capital of JPY100 million or less
(other than companies indicated in (3))
Business tax levied on income

Taxable base
Taxable base
rate rate
In excess of Up to
JPY4 million JPY8 million 4% x Standard rate of 81%

million.

Taxable base
Taxable base
rate rate
In excess of Up to
JPY4 million JPY8 million 5.1% x Standard rate of 43.2%

million.
8
Size-based business tax
Not applicable.
(3) Companies Conducting Electricity/Gas Supply Business or

Insurance Business
Business tax levied on revenue

(Revenue component) corporation tax
Tax Tax
Taxable base Taxable base
rate rate
Adjusted gross revenue
Adjusted gross revenue 0.7% x Standard rate of 81%
Business Tax

(Revenue component) corporation tax
Tax Tax
Taxable base Taxable base
rate rate
Adjusted gross revenue
Adjusted gross revenue 0.9% x Standard rate of 43.2%
Business Tax
Size-based Business Tax
Not applicable.
9
1.3.3 Prefectural and Municipal Inhabitant Taxes
Prefectural and municipal taxes consist of two elements; (1) an

income tax calculated based on national corporation tax and (2) a
per-capita tax. Specific rates applied are determined by the local tax
jurisdiction.
(1) Inhabitant Tax Levied on Corporation Tax
Part of inhabitant tax levied on corporation tax will be collected as

newly introduced local corporation tax by the national government,
which will be allocated to local governments in order to decrease
the gap in tax revenue between urban and rural areas for fiscal
years beginning on or after 1 October 2014.
Inhabitant tax Local corporation tax

Taxable base Tax rate Taxable base Tax rate
Standard rate
17.3%
Prefectural:
5.0%
Municipal:
Corporation tax 12.3%

(National tax) Maximum rate
20.7%
Prefectural:
6.0%
Municipal:
14.7%
10
Inhabitant Tax Local corporation tax

Taxable base Tax rate Taxable base Tax rate
Standard rate
12.9%
Prefectural:
3.2%
Municipal:
Corporation tax 9.7% Corporation tax
4.4%
(National tax) Maximum rate (National tax)
16.3%
Prefectural:
4.2%
Municipal:
12.1%
(2) Per-Capita Tax
Per-capita prefectural tax is levied according to a published scale

which varies based upon the paid-in capital amount of the company.
Per-capita municipal tax is similarly levied according to a published
scale which varies based upon the paid-in capital amount of the
company and the number of the companys employees within the
municipality.
1.3.4 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 is still 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-
sized company as defined in 1.3.1.
11
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 of another company, the company is treated as controlled by
the shareholder and its related persons. Related persons are (i) the
shareholders family relatives, (ii) a company controlled by the
shareholder 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 an fiscal year are the excess of
undistributed profits over the largest of the following three
amounts:
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 paid-in capital less the accumulated retained
earnings at the end of the fiscal year not including the earnings
for that fiscal year
The additional corporation tax is computed at the following rates per

year:
Excess retained earnings Tax rate

Up to JPY30 million 10%
Excess over JPY30 million and
15%
up to JPY100 million
Excess over JPY100 million 20%
Inhabitant tax is also payable on the above corporation tax.
12
1.3.5 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
and per-capita liabilities on prefectural and municipal taxes, effective
statutory tax rates will vary from taxpayer to taxpayer. In addition,
the effective statutory tax rate for companies with paid-in capital in
excess of JPY100 million is, following the introduction of size-based
business tax, 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 applicable to a company
whose paid-in capital is over JPY100 million will be as follows:
Fiscal years beginning

in the period in the period
from 1 April from 1 April on or after 1
2012 to 31 2014 to 30 October 2014
March 2014 September 2014
Corporation tax 25.5% 25. 5% 25. 5%
Special
2.55%
reconstruction - -
(25.5% x 10%)
corporation tax
Business tax(1) 3.26% 3.26% 4.66%
Special local 4.292% 4.292% 2.8982%
corporation tax (2.9% x 148%) (2.9% x 148%) (4.3% x 67.4%)
Prefectural and 5.2785% 5.2785% 4.1565%
municipal tax (25.5% x 20.7%) (25.5% x 20.7%) (25.5% x 16.3%)
Local 1.122%
corporation tax - - (25.5% x 4.4%)
Total 40.8805% 38.3305% 38.3367%
Effective tax
38.01% 35.64% 35.64%
rate(2)
13
(1)
In addition, such a company is subject to size-based business tax
which increases the overall effective statutory tax rate.
(2)
The effective tax rate is calculated after taking into account the
tax deductible nature of business tax and special local
corporation tax payments.
1.4 Taxable Year of Companies
The taxable year of a company is in line with the companys

accounting period (i.e. fiscal year). A taxable year can not exceed 12
months in duration but can be less than 12 months.
1.5 Taxable Income
1.5.1 Japanese Companies
Taxable income represents the net of gross revenue less costs,

expenses and losses, in general, on an accruals basis in accordance
with fair accounting standards and as adjusted in accordance with
the requirements of the tax laws.
Generally speaking, a Japanese company is subject to Japanese

income tax on its worldwide income. In order to eliminate double
taxation on income, the foreign taxes levied on a Japanese
company may be credited against Japanese corporation tax and
local inhabitant tax. Note that dividends received from Foreign
Subsidiaries are exempt in calculation of a Japanese companys
taxable income under the foreign dividend exclusion (FDE) system
as discussed in 4.1.
1.5.2 Foreign Companies having a PE in Japan
(1) Before the 2014 Tax Reform
A foreign company operating in Japan through a branch or any other

type of permanent establishment (PE) is liable for corporate income
taxes on the entire income from sources within Japan under the
14
domestic tax laws, whether or not such income is attributable to
the PE.
However, Japan has concluded tax treaties with a number of

foreign countries. Under the tax treaties, where industrial or
commercial activities are carried on through a PE maintained in
Japan by a company of such foreign countries, Japanese corporate
tax is imposed only on the business profits attributable to the PE.
Therefore, the foreign company is not liable for corporate income
taxes on industrial or commercial profits from sources in Japan
which are not attributable to its PE in Japan.
Profits/losses derived from internal dealings (i.e. transactions

between a PE and its head office (or other branches located outside
Japan)) are not recognized, except for internal interest for banks.
(2) After the 2014 Tax Reform
The international taxation principle in Japan was amended by virtue

of the 2014 tax reform and the amendments will be applied to a
foreign company for its fiscal years beginning on or after 1 April
2016.
Under the amended tax law, a foreign company operating in Japan

through a PE will be liable for corporate income taxes only on the
income attributable to the PE under the domestic tax laws. (Please
note that certain Japanese source income (e.g. capital gains from
sales of real estate located in Japan and shares in certain Japanese
companies) should still be subject to corporate income taxes even if
it is not attributable to the PE basically in the same way as for a
foreign company not having a PE.)
The new rules including the following will be applied in calculating

income attributable to a PE in line with the Authorized OECD
Approach (AOA)(1):
Income attributable to a PE will be the income that the PE would

have earned if it were a distinct and separate enterprise from its
head office.
15
Profits/losses derived from internal dealings will be recognized at
an arms length price. (Note that internal interest for non-financial
institutions and internal royalties on intangibles will not be
recognized if a tax treaty including a provision equivalent to the
pre-amended 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 will
not be 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
was amended 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.
1.6.1 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 of acquisition and type of new fixed assets
which must be met for this relief to apply.
16
government subsidies
insurance loss payments
exchange of properties
acquisition of replacement property which is located in specific
districts or falls under specific categories
1.6.2 Special Rules for Land Acquired in 2009 and 2010
In addition to the above, there are two special rules for land
acquired in 2009 and 2010, which were introduced in the 2009 tax
reform:
(1) Capital Gains Rollover Relief
This relief is applicable where a company acquires land in Japan in

2009 and 2010 and submits an appropriate application form by the
filing due date of the final tax return for the fiscal year in which the
acquisition occurred. If the company sells another piece of land
within 10 years after the end of the fiscal year of the acquisition of
the first piece of land acquired in 2009 and 2010, capital gains
rollover for the sale of the second piece of land will be available by
reducing the tax basis of the first piece of land. The maximum
amount of deferred capital gains is 80 percent of the capital gain (if
the first piece of land is acquired in 2010, 60 percent of the capital
gain). Note that this capital gains rollover can not be applicable to
capital gains on land held as inventory.
(2) Special Deduction for Long-Term Capital Gains
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 the selling year, a special deduction can be applicable. The
amount of the special deduction is the lower of JPY10 million or the
amount of the capital gain.
The above two special rules for land acquired in 2009 and 2010 also
apply to individual taxpayers (See 3.2.2).
17
1.7 Treatment of Excess Tax Losses
1.7.1 Tax Losses Carry-forward
Where a tax loss is realized in a given tax year, provided the

company has blue-form tax return filing status (see below), that loss
may be carried forward by the company for use in sheltering taxable
profits of a future tax year.
The maximum deductible amount of tax losses brought forward is

as set out below:
(A) (B)
Companies Small and medium-sized Companies other than
companies(1) /TMKs(2) (A)
Maximum Total amount of taxable
80% of taxable income
deductible income
for the fiscal year
amount for the fiscal year
(1)
A small and medium-sized company for the purpose of this rule
is the same as that defined in 1.3.1.
(2)
TMKs include tax qualifying Tokutei Mokuteki Kaisha (TMKs) and
Toushi Houjin (THs), etc.
Such losses can be utilized against profits for the 9 succeeding

years (7 succeeding years for tax losses incurred in fiscal years
ending before 1 April 2008). It should be noted that there is no
distinction between losses of a revenue 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 carry forward tax losses as explained above. The
conditions attached to obtaining blue-form status are not onerous,
however it is important that a timely application is made (i.e.
submission of an application by whichever is the earlier, either 3
months from the establishment of the company or the end of the
18
first fiscal year) to ensure tax losses are not extinguished.
1.7.2 Tax Losses Carry-back
The Japanese Corporation Tax Law also provides for a tax loss
carry-back system at the option of the taxpayer company. This tax
loss carry-back system, under which a company suffering a tax loss
can get a refund of the previous years corporation tax by offsetting
the loss against the income for the previous year, has been
suspended since 1 April 1992 except for certain limited
circumstances, including the following:
small and medium-sized companies defined in 1.3.1

fiscal years including the date of dissolution
fiscal years ending during liquidation procedures
1.7.3 Change of Control
When an ownership change occurs for a company which has tax

losses incurred in prior years or assets having built-in losses, if one
of certain specified events occurs within 5 years from the date of
the ownership change, utilization of the tax losses of the company
may be restricted.
An ownership change for the purpose of this rule occurs when a

new shareholder directly or indirectly acquires more than 50 percent
of the outstanding shares in a company except for acquisitions
through certain events such as a tax-qualified merger.
The specified events include the following:
(i) (a) When a company was a dormant company just before the
ownership change, (b) the company starts its business after the
ownership change.
(ii) (a) When a company ceased (or plans to cease) its business
carried on just before the ownership change after the ownership
change, (b) the company receives loans or capital contributions,
19
the amount of which exceeds five times the previous business
scale.
(iii) In the case of (i)(a) or (ii)(a), (b) the company is merged into
another company under a tax-qualified merger.
In the above cases, deduction of built-in losses of assets of the

company may be restricted as well.
1.8 Deduction of Expenses
1.8.1 Valuation of Inventories
The cost of inventories must include the entire actual cost of

acquisition of 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 the year-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

in accordance 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 discount method) or lower of cost or market value method.
The valuation method selected by the company must be applied

consistently. If a company wishes to change the current method, an
application for change of method must be submitted to the tax
office prior 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 a list thereof must be prepared (if not at the year-end, a
reconciliation between the physical inventory and the year-end
inventory will be required).
20
1.8.2 Valuation of Marketable and Investment Securities
The acquisition cost of securities is the total of the price paid and
incidental 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.
Valuation of securities at the end of each fiscal year must be made

in accordance with the following method(s):
Kind of securities Valuation methods

Securities held for trading
Mark-to-market valuation method
purposes
Cost method
Other securities
(weighted average or moving average)
The specific cost calculation basis can be determined by selection

to the tax authorities. Subsequent changes to the adopted basis
must be made in a similar manner as discussed under valuation of
inventories above. Note that amortization and accumulation is
required in respect of securities which are to be held to maturity.
1.8.3 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 account receivables, as

specifically identified under the tax law (up to the relevant limits
specified under the tax law)
(ii) General bad debt provision
A provision for potential bad debts among existing receivables
21
(other than those falling under (i) above) based upon the actual bad
debt ratio for the 3 preceding years
The amount of (ii) is calculated using the formula below:
Average amount of bad debts

Outstanding accounts for the prior 3 years
x
receivable at the year end
(other than those under (i)) Average outstanding accounts
receivables for prior 3 years
By virtue of the 2011 tax reform, provisions for bad debts are
allowable only for companies categorized into (A) or (B) below for
tax purposes for fiscal years beginning on or after 1 April 2012.
Moreover, for companies categorized into (B), provision for bad
debts for tax purposes is limited to only certain receivables.
(A) (B)
Small and medium- Certain companies
sized companies which hold certain
defined in 1.3.1 monetary claims
Companies
Banks, insurance (e.g. receivables
companies and incurred in finance
similar companies lease transactions)
Receivables subject Finance lease
Monetary claims
to the provision receivables, etc.
There is a 3-year transitional measure whereby the following

amounts should be allowed for companies categorized into (B) or
companies not categorized into (A) or (B):
Fiscal years commencing from 1 April 2012 to 31 March 2013:

Allowable limit before the 2011 tax reform x 3/4


22
For a small and medium-sized company defined in 1.3.1, as an
alternative to the formula above, standard allowable industry
specific percentages for bad debt ratios may be applied against the
companys outstanding accounts receivable. The standard
percentages are as shown below:
Industry sector Standard percentage

Wholesale and retail 1.0%
Manufacturing 0.8%
Finance and insurance 0.3%
Installment retailer 1.3%
Other 0.6%
1.8.4 Bad Debt Expenses
If the following facts have occurred, the following amounts are

treated as tax deductible bad debt expenses in the fiscal year the
facts arise:
Facts Bad debt expense amount

Approval of rehabilitation plans in
accordance with the Corporate The amount determined to be
Rehabilitation Law or the Civil written off
Rehabilitation Law
Approval of special liquidation
The amount determined to be
proceedings under the Company
written off
Law
Resolution at creditors meetings
or a contract between related The amount determined to be
parties by arrangement by written off
governments or banks
A notice issuance to a debtor
The amount declared to be
who has been insolvent for a
written off in the notice
certain period
23
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 can not pay off the receivable considering the financial
situation and insolvency of the debtor.
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 is later) or when expected costs to collect money
exceed the outstanding receivables, a company can write off the
receivables with a remaining balance of JPY1 in its accounting
books.
1.8.5 Provision for Retirement Allowance
A provision for retirement allowances used to be partially tax

allowable until 2001 but it is currently not tax allowable.
1.8.6 Directors Compensation
If compensation (excluding retirement/severance allowances and

stock option expenses discussed in 1.8.7 below) paid to company
directors (e.g. members of the board of directors, officers and
statutory auditors) falls under one of the following, the
compensation is allowable for corporate tax purposes:
(1) Fixed Amount Periodical Compensation
Fixed amount periodical compensation means compensation

which is regularly paid on a monthly/weekly/daily basis with a fixed
amount through 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:
24
(i) annual revision (revision made within 3 months (4 months for
insurance companies) from the beginning of the fiscal year)
(ii) extra-ordinary revision due to unavoidable reasons (e.g.
reorganization)
(iii) revision to decrease base compensation due to significant
deterioration in the companys financial situation
Fringe benefits where they are continuously provided and the value
of the 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 means compensation

fixed in the amount and timing of the payment which falls under
neither fixed amount periodical compensation nor profit-based
compensation and for which advance notification is filed with the
tax office.
The deadline of advanced notification is extended to the earlier of

(a) 1 month after the resolution date of the compensation at the
shareholders meeting, etc. or (b) 4 months (5 months for insurance
companies) from the beginning of the fiscal year. When such
compensation is determined through irregular revisions due to
unavoidable reasons is treated as an allowable compensation,
provided that the notification is filed with the tax office by the later
of (a) 1 month from when the cause of the irregular revision
occurred or (b) the deadline of a regular advanced notification
discussed above. There are rules to change the items that had
already been notified.
(3) Profit-based Compensation
Profit-based compensation is compensation satisfying the

following conditions:
- The compensation is paid to all the directors involved in

execution of the business operations of the company.
25
- The compensation is calculated based on parameters related to
profit, which must be reported in a Securities Report provided in
Art. 24 (1) of the Financial Instruments and Exchange Law and
the calculation method satisfies the following:
- The ceiling of the compensation is pre-determined.

- The calculation method for a director involved in managing
the business is similar to that for the other directors involved
in execution of the business operations.
- The calculation method must be determined by the
Compensation Committee prescribed by the Company Law
(provided that directors involved in execution of the business
operations of the company or a person related to the
directors are not members of the Committee) or equivalent
procedures provided in the Cabinet Order within 3 months (4
months for insurance companies) from the beginning of the
fiscal year.
- The calculation method is disclosed in a timely manner
through a Securities Report or certain similar reports.
- The compensation is paid or expected to be paid to the director

within 1 month after the result of the relevant parameters
become available.
- The company records the compensation as expenses in its

accounting books.
This is only applicable to a company that is not a family company

and which is required to submit a Securities Report under the
Financial Instruments and Exchange Law. This means, generally,
only companies listed in Japan are eligible for deduction of profit-
based compensation for directors.
***
Note that for compensation including retirement/severance
allowances and stock option expenses, even if it falls under either
of the above three categories, if the amount is unreasonably high,
the excess portion is not deductible for corporation tax purposes. In
addition, if it is paid by concealing facts or disguising the accounting
books, it is not deductible.
26
1.8.7 Stock Option Expenses
When a company issues stock options as consideration for services

rendered by individuals, expenses for such services (the value of
the stock option at the time of issuance) are deductible expenses at
the time of exercise of the stock options unless the stock options
are tax-qualified stock options for Japanese individual income tax
purposes. See Chapter 3 for further information on tax-qualified
stock options.
1.8.8 Devaluation Loss
A write-down of assets, other than a write down to market value in

the case of damage due to disaster or obsolescence of inventories
or fixed assets, should generally be disallowed for tax purposes.
1.8.9 Corporate Taxes, etc.
Corporation tax, prefectural and municipal inhabitant taxes, local

corporation tax, interest on delinquent taxes, penalties and fines,
etc. should be disallowed for tax purposes. Note that business tax
and special local corporation tax are deductible basically when a tax
return for such taxes is lodged.
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 not creditable. Neither are they deductible if the
foreign dividend exclusion (FDE) is applied to the dividends. See 4.1
for the definition of a Foreign Subsidiary and the FDE system.
27
1.8.10 Donations/Contributions
Donations and contributions are partially deductible as follows:
Donations and contributions Deductible amount

Designated by the
All
government
3.125% of taxable income
To Specified Public Interest + 0.1875% of paid-in capital and
Facilitating Corporations capital surplus
(per annum)
0.625% of taxable income
+ 0.0625% of paid-in capital and
Other than above
capital surplus
(per annum)
If the amount of donations and contributions to Specified Public

Interest Facilitating Corporations exceeds the above limit, the
excess amount is treated as ordinary donations and contributions in
the third category.
If assets are sold at a lower price than the fair market value, the
difference between them is treated as a donation, which has only
limited deductibility as discussed above. Since the donee will also
be required to recognize taxable income equal to the amount of the
undervalue, this will often result in additional net taxable income
arising.
If a company makes a payment, details of which are not disclosed,

such payment is disallowed for corporate tax purposes by the
paying company, and a surtax of 40 percent of the payment amount
is levied as a penalty for making such improper payments in
addition to regular corporate taxes.
Please see 1.13.4 for donations between Japanese companies

within a 100 Percent Group.
28
1.8.11 Entertainment Expenses
Entertainment expenses for a year in excess of the following

deductible limits are disallowed:
Deductible limit
Size of company Fiscal years Fiscal years
beginning before 1 beginning on or after
April 2014 1 April 2014
A small and JPY8 million
medium-sized or
JPY8 million
company defined in 50% of eating and
1.3.1 drinking expenses
Other than small and
50% of eating and
medium-sized Zero
drinking expenses
company
Social and entertainment expenses include expenses generally

disbursed for the purpose of reception, entertainment, consolation,
gifts, etc. However, it does not include expenses falling under
contributions, discounts and rebates, welfare expenses, personnel
costs, etc. which are treated differently for tax purposes.
A company is required to keep relevant documents indicating

details of eating and drinking expenses in order to have such
expenses to be subject to the 50% deduction. The following items
are excluded from eating and drinking expenses subject to the 50%
deduction:
eating and drinking expenses solely for the companys

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 the
companys directors/employees and relatives of them).
29
1.8.12 Interest Thin Capitalization Rules/Earnings
Stripping Rules
Thin capitalization rules were introduced in 1992 as a counter-

measure for tax avoidance caused by a taxpayer paying interest on
a loan in place of dividends on capital. Under these rules, broadly,
interest is excluded from a companys tax deductible expenses to
the extent that such interest relates to borrowings from Overseas
Controlling Shareholders in excess of three times the companys
equity.
Earnings stripping rules were introduced in 2012 with the aim of

preventing tax avoidance by limiting the deductibility of interest paid
to related persons where it is disproportionate to income. Under the
rules, if Net Interest Payments to Related Persons exceed 50
percent of Adjusted Taxable Income, the excess portion is
disallowed.
See Chapter 4 for further information on the above rules.
1.8.13 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 each fiscal year. The default translation method for
short-term receivable/payable is (ii) while that for long-term
receivable/payable is (i).
If a company wishes to select a non-default translation method, the

company is required to submit a report on the selected method of
translation to the tax authorities by the due date of the first relevant
corporation tax return. If a company wishes to change the method,
an application is required to be filed for approval by the chief of the
tax office prior to the commencement date of the fiscal year in
which the change is to be effected.
30
If a company has a forward contract on receivables and payables in
foreign currencies at the end of a fiscal year, the Yen amount fixed
under such forward contract is generally used for translation
purposes instead of 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 and losses 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 the relevant taxable year.
- If a forward contract is concluded after a transaction, the

difference between the forward rate and the spot rate at the day
of concluding the forward contract is spread proportionately over
the period from the date of concluding the contract to the
settlement date and included within taxable income/loss of the
relevant taxable year.
1.8.14 Management Service Fees
If a foreign parent company is operating in Japan through a

subsidiary or a joint venture (JV) formed with a Japanese partner,
there would be situations 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 for Japanese tax
purposes. However, to ensure full deductibility, the management
service fee levied should be reasonable in view of the nature and
extent of services provided and should not be used for the purpose
of shifting profits from the Japanese subsidiary to the foreign parent
company.
31
Japanese tax law contains transfer pricing provisions aimed at
preventing tax avoidance by companies through transactions with
their Related Overseas Companies (see Chapter 4). This transfer
pricing legislation is applicable not only to the sale or purchase of
goods but also to rendering of services, charging of interest and
royalties, and to any other transactions with Related Overseas
Companies that do not meet the arms-length concept; further, the
legislation obliges the taxpayer to justify 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.
1.8.15 Allocation of Head Office Expenses
Where common costs incurred for businesses of both a PE and the

head office are allocated to the PE based on reasonable allocation
keys, such allocated costs are allowable in the hands of the PE
provided that a document regarding the cost allocation is attached
to the tax returns for fiscal years beginning before 1 April 2016
(preserved for fiscal years beginning on or after 1 April 2016).
32
1.9 Tax Depreciation
1.9.1 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 are used up within 1 year are not required to be taken up as
fixed assets and the 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 be amortized 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
of each respective class of tangible fixed assets located at different
business places. However, buildings and certain leased assets must
be depreciated using the straight-line method whilst intangible
assets must also generally be amortized using this 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.
33
Tangible fixed assets acquired Before 1 April 2007
Depreciation rates
Useful life Straight-line method Declining-balance method
2 0.500 0.684
3 0.333 0.536
4 0.250 0.438
5 0.200 0.369
6 0.166 0.319
7 0.142 0.280
8 0.125 0.250
9 0.111 0.226
10 0.100 0.206

Calculation
Annual depreciable amount
methods
Acquisition cost
Straight-line
x 90% (i.e. cost less 10% residual value)
method
x Depreciation rate
Declining-
Tax book value at the beginning of the fiscal year
balance
x Depreciation rate
method
(Minimum residual value: 5% of the acquisition cost)
Note that under the 2007 tax reform, assets depreciated to the
allowable limit (95 percent of acquisition cost) in a particular fiscal
year can be further depreciated down to JPY1 evenly over 5 years
starting from the following fiscal year. This rule is applicable for
fiscal years starting on or after 1 April 2007.
34
Tangible fixed assets acquired on or after 1 April 2007 but before
1 April 2012
Depreciation rates
Declining-balance method
Straight-line
method Minimum
Useful life Modified
Depreciation annual
depreciation
Depreciation rate (X) depreciation
rate (Y)
rate (A) rate (Z)
2 0.500 1.000 ----- -----
3 0.334 0.833 1.000 0.02789
4 0.250 0.625 1.000 0.05274
5 0.200 0.500 1.000 0.06249
6 0.167 0.417 0.500 0.05776
7 0.143 0.357 0.500 0.05496
8 0.125 0.313 0.334 0.05111
9 0.112 0.278 0.334 0.04731
10 0.100 0.250 0.334 0.04448

Calculation
Annual depreciable amount
methods
Straight-line
Acquisition cost x Depreciation rate (A)
method
(i) For the period where:
Tax book value at the Acquisition cost
beginning of the fiscal year > x Minimum annual
x Depreciation rate (X) depreciation rate (Z)
Tax book value at the
x Depreciation rate (X)
Declining- beginning of the fiscal year
balance (ii) For the period where:
method Tax book value at the Acquisition cost
beginning of the fiscal year < x Minimum annual
x Depreciation rate (X) depreciation rate (Z)
Tax book value at the Modified depreciation
beginning of the first fiscal x
rate (Y)
year when it falls in (ii)
(Minimum residual value: JPY1)
35
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
is depreciated using Depreciation rate (X), which is 250 percent of
the depreciation 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
Declining-balance method
Straight-line
method Minimum
Useful life Modified
Depreciation annual
depreciation
Depreciation rate (X) depreciation
rate (Y)
rate (A) rate (Z)
2 0.500 1.000 ----- -----
3 0.334 0.667 1.000 0.11089
4 0.250 0.500 1.000 0.12499
5 0.200 0.400 0.500 0.10800
6 0.167 0.333 0.334 0.09911
7 0.143 0.286 0.334 0.08680
8 0.125 0.250 0.334 0.07909
9 0.112 0.222 0.250 0.07126
10 0.100 0.200 0.250 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.
Intangible Fixed Assets
Intangible assets are amortized over statutory useful lives under the
straight-line method without a depreciable limit.
36
(3) Reports on Depreciation Methods
The depreciation method(s) needs to be reported to the tax office in

a timely 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
in which assets of a different classification were acquired, if the
selected depreciation method for such classification has not
been selected previously (i.e. if the depreciation method for
furniture and fixtures has been selected and trucks were newly
acquired, then a report 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

the case of machinery and equipment at factories, an application
may be submitted to the tax office for approval of shortening of
useful lives or taking extra depreciation.
With regard to second-hand property if it is difficult to estimate the

remaining useful life, the useful life for tax purposes can be
calculated using the following formula (subject to a minimum of 2
years):
37
If statutory useful life
Statutory useful life x 20%
< number of years elapsed (A)
If statutory useful life Statutory useful life
> number of years elapsed (A) (A) + 20% of (A)
(5) Accounting and Tax Treatment
The depreciation and amortization must be recorded in the books of

account. 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 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 for tax 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

depreciation or accelerated depreciation is available for companies
filing blue-form tax returns in relation to certain fixed assets as
specified under the law. Such reliefs merely accelerate the timing of
depreciation relief rather than increasing 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 the companies or assets qualifying for
such benefit.
In contrast to the treatment for ordinary depreciation, short

depreciation arising in respect of the special depreciation allowance
may be carried forward for 1 year, and excess depreciation in such a
year can be set off against the short depreciation.
38
1.9.2 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
deferred charges 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 of amortization for accounting purposes:
- organization expenses
- pre-operating expenses incurred specifically in connection with
commencement of operations
- development expenses incurred specifically in connection with
application of new technology or a new operating system, or
development 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

usually amortized 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 to customers for advertising and sales promotion
purposes, lump-sum payment for know-how, etc.
The amortization of deferred charges is computed by applying the

straight-line method. Deferred charges of less than JPY200,000 per
item may be expensed immediately.
39
1.10 Revenue to be excluded from Taxable Income
1.10.1 Dividends Received from Japanese Companies
Dividends received by a company from other Japanese companies,

less the interest allocable to the shares on which those dividends
were paid, are fully excluded from taxable income. However, if a
company owns less than 25 percent of the shares of the Japanese
company which pays the dividends, or if a company owns 25
percent or more of the shares but for less than 6 months, only 50
percent of the dividends received, less the interest allocable to the
shares on which those dividends were paid, is exempt. As
discussed at 1.13.2 below, dividends paid within a 100 Percent
Group are entirely excluded from taxable income with no limitation
in respect of allocable interest.
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 2 months after the end of the same fiscal year, those
dividends are not excluded from gross income.
1.10.2 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.
1.10.3 Refunds of Corporate Tax, etc.
Refunds of non-deductible items (corporation tax, prefectural and

municipal inhabitant taxes, local corporation tax, interest on
delinquent taxes, penalties, fines, etc.) are not taxable if refunded.
Note that refunds of business tax and special local corporation tax
constitute taxable income since payments of these taxes are tax
deductible.
40
1.11 Tax Credits
1.11.1 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.
If a recipient company holds bonds or shares for the full period of

the interest or dividend calculation period, the withholding tax on
the interest or 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:
Pro-rata method
Holding period of the respective bonds/shares
Withholding
from which interest/dividend is paid
tax on interest X
Calculation period for the respective
/dividends
interest/dividend
Weighted average method
No. of bonds/shares
held at the
+ {(A) (B)} x 1/2
Withholding commencement of the
tax on interest X base period (B)
/dividends No. of bonds/shares held at the end of the
base period for interest/dividend calculation
(A)
By virtue of the 2013 tax reform, withholding tax on bond interest

received on or after 1 January 2016 by a taxpayer company will
become fully creditable regardless of the holding period.
Note that special reconstruction income tax will be imposed on

withholding tax at 2.1 percent from 2013 to 2037. Such special
reconstruction income tax is creditable/refundable in a similar way
as discussed above.
41
1.11.2 Foreign Tax Credits
A Japanese company is eligible for direct foreign tax credits. See

Chapter 4 for details.
1.11.3 Tax Credits for Research and Development (R&D)

Expenditure
(1) Tax Credit on Total R&D expenditure
A company filing a blue-form tax return is eligible for R&D tax

credits. The creditable amount depends on the size of the
companies and the R&D ratio. The creditable amount is calculated
based on total R&D expenditure for a fiscal year as follows:
Scale of
Tax credit on total R&D expenditure
company
Small and
medium-sized Total R&D expenditure x 12%
companies(2)
Other than R&D ratio(1) is Total R&D expenditure
small and 10% or more x 10%
medium-sized R&D ratio is less Total R&D expenditure
companies than 10% x (8% + R&D ratio x 0.2)
(1)
R&D ratio
Total R&D expenditure in a fiscal year divided by the average
sales proceeds for the preceding 3 years and the current fiscal
year (Average Sales Proceeds)
(2)
A small and medium-sized company for the purpose of this rule
A company with a capital of JPY100 million or less, excluding the
following cases:
at least 50 percent of the shares are held by one large-scale
company (a company whose paid-in capital is over JPY100
million)
at least two-thirds of the shares are held by two or more
large scale companies
42
The maximum creditable amount is 20 percent of the corporation
tax liability for the fiscal year, which is increased to 30 percent of
the corporation tax liability for the fiscal years beginning from 1 April
2013 to 31 March 2015.
(2) Additional Tax Credit on R&D expenditure
In addition to the above, either of the two tax credits indicated

below is available for fiscal years beginning before 1 April 2017:
(i) Tax credit on incremental R&D expenditure
When R&D expenditure in the fiscal year is larger than the highest
annual R&D expenditure for the preceding 2 fiscal years, a tax credit
on incremental R&D expenditure is available to the extent of the
following amount:
[For fiscal years beginning before 1 April 2014]
Incremental R&D expenditure(1) x 5%
[For fiscal years beginning between 1 April 2014 and 31 March

2017]
If the incremental ratio(2) is Incremental R&D Incremental

x
over 5% but less than 30% expenditure(1) ratio
If the incremental ratio(2) is Incremental R&D
x 30%
30% or more expenditure(1)
(1)
Incremental R&D expenditure
R&D expenditure for Annual average of R&D expenditure
-
the fiscal year for the preceding 3 fiscal years
(2)
Incremental ratio
Incremental R&D expenditure
Annual average of R&D expenditure
for the preceding 3 fiscal years
43
(ii) Tax credit on the excess of R&D expenditure over 10 percent of
Average Sales Proceeds
If R&D expenditure in the year is over 10 percent of Average Sales

Proceeds, the company is eligible for a tax credit for the excess
R&D expenditure to the extent of the following amount:
(R&D expenditure Average Sales Proceeds x 10%)

x (R&D ratio 10%) x 0.2
The maximum creditable amount is 10 percent of the corporation

tax liability for the fiscal year.
1.11.4 Tax Credits for Job Creation
As a political measure to boost employment, a tax credit for job

creation was introduced under the 2011 tax reform and expanded
under the 2013 and 2014 tax reform. If a blue-return filing company
which submits a job creation plan to a public job placement agency
satisfies all of the conditions in (i) to (iv), tax credits are available to
the company.
(i) Increase in number of employees
Increased number of employees (the number of employees at the

end of the current fiscal year less the number of employees at the
end of the previous fiscal year) is equal to or larger than five (two for
small and medium-sized companies).
The scope of small and medium-sized companies for the purposes

of this rule is the same as that discussed in 1.11.3.
(ii) Increase in ratio of employees
Increased ratio of employees (the increased number of

employees/the number of employees at the end of the previous
fiscal year) is equal to or greater than 10 percent.
44
(iii) Zero terminations
There are no terminations (there are no people who had to leave the
company due to reasons of the company) in the current year and
the preceding fiscal year.
(iv) Reasonable increase in the amount of salary payments
The amount of (a) is equal to or greater than (b):
(a) Salary payments in the current year
(b) (Salary payments in the preceding year) + {(Salary payments in

the preceding year) x (percentage increase in number of
employees) x 30%}
The creditable amount is JPY400,000 per person for the increased

number of employees. The maximum creditable amount is 10
percent (20 percent for a small and medium-sized company defined
in 1.11.3) of the corporation tax liability for the fiscal year. An
excess amount for a fiscal year is carried forward to the next fiscal
year.
This tax credit is applicable for all fiscal years commencing between
1 April 2011 and 31 March 2016, except for fiscal years in which the
Tax Credits for Salary Growth discussed in 1.11.5 are applied.
1.11.5 Tax Credits for Salary Growth
In order to raise the general level of personal income, tax credits for
salary growth were introduced under the 2013 tax reform and
expanded in the 2014 tax reform. If a blue-return filing company
satisfies all of the following conditions, tax credits are available to
the company:
(i) The amount of salary paid to employees in the current year was
increased by 5 percent(*) or more compared to the base year
(generally, the fiscal year preceding the first fiscal year
commencing on or after 1 April 2013).
45
(*)
Under the 2014 tax reform, it was reduced to 2 percent for
fiscal years beginning before 31 March 2015, 3 percent for
fiscal years beginning before 31 March 2016.
(ii) The amount of salary paid to employees in the current year was
not less than such amount paid in the preceding fiscal year.
(iii) The average of salary paid to employees in the current year was
not less than such average paid in the preceding fiscal year.
The creditable amount is 10 percent of the amount of the increase

in salary paid in the fiscal year from the base year. The maximum
creditable amount is 10 percent (20 percent for a small and
medium-sized company defined in 1.11.3) of the corporation tax
liability for the fiscal year.
This tax credit is applicable for all fiscal years commencing between
1 April 2013 and 31 March 2018 unless the Tax Credits for Job
Creation discussed in 1.11.4 are applied.
1.11.6 Tax Incentives for Investment in Production

Facilities
With the aim of strengthening industrial competitiveness through

renewal of production facilities, a new measure was introduced
under the 2013 tax reform.
If a blue-return filing company acquires production facilities and puts

them into use for business in Japan during the fiscal years
commencing from 1 April 2013 to 31 March 2015, the company
may claim increased initial depreciation of 30 percent of the
acquisition cost of new machinery (attributable to the acquired
production facilities) provided that all of the following conditions are
met:
(i) The total acquisition cost of production facilities in the current

year exceeds the total depreciation cost of depreciable assets
recorded in the current year.
46
(ii) The total acquisition cost of production facilities in the current
year was increased by more than 10 percent compared to that in
the preceding year.
Production facilities for the purpose of this rule are facilities

consisting of depreciable assets directly used for income-producing
business activities. For example, a head office building and welfare
facilities would not be treated as production facilities.
A tax credit equivalent to 3 percent of the acquisition cost of new

machinery (attributable to the acquired production facilities) may be
applied instead of the increased initial depreciation, up to the
limitation of 20 percent of the corporation tax liability for the fiscal
year.
1.11.7 Tax Incentives for Investment in Productivity

Improvement Facilities
Under the 2014 tax reform, an additional measure to encourage

companies to make investment in production facilities has been
introduced.
If a blue-return filing company acquires production facilities that are

treated as Productivity Improvement Facilities and are meeting the
minimum acquisition cost requirements and puts them into use for
business in Japan during the period from 20 January 2014 to 31
March 2017, the company may claim increased initial depreciation
(25 percent to 100 percent of the acquisition cost) or take a tax
credit (2 percent to 5 percent of the acquisition cost) up to the
limitation of 20 percent of the corporation tax liability for the fiscal
year.
Productivity Improvement Facilities consist of high-technology

facilities and facilities to improve production line/operation
defined under the Industrial Competitiveness Enhancement Act.
47
1.12 Administrative Overview
1.12.1 Tax Returns and Tax Payment
(1) Final Tax Returns
A company is required to file final returns (a corporation tax return

to the 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. However,
generally, an extension of 1 month can be obtained from the tax
office for a Japanese company or longer for a branch of a foreign
company. The final tax liability for the fiscal year must be paid to the
tax offices within 2 months after the end of the fiscal year
regardless of whether a filing extension has been obtained.
A corporation final return must be accompanied by the companys

balance 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
prescribed documents.
For groups using consolidated filing (see section 1.14 below) the tax
return filing and payment due dates remain as above, however a 2-
month filing extension will generally be granted upon application.
A tax return for special reconstruction corporation tax should also be

filed within 2 months after the end of each fiscal year. A filing
extension obtained for corporation tax purposes automatically
applies to filing a tax return for special reconstruction corporation
tax.
(2) Interim Tax Return
A company, the fiscal year of which is longer than 6 months, should

file interim 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 the preceding fiscal year multiplied by six and divided by the
number of months of the preceding fiscal year is JPY100,000 or
48
less, the company is generally not required to file interim tax returns.
However, a company subject to the size-based business tax or
business tax imposed on gross revenue rather than net income is
always required to file an interim tax return with respect to business
tax regardless of the amount of the corporation tax for the
preceding fiscal year.
The amounts of taxes to be reported in interim 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
6-month 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 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 returns should be paid to the tax
office and local governments within the time limit for filing interim
returns.
1.12.2 Tax Audits and the Statute of Limitation
The Japanese corporate tax filing system utilizes a self assessment

basis. The tax authorities may then carry out a tax audit of returns
filed and make any necessary adjustments within the limitations laid
down by the law. 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 9 years(*)
Relating to transfer pricing issues 6 years
Relating to fraud 7 years
49
(*)
7 years for tax losses incurred in fiscal years ending before 1
April 2008
1.13 Group Taxation Regime
The Group Taxation Regime is provided in order to make the

Japanese taxation system more in line with a business environment
where business operations are managed on a unified basis across a
corporate group.
Although the Consolidated Tax Return Filing System discussed in

1.14 applies to Japanese companies that have made an election for
the system, the Group Taxation Regime automatically applies to
certain transactions carried out by companies belonging to a 100
Percent Group, including a tax consolidated group.
1.13.1 100 Percent Group
A 100 Percent Group under the Group Taxation Regime is a group

comprising companies having a 100 Percent Control Relationship,
which is:
relationship in which a person holds directly or indirectly 100

percent of the outstanding shares in a company; or
relationship in which 100 percent of the outstanding shares in a

company and 100 percent of the outstanding shares in another
company are directly or indirectly held by the same person.
A person as described above should include not only a Japanese

company but also a foreign company or an individual. Even if foreign
companies 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 Japanese companies 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
50
ownership plan or the number of shares owned by employees and
directors that were acquired through exercises of stock option plans
can be disregarded if the total number of those shares is less than 5
percent of the total number of outstanding shares.
A structure diagram showing 100 Percent Control Relationships

should be included in the statement of outline of business activities
to be attached to corporate tax returns.
1.13.2 Dividends Received Deduction (DRD)
When a Japanese company receives dividends from a 100 percent

Japanese subsidiary, such dividends should be fully excluded from
taxable 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 purpose 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 Relationship

with the company receiving the dividend for the whole of the
calculation period for the dividend
In the case of a deemed dividend
A Japanese company that had a 100 Percent Control Relationship

with the company receiving the dividend on the day prior to the
effective date of the deemed dividend
***
The same rule is included in the Consolidated Tax Return Filing
System. This rule is applicable for companies not electing for the
Consolidated Tax Return Filing System.
51
1.13.3 Deferral of Capital Gains/Losses
(1) Deferral of Capital Gains/Losses
When a Japanese company transfers certain assets to another

Japanese company having a 100 Percent Control Relationship with
the first mentioned 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 as a 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 the transferor 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 of
deferred gains/losses and the amount of realized gains/losses:
Amount of realized capital

Trigger events
gains/losses
Transfer of the asset by the Amount of deferred capital
transferee company gains/losses
The asset becoming a bad
debt, or retirement/revaluation
Amount of deferred capital
and similar events related to
gains/losses
the asset by the transferee
company
52
Amount of deferred capital
gains/losses
Depreciation or amortization
amount included in
deductible expenses of the
transferee company
Depreciation or amortization of x
the asset by the transferee Acquisition cost
company (Depreciable assets of the asset
or deferred charges) Instead of the above, it is possible
for the transferor company to
realize the amount of deferred
capital gains/losses over the
useful life being applied to the
asset in the transferee company
(Simplified Method).
Losing the 100% Control
Relationship between the Amount of deferred capital
transferor company and the gains/losses
transferee company
(4) Notification
When assets subject to this rule are transferred within a 100

Percent Group, the transferor company should notify the
transferee company of 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.
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 the transferor company of the useful lives for such
assets, after the above notification without delay.
53
If an event to realize deferred capital gains/losses happens, the
transferee company should notify the transferor company about
that fact 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
Consolidated Tax Return Filing System. This rule is applicable for
transfers of assets for companies not electing for the Consolidated
Tax Return Filing System.
1.13.4 Donations
(1) Donations
When a Japanese company pays donations to another Japanese

company 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 the recipient company.
Donations under the Japanese Corporation Tax Law have a broader

meaning than simply donations to charitable entities/political parties.
(2) Adjustments to Tax Book Value of Shares
In order to prevent a shareholder company of the donating/recipient

company from conducting tax-avoidance through a transfer of value
of the shares in these companies by taking advantage of the new
rule for donations within a 100 Percent Group, the shareholder
company is required 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
the tax book value of the shares in the donating company by the
amount of the donation attributable to the direct holding ratio of
the shareholder company.
54
If a company has a 100 Percent Control Relationship with the
recipient 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
the administrative burden, the adjustments are required only for
direct shareholders. If the shareholder company belongs to a tax
consolidated group to which the donating company or the recipient
company belongs, instead of this rule, another rule for adjustments
to the value of shares under the Consolidated Tax Return Filing
System is applied.
1.13.5 Tax Qualified Dividends-in-Kind
(1) Tax Qualified Dividends-in-Kind
Dividends-in-kind
Dividends-in-kind are where a company distributes assets other

than money as dividends of profits or deemed dividends to its
shareholders. A deemed dividend should be recognized in the
following circumstances:
- return of capital or distribution of residual assets due to

dissolution
- acquisition of shares by a company issuing the shares
- retirement of investments
- change of the corporate type of a company (when assets other
than shares in the company are distributed to shareholders)
Tax qualified dividends-in-kind
When a Japanese company distributes a dividend-in-kind to its

shareholders, if all the shareholders are Japanese companies which
have a 100 Percent Control Relationship with the dividend paying
55
company at the time of the payment, the dividends-in-kind are
treated as tax-qualified dividends-in-kind.
Therefore, in a case where a foreign company is one of the

recipients of a dividend-in-kind, such dividend is not treated as a tax-
qualified one for all shareholders.
(2) Tax Treatment of Tax Qualified Dividends-in-Kind
When an asset is transferred under a tax-qualified dividend-in-

kind, as the asset is treated as being transferred at the tax book
value for the dividend paying company, there is no recognition of
capital gains/losses in the hands of the dividend paying company.
The recipient company records the asset at the tax book value
for the dividend paying company, which does not constitute
taxable income for the recipient.
Withholding tax is not imposed on tax-qualified dividends-in-kind.
As a tax-qualified dividend-in-kind is a kind of corporate

reorganization for tax purposes, specific rules for corporate
reorganizations are applied. For example, if certain conditions are
not met, utilization of tax losses of the recipient company and
deductions incurred on specified assets will be restricted.
1.13.6 Non-Recognition of Capital Gains/Losses from

Transfers of Shares to the Share Issuing Company
When a Japanese company holds shares in another Japanese

company having a 100 Percent Control Relationship with the first
mentioned company, if the shareholder company receives money or
assets other than money from the share issuing company for the
following reasons or surrenders the shares in the share issuing
company for the following reasons (including a case where 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.
- non tax-qualified merger
56
- non tax-qualified horizontal type corporate division
- return of capital or distribution of residual assets due to
dissolution
- acquisition of shares by a company issuing the shares
- retirement of investments
- change of the corporate type of a company (when assets other
than shares in the company are distributed to shareholders)
Under this rule, for example, when a Japanese company is

liquidated, a shareholder company having a 100 Percent Control
Relationship with the liquidated company does not recognize capital
gains/losses from shares. (Note that, however, tax losses incurred
by the liquidated company may be transferred to the shareholder
company subject to certain conditions.)
1.13.7 Valuation Losses of Liquidating

Companies/Merged Companies
Valuation losses of shares in a Japanese subsidiary in a 100 Percent

Group are not deductible by its shareholder companies in the same
group if the Japanese subsidiary 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.
1.14 Tax Consolidation
1.14.1 Tax Consolidated Group
The Consolidated Tax Return Filing system is applied by election

(ordinarily irrevocable) to a Japanese domestic parent company and
its Japanese subsidiaries having 100 Percent Control Relationships
discussed in 1.13.1 without foreign companies being interposed.
Once the election is made, all subsidiaries having 100 Percent
Control Relationships are required to be included within the
consolidated group.
57
1.14.2 Tax Consolidation Rules
In addition to the Group Taxation Regime discussed in 1.13, the

following rules are applied to a tax consolidated group:
(1) Offsetting Profits and Losses
Current year taxable profits and tax losses within a tax consolidated
group are offset for corporation tax purposes, which is the most
beneficial treatment under the Consolidated Tax Return Filing
System.
(2) Crystallization of Built-in Gains/Losses
Upon starting a tax consolidation or a subsidiary joining an existing

tax consolidated group, assets of the subsidiary will be revalued to
market value in principle. Crystallizing built-in gains/losses could
result in either additional taxation or increase of extinguished losses
described in (3).
However, certain subsidiaries of a tax consolidated group including

the following are not subject to this rule:
Upon starting a tax consolidation:
- a subsidiary underneath the parent company that was

established by a Share-Transfer (Kabushiki-Iten)
- a subsidiary held by the parent company for more than 5 years,
- a subsidiary established within a tax consolidated group
- a company that has become a subsidiary of a tax consolidated
group through a tax-qualified Share-for-Share Exchange
(Kabushiki-Kokan)
group through a tax-qualified merger whereby its parent
company holding the company for more than 5 years is merged
into the parent company of the tax consolidated group
58
Upon joining an existing tax consolidated group:
- a subsidiary established within a tax consolidated group

group through a tax-qualified Share-for-Share Exchange
(Kabushiki-Kokan)
group through a tax-qualified merger whereby its parent
company holding the company for more than 5 years is merged
into the parent company of the tax consolidated group
Assets covered by this rule are fixed assets, land (if land is not
treated as a fixed asset), securities, monetary receivables and
deferred charges. There are some exceptions.
(3) Extinguishment of Pre-Consolidation Tax Losses
Upon starting a tax consolidation or a subsidiary joining an existing

tax consolidated group, tax losses incurred by the subsidiary prior to
joining a tax consolidated group will be extinguished in principle.
However, a subsidiary that is not subject to the rule discussed in (2)

is not captured by this rule, although the pre-consolidation tax
losses are available only to offset against taxable income generated
by the subsidiary.
(4) Others
The use of a consolidated tax system will also result in certain

tax related treatments being calculated based not on the status
of individual companies but on the consolidated status (for
example; the deductible limit of donations, R&D tax credit limit,
etc.).
Filing and payment deadlines under tax consolidated filing are in

principle the same as for a normal Japanese company, however
a 2-month filing extension will generally be allowed.
A consolidated return can only be filed for national corporation
59
tax purposes. For the purposes of local taxes, each member of
the consolidated group must continue to file their own tax
returns based upon their own taxable income without offsetting
losses from elsewhere in the group. In order to mitigate the
administrative burden of the recalculation of taxable income
solely for local tax purposes, certain items of taxable income, as
calculated on a consolidated basis, can be apportioned amongst
group members as a simplified basis.
1.15 Corporate Reorganizations
1.15.1 Tax Qualified Reorganizations vs. Non Tax

Qualified Reorganizations
The Japanese Corporation Tax Law provides for the definitions of

tax-qualified reorganizations and non tax-qualified reorganizations for
the following transactions:
- merger
- corporate division (horizontal type and vertical type)
- contributions-in-kind
- dividends-in-kind
- Share-for-Share-Exchange (Kabushiki-Kokan) or Share-Transfer
(Kabushiki-Iten)
Under a tax-qualified reorganization, assets and liabilities are

transferred at tax book value (i.e. recognition of gains/losses are
deferred) for tax purposes, while under a non tax-qualified
reorganization, assets and liabilities are transferred 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.
When a Share-for-Share-Exchange or a Share-Transfer is carried out

as a non tax-qualified reorganization, built-in gains/losses in assets
held by the subsidiaries will be crystallized although assets and
liabilities are not transferred and remain in the subsidiary unless the
parent company and the subsidiaries (the subsidiaries for a Share-
60
Transfer) have a 100 Percent Control Relationship.
(1) Mergers/Corporate Divisions/Contributions-in-Kind
The following is a general outline of the conditions required for a

tax-qualified reorganization with respect to mergers, corporate
divisions and contributions-in-kind:
Relationship Conditions
(1) 100% Control (a) Delivery of shares only as
Relationship consideration for transfer (no
involvement of cash or any other
assets).
(b) Expectation that the 100% Control
Relationship will remain.
(2) More than 50% (a) Delivery of shares only as
Control Relationship consideration for transfer (no
assets).
(b) Expectation that the More than
50% Control Relationship will
remain.
(c) Transfer of the main
assets/liabilities of the transferred
business.
(d) Expectation for the transfer and
retention of approximately 80% or
more of employees engaged in the
transferred business.
(e) Expectation that the transferee will
continue to operate the transferred
business.
(3) 50% or less (a) Same as (2)-(a),(c),(d) and (e)
relationship (b) The transferred business has a
relationship with one of the
transferees businesses.
(c) The relative business size (i.e.
sales, number of employees, etc.)
61
of the related businesses is not
considerably different (within a 1:5
ratio), or senior directors from both
sides will participate in the
management of the transferred
business.
(d) Expectation that the shares
received for the transferred
business will continue to be held.
Under a triangular merger or a triangular horizontal type corporate

division, the shares of the parent company of the transferee
company are delivered to shareholders of the transferor company
instead of shares in the transferee company. In connection with
condition (a) above, if the shareholders of the transferor company
receive solely shares in the parent company of the transferee
company in a triangular reorganization, condition (a) is satisfied
provided that the parent company directly holds 100 percent of the
shares of the transferee company.
(2) Share-for-Share Exchanges/Share-Transfers
The conditions for a tax-qualified Share-for-Share Exchange or

Share-Transfer are similar to the above but slightly different since
there is no transfer of business under these reorganizations.
The following is a general outline of the conditions required for a

tax-qualified Share-for-Share Exchange and Share-Transfer:
(Note that in the table below, a transferred company and a company

which becomes the holder of all shares in the transferred company
under a Share-for-Share Exchange or Share-Transfer are referred to
as the Subsidiary and the Parent Company, respectively.)
(1) 100% Control (a) Delivery of shares only as
Relationship consideration for transfer (no
62
assets) to shareholders of the
Subsidiaries.
(b) Expectation that the 100% Control
Relationship will remain.
(2) More than 50% (a) Delivery of shares only as
Control Relationship consideration for transfer (no
assets) to shareholders of the
Subsidiaries.
(b) Expectation that the More than
50% Control Relationship will
remain.
(c) Expectation that approximately
80% or more of the employees in
the Subsidiary will continue
working for the Subsidiary.
(d) Expectation that the Subsidiary will
continue to operate its own main
business.
(3) 50% or less (a) Same as (2)-(a),(c) and (d)
relationship (b) The main business of the
Subsidiary has a relationship with
one of the Parent Companys
businesses (the other Subsidiarys
businesses for a Share-Transfer).
(c) The relative business size (i.e.
sales, number of employees, etc.)
of the related businesses is not
considerably different (within a 1:5
ratio), or senior directors of the
Subsidiary will not resign upon the
reorganization.
(d) Expectation that the shares
received for the reorganization will
continue to be held.
(e) Expectation that 100% Control
Relationship between the Parent
Company and the Subsidiary after
the reorganization will continue.
63
Under a triangular Share-for-Share Exchange, the shares of the
parent company of the Parent Company are transferred to
shareholders of the Subsidiary instead of shares in the Parent
Company. In connection with condition (a) above, if the
shareholders of the Subsidiary receive solely shares in the parent
company of the Parent Company in a triangular Share-for-Share
Exchange, condition (a) is satisfied provided that the parent
company directly holds 100 percent of the shares of the Parent
Company.
(3) Dividends-in-Kind
When a Japanese company distributes a dividend-in-kind to its

shareholders, if all the shareholders are Japanese companies which
have a 100 Percent Control Relationship with the dividend paying
company at the time of the payment, the dividends-in-kind are
treated as tax-qualified dividends-in-kind.
Therefore, in a case where a foreign company is one of the

recipients of a dividend-in-kind, such dividend is not treated as tax-
qualified for all shareholders.
1.15.2 Pre-Reorganization Losses
(1) Pre-Reorganization Losses Incurred by a Merged Company, etc.
While under a non tax-qualified merger, pre-merger losses are not

transferred from the merged company to the surviving company,
under a tax-qualified merger, the pre-merger losses are transferred
from the merged company to the surviving company in principle.
However, if the following conditions are not met, the amount of the
transfer of such losses may be restricted.
(1) 100% Control (a) 5 year control relationship
Relationship requirements
(2) More than 50% or
Control Relationship (b) Joint business operations
requirements
64
(3) 50% or less No conditions (therefore, no restriction)
relationship
(a) 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 the latest day among the following, this
requirement should be passed:
- 5 years before the first day of the fiscal year including the
merger date
- establishment day of the surviving company
- establishment day of the merged company
(b) Joint business operations requirements
If the following conditions ((i) to (iv) or (i) and (v)) are satisfied, this
requirement should be passed:
(i) The business of the merged company has a relationship with

one of the surviving companys businesses.
(ii) The relative business size (i.e. sales, number of employees, etc.)
of the related businesses does not exceed around 1 to 5.
(iii) The relative business size of the merged company at the time
when the More than 50 Percent Control Relationship was
formed and the size at the time of the merger does not exceed
around 1 to 2.
(iv) The relative business size of the surviving company at the time
when the More than 50 Percent Control Relationship was
formed and the size at the time of the merger does not exceed
around 1 to 2.
(v) One or more senior directors of both the merged company and
the surviving company become senior directors of the surviving
company after the merger.
65
When a Japanese company under liquidation procedures
determines the amount 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 the shareholders provided that the 5 year control
relationship requirement 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 the merger.
This rule is also applied to the following reorganizations:
- non tax-qualified merger between companies having a 100

Percent Control Relationship
- tax-qualified corporate divisions
- tax-qualified contributions-in-kind
- tax-qualified dividends-in-kind
Furthermore, there is a rule to restrict utilization of built-in losses

after the above reorganizations unless requirements discussed in (1)
are met.
1.15.3 Taxation of Shareholders
When the shareholders receive shares in the transferee company

only or shares in the parent company of the transferee company (in
triangular reorganizations) only, capital gains/losses from the
transfer of the shares are deferred.
However, if the shareholder is a foreign shareholder not having a

permanent establishment (PE) in Japan and receives shares in the
foreign parent company of the Japanese transferee company, the
deferral of capital gains/losses is not applicable. Moreover, if the
shareholder is a foreign shareholder with a PE in Japan and receives
the shares in the foreign parent company of the Japanese
66
transferee company, the realization of capital gains/losses may not
be deferred, unless the PE has the custody in the shares as
property related to its Japanese business. 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.
Moreover, in the case of a merger or a horizontal type corporate

division, if the reorganization is non tax-qualified, the shareholders
of the transferor company recognize a receipt of deemed dividends.
67
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 the basis of their share of profits under a partnership agreement
and in accordance with their own Japanese tax status.
2.1 NK-type Partnerships
2.1.1 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
NK-type 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

for the obligations of the NK. One or more managers may be
appointed to manage the business operation of the NK. There is no
limitation on the kinds of business which an NK can carry out and
no registration is required.
(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 general partner 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.
68
(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 a partner of an LLP but another partnership can
not 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 to be 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.
2.1.2 Taxation of Partners
(1) Japan Resident Partners
Income/loss of an NK-type partnership allocated to its partners

generally retains its nature for tax purposes. Japan resident partners
(both individuals and companies) are required to declare their
income/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 more than once a year and the income/loss is allocated to
each partner within 1 year after the income/loss is generated, the
partners can declare such income/loss for the taxable period in
which the calculation period end date of the partnership falls. In
certain cases, utilization of losses generated from partnerships is
restricted (please see 2.3 below).
(2) Foreign Partners Having a PE in Japan
In the same way as Japan resident partners, foreign partners (both

individuals and companies) having a permanent 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).
69
Profit allocations to foreign partners having a PE in Japan derived
from businesses 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 is creditable when declaring such income in the
partners Japanese tax return. Thus, the withholding tax does not
constitute an additional tax burden for taxpayers although it may
cause an administrative burden and cash flow differences.
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 allocation from 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 2 months have passed from the
end of the calculation period of the NK-type partnership if no
distribution is made within 2 months after the end of the calculation
period). Also, a person who allocates partnership income 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 a permanent establishment in connection with the business
carried on by the partnership.
If a foreign partner of Investment LPSs or foreign partnerships

similar to an Investment LPS (collectively, hereinafter referred to as
Investment Funds) falls under the scope of a Specified Foreign
Partner, the foreign partner is deemed not to have a PE in Japan.
A Specified Foreign Partner of an Investment Fund is a partner who

satisfies the following conditions:
(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 the
Investment Fund
70
(iv) not having a special (affiliate) relationship with the general
partners of the Investment Fund
(v) not having a PE in Japan with respect to business other than the
business carried on by the Investment Fund
A foreign partner must file an application form to the relevant tax

office through a general partner along with Japanese translations of
the partnership agreements in order to apply the above rule. Also,
the foreign partner is required to show the general 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
2.2.1 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 (Kumiai-In) contributes funds under a TK
agreement for the operation of a specific business carried on by an
operator (Eigyoshiya) and in 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 operators business, nor generally can the TK silent
partner(s) participate in the management or operation of the
business. The mechanics of a TK can be used in any kind of
business.
2.2.2 Taxation of the Operator
A TK operator carrying on business in Japan is subject to normal

Japanese corporate/income taxes in relation to the operation of its
business. However, when calculating taxable income, the TK
71
operator is entitled to take a deduction for any element of profits
allocated to the TK silent partner(s). Conversely, where losses are
allocated to the TK silent partner(s), the TK operator is required to
recognize corresponding taxable income.
2.2.3 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 Japan resident.
(1) Japan Resident Partners
The TK profit/loss allocation is treated as normal taxable

income/loss of the TK silent partner for the 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,
the TK profit/loss allocation is basically classified as miscellaneous
income, which means that a loss allocation from a TK can not be
offset against any other types of income. However, if the individual
silent partner is involved with managing the business operation
together with the operator, the TK profit/loss allocation may be
classified as other types of income 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 the partners when declaring such income in their tax returns.
(2) Foreign Partners Having a PE in Japan
The TK profit/loss allocation is treated as normal taxable

income/loss of the TK silent partner for the 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).
72
Actual distributions from a TK to foreign partners are subject to 20
percent withholding tax (from 2013 to 2037, 20.42 percent
withholding tax, including a special reconstruction income tax),
which is creditable for the partners when declaring such income in
their Japanese tax returns.
(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
an appropriate Other Income article, which provides that Other
Income is taxable 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 the taxing 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 a

partnership at the level of each partner as discussed below. For a
foreign investor, these rules affect the investors taxable income in
Japan only when the investor has a permanent establishment in
Japan.
2.3.1 Corporate Partners of Partnerships other than

Japanese LLP - At-Risk Rule (AR rule)
Where a corporate partner of a certain partnership suffers losses

from the partnership in its fiscal year, the following amount is not
73
deductible in calculating taxable income for the fiscal year:
(i) Where a corporate partner is not at risk with respect to liabilities

of the 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 (excess
partnership losses)
(ii) Where it is obvious that the business of the partnership results

in profits due to an arrangement such as a profit guarantee
contract or a residual value insurance/guarantee:
the partnership losses
If the corporate partner derives profits from the partnership

business in subsequent years, the excess partnership losses
incurred in prior years can be offset against the profits.
This rule does not apply to a corporate partner who is involved in

decision-making of important transactions of the partnership activity
and who participates in important management decisions and
operations continuously.
Partnerships covered by this rule are as follows:

(a) NK
(b) Investment LPS
(c) Tokumei-Kumiai (TK) and any other arrangement similar to a TK
(d) foreign arrangements similar to (a), (b) and (c)
(e) foreign arrangements similar to a Japanese LLP
2.3.2 Individual Partners of Partnerships other than

Japanese LLP
Where an individual partner of a certain partnership that is involved

in rental real property activity incurs losses from the rental activity,
such losses are disregarded for income tax purposes and can not be
carried over to the following years. This rule does not apply to an
individual partner who is involved in decision-making of important
operations of the activity and who participates in operations such as
74
negotiating contracts.
Partnerships covered by this rule are as follows:

(a) NK
(b) Investment LPS
(c) foreign arrangements similar to (a) and (b)
(d) foreign arrangements similar to Japanese LLP
Rental real property activity includes not only the rental of land and
buildings but also leasing ships and aircraft. The aim of this rule is to
prevent individual taxpayers from offsetting losses incurred from
investments in aircraft leasing arrangements through partnerships
against any other income.
2.3.3 Corporate Partners of Japanese LLP
When a corporate partner of an LLP incurs losses from the LLP

business in 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 in

subsequent years, the excess LLP losses incurred in prior years can
be offset against the profits.
2.3.4 Individual Partners of Japanese LLP
When an individual partner of an LLP derives rental real property

income, business income or forestry income from the LLP business,
if the losses incurred from the LLP business in a year exceed the
amount calculated 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.
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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 each year, based on income for the preceding year.
Moreover, those individuals who are operating certain specified
businesses of their own at fixed places in Japan are liable for
business tax assessable by prefectural governments.
3.2 Taxpayers
3.2.1 Classification of Individual Taxpayers
Under the Income Tax Law of Japan, there are two categories of
individual taxpayers; resident and non-resident.
(1) Resident
A resident is an individual who has their domicile in Japan or has

resided in Japan for a continuous period of 1 year or more.
Residents are further divided into either non-permanent or
permanent residents with consequential tax implications as
described below.
(i) Non-permanent resident
A non-permanent resident is a resident who does not have

Japanese nationality 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

and inhabitant taxes on Japanese source income plus foreign
76
source income paid in or remitted to Japan.
(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 worldwide income.
(2) Non-Resident
A non-resident is an individual other than a resident; therefore an

individual who has no domicile in Japan, or has not been resident
for a continuous 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
permanent establishment in Japan.
3.2.2 Domicile
Domicile, as provided for in the Income Tax Law of Japan, means

the principal place of living. Whether or not an individual has their
domicile in Japan is determined on the basis of objective facts, such
as the fact that the person has an occupation in Japan, that the
persons spouse or other relatives make up the persons household
in Japan, or that the place 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 at the same moment.
Generally speaking, if a person, regardless of whether the person is

a Japanese national or a foreign national, has come to reside in
Japan to engage 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 the persons stay in Japan is not 1
77
year or more. It should be noted in this connection that the visa
status under which a foreign national has been permitted to enter
Japan is not directly relevant.
3.2.3 Short-Term Visitors
Generally, Japans double tax treaties are in line with the OECD
Model Treaty 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
twelve month 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 in
Japan.
3.3 Tax Rates
3.3.1 Tax Rates on Ordinary Income
The following progressive tax rates are applied to the net of

assessable ordinary income minus allowable deductions and
personal reliefs.
(1) National Income Tax Rates

(JPY)
Tax rate
Taxable income
applicable
Deduction
to taxable
From But not over
income band
- 1,950,000 5% -
1,950,000 3,300,000 10% 97,500
3,300,000 6,950,000 20% 427,500
6,950,000 9,000,000 23% 636,000
9,000,000 18,000,000 33% 1,536,000
18,000,000 - 40% 2,796,000
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From 2015, the highest tax rate will be raised from 40 percent to
45 percent for taxable income in excess of JPY40 million.
(2) Inhabitant Tax Rates
Inhabitant tax consists of two elements; a small levy imposed

regardless of the amount of income (per capita levy) and a more
significant tax based upon the taxable income of the individual
taxpayer (Income based levy).
Per capita levy

(JPY)
Municipal inhabitant Prefectural inhabitant
tax tax
3,000 1,000
Income based levy
The inhabitant tax rate is 10 percent regardless of the amount of

taxable income.
3.3.2 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 as of 1 January of the sale year) 30 percent 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 income tax
and 5 percent inhabitant tax
Where the asset sold is a residence, further concessions such as

special deductions, loss carry-forward and preferential tax rates are
available.
Note that if land in Japan was acquired in 2009 and 2010, a capital
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gains rollover relief or a special deduction for long-term capital gains
may be available, which is discussed in 1.6.
3.3.3 Tax Rates on Investment Income until 2015
(1) Investment Income derived from Listed Shares
Dividend income from listed shares, in principle, is required to be

added to ordinary income; however, a taxpayer has the following
options to settle their tax liability on the dividends from listed shares
unless the taxpayer holds 3 percent or more of the outstanding
shares of a Japanese dividend paying company:
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 tax and 5 percent inhabitant tax).
Capital gains from sales of listed shares are basically taxed at 20

percent (15 percent national tax and 5 percent inhabitant tax)
separately from ordinary income. When calculating such capital
gains, any gains/losses from sales of shares including non-listed
shares are aggregated.
Note that if a taxpayer suffers capital losses from certain sales of

listed shares in a given year, such capital losses can be offset
against dividend income from listed shares declared separately from
ordinary income.
Moreover, it is possible to carry over capital losses incurred from

certain sales of listed shares for 3 years to set off against the
following income:
dividend income from listed shares declared separately from

ordinary income
capital gains from listed and non-listed shares
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Note that dividends and capital gains from publicly-offered stock
investment trusts are basically treated in the same way as those
from listed shares.
(2) Investment Income derived from Non-Listed Shares
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 tax return if the amount
of the dividend 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 dividend and divided by 12.). Note
that such dividends are still required to be declared for inhabitant
tax purposes.
Capital gains from the sale of non-listed shares are basically taxed at
20 percent (15 percent national tax and 5 percent inhabitant tax)
separately from ordinary income. When calculating the capital gains,
any gains/losses from sales of shares including listed shares are
aggregated.
Note that dividends and capital gains from privately-offered stock

from non-listed shares.
(3) Investment Income derived from Bonds/Bond Investment

Trusts/Bank Deposits
Interest from bonds, bond investment trusts and bank deposits is

generally taxed only through withholding tax and declaration in an
income tax return is not required provided that the interest is paid in
Japan. Capital gains from sales of bonds are generally not taxable.
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3.3.4 Tax Rates on Investment Income from 2016
(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 to settle their tax liability on the dividends from listed shares
unless the taxpayer holds 3 percent or more of the outstanding
shares of a Japanese dividend paying company:
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 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
discount bonds where tax is withheld at the time of issuance)
Capital gains from sales of listed shares and specified bonds are
basically taxed at 20 percent (15 percent national tax and 5 percent
inhabitant tax) separately from ordinary income. When calculating
the capital 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
of listed shares and specified bonds in a given year, such losses can
be offset against dividend income from listed shares declared
separately from ordinary income and interest income from specified
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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

from listed shares. Also, interest and capital gains from publicly-
offered bond investment 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 tax return if the amount
of the dividend 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 dividend and divided by 12.). Note
that such dividends are still required to be declared for inhabitant
tax purposes.
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 in
Japan.
Capital gains from sales of non-listed shares and ordinary bonds are
basically taxed at 20 percent (15 percent national tax and 5 percent
inhabitant tax) separately from ordinary income. When calculating
83
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

from non-listed shares. Also, interest and capital gains from
privately-offered bond investment trusts are treated in the same
way as those from ordinary 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 that the interest is paid in Japan.
3.3.5 Withholding Tax Rates on Investment Income
Withholding tax rates on interest/dividends paid to individuals in

Japan are as follows:
National Inhabitant
Investment income
income tax tax
Dividends from listed
shares(*)/publicly-offered stock 15% 5%
investment trusts
Dividends from non-listed shares/
privately-offered stock investment 20% -
trusts
Interest on bonds/bond investment
15% 5%
trusts/bank deposits
(*)
If an individual holds 3 percent or more of the outstanding shares
of a Japanese dividend paying company, the tax rate for
dividends from non-listed shares is applied.
Please see 4.8.2 for details of withholding tax imposed on

investment income earned by non-residents.
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3.3.6 Tax Rates Imposed on Non-Residents
In general, a non-resident is liable for Japanese 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 non-resident is generally not liable for inhabitant tax. Where a
non-resident is registered in the relevant municipal government
under the Basic Resident Registration system, the individual may be
liable for inhabitant tax.
3.3.7 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 to 2037 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 the national 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 for municipal inhabitant tax and JPY500 for prefectural
inhabitant tax) from 2014 to 2023 for reconstruction funding.
3.4 Assessable Income
An individuals taxable income is defined as assessable income less

allowable deductions. Assessable income for these purposes
consists of the following:
interest income
dividend income
real estate income
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business income
employment income
retirement income
timber income
capital gains
occasional income
miscellaneous income
3.4.1 Remuneration
When considering the tax position of expatriates assigned to work

in Japan, the most significant item of assessable income is likely to
be employment income.
Employment income may commonly include the following items:
basic salary
bonus
cost of living allowance
overseas premium
housing allowance or company housing
maid allowance
utility allowance
childrens tuition allowance
foreign exchange allowance
tax equalization
medical allowance
stock options
other economic benefits, such as company car or home leave
transportation
In addition to the foregoing, the expatriates may continue to be

covered by 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 within assessable income, unless specifically exempted
86
from taxes under the tax laws, regulations or administrative rulings.
3.4.2 Treatment of Benefits
(1) Company Housing
Rent paid by an employer is not entirely included in assessable

income, however the assessed rental (legal rent) (i.e. the value of
the taxable economic benefit) is included.
Assessed rental is determined using a formula which considers the

type and value of the premises. Generally, the taxable amount is in
the range of 5 to 10 percent of the actual rent for an employee or
50 percent for an officer (the 50 percent rate can be reduced to 35
percent if the premises are used partly for business purposes).
(2) Childrens 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 the contribution plan of certain international schools
in Japan. Under such plans, an employer company can effectively
make a donation to the school and in recognition of this, children of
employees are exempted from tuition fees for attending the school.
The employees are not required to report any benefits arising from
this arrangement as taxable income. However, employer companies
are required to treat the contribution payments as donations for
corporate income tax purposes. As discussed in 1.8.10, donations
have only limited deductibility for corporate 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 of donations to such qualifying schools.
87
(3) Company Car
A company car used for the employers business is not treated as a

taxable economic benefit.
(4) Home Leave Transportation
Cash or an in-kind benefit provided by an employer to an expatriate

in Japan to facilitate a home leave trip to that expatriates 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
expatriates co-habiting family members. Such home leave should,
generally speaking, be limited to a single trip per year and should be
in accordance with the employers working rules, terms of the
expatriates contract, etc. Further, the expense should be
reasonable based upon the relevant facts, 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 a
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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 indirectly by 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
the shareholders meeting for the option grant and the tenth
anniversary.
The total exercise price of all options exercised in a year must

not exceed JPY12 million.
The exercise price of the option must be equal to or higher than

the fair market value of the underlying shares on the date the
agreement for the option grant is concluded.
The option rights cannot be transferred.
Issuance of new stock pursuant to the stock options was made

in compliance with the Japanese Commercial Code or Japanese
Company Law relating to a shareholders 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
by an option holder, but must be kept in trust and custody by either
a securities company or a trust company (Trust) in accordance with
a prearranged agreement made between a company and the Trust.
That is, share certificates must be kept under the supervision and
control of the Trust until such shares are sold.
(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 fair market value and exercise price on the date of exercise. The
income is generally treated as additional compensation and subject
to ordinary income taxes.
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3.4.3 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

JPY100,000 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 the commemoration 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 sale price must be 70 percent

or more of the ordinary selling price, and the quantity of the
discounted goods sold to an employee should be such as would
reasonably be required for the use of the household of the
officer or employee.)
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 the insurance term
insurance premiums, provided the amount borne by the

employer shall not exceed JPY300 a month
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compensation for damage paid to a third party and legal fees in
connection therewith where such damage was caused by an
officer or employee while on duty and not due to their fault
golf club or social club membership fees, etc. provided that they
are connected with the business of the employer
dividends and capital gains from listed shares held in an

individual savings account, in which an individual can make
investments in listed shares up to JPY1 million per year from
2014 to 2023 and hold them for a maximum of 5 years
3.5 Allowable Deductions
3.5.1 Standard Deductions
The following standard deductions are allowable to a resident

taxpayer.
(1) Employment Income:

(JPY)
Amount of compensation Standard deduction
40% of compensation
Up to 1,800,000
(subject to 650,000 minimum)
Excess over 1,800,000 30% of compensation +
Up to 3,600,000 180,000
Up to 6,600,000 540,000
Up to 10,000,000 1,200,000
Up to 15,000,000 1,700,000
Excess over 15,000,000 2,450,000
91
The maximum standard deduction (currently JPY2,450,000) will be
reduced to JPY2,300,000 (for compensation over JPY12,000,000) in
2016 and JPY2,200,000 (for compensation over JPY10,000,000)
from 2017 onwards.
When a resident taxpayer having employment income has borne

specified expenditure in a given year, the following amounts can be
deducted from gross compensation in addition to the standard
deduction:
Amount of compensation Deductible amount

Specified expenditure
Up to JPY15,000,000
(standard deduction x 1/2)
Over JPY15,000,000 Specified expenditure JPY1,250,000
Note that the deductible amount will be calculated by the specified

expenditure less 50 percent of the standard deduction regardless of
the compensation amount from 2016 onwards.
Specified expenditure includes expenditure for commuting,

relocation and professional qualifications. Expenses for books,
clothing and entertainment directly required to perform duties are
also treated as specified expenditure, up to JPY650,000 a year.
(2) Retirement Income:

(JPY)
Circumstances Standard deduction
Up to first 20 years of service 400,000 per year of service
For each year of service over 20
700,000 per year of service
years
Minimum deduction 800,000 per case
Special deduction for those Amount of the above deduction
retiring due to physical handicap + 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
the ordinary tax rates but separately from ordinary income.
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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.
3.5.2 Specific Deductions
The following deductions are applicable to a resident taxpayer. Note

that a non-resident taxpayer subject to progressive tax rates may
also enjoy special deductions for casualty losses incurred on the
assets in Japan and donations.
(1) Casualty Losses
A deduction is available for losses incurred on a taxpayers assets,

or those of family members living in the same household, from a
disaster or a robbery. The deductible amount is equivalent to any
loss not covered by insurance proceeds, etc. in excess of the
smaller of JPY50,000 or 10 percent of assessable income.
(2) Medical Expenses
A deduction is available for medical expenses for the taxpayer and

family members living in the same household. The deductible
amount is equivalent 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
JPY2,000,000.
(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.
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(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]

(JPY)
National Inhabitant
Life insurance premiums
income tax tax
Life insurance premiums 50,000 35,000
Personal pension insurance
50,000 35,000
premiums
[For insurance policies entered into on or after 1 January 2012]

(JPY)
National Inhabitant
Life insurance premiums
income tax tax
Life insurance premiums 40,000 28,000
Personal pension insurance
40,000 28,000
premiums
Medical care insurance
40,000 28,000
premiums
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 by

foreign 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 were entered into before 1 January 2007. The maximum
94
deduction for long-term casualty insurance premiums is JPY15,000
and JPY10,000 for national 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
for national 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 can be deducted from income for national income tax
purposes, and a half of the 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
designated by the Minister of Finance
(iv) institutions for scientific study or research specifically provided
for in the regulations
(v) public interest incorporated associations/ foundations,
educational institutions and social welfare institutions, etc.
(vi) political parties or organizations (where the donations are
qualified under certain conditions and made by 2014)
(vii) 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.
95
In order to support people and areas affected by the Great East
Japan earthquake, special measures have been established in
connection with earthquake-related donations. When earthquake-
related donations are made, the ceiling for the total eligible
donations deductible amount for earthquake-related donations and
other tax qualified donations is expanded from 40 percent to 80
percent of the total assessable income, although the ceiling for the
donations other than earthquake-related donations remains 40
percent.
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

for 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.
(JPY)
National Inhabitant
Relief
income tax tax
Basic deduction for taxpayer 380,000 330,000
Spouse younger than 70 years 380,000 330,000
Spouse - 70 years or older 480,000 380,000
Dependent - 16-18 years of age 380,000 330,000
Dependent 19-22 years of age 630,000 450,000
Dependent 23-69 years of age 380,000 330,000
Dependent - 70 years or older 480,000 380,000
Parent, 70 years old or older, of
the taxpayer or his or her spouse 580,000 450,000
living under the same roof
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[Additional reliefs for specific cases ]
(JPY)
National Inhabitant
Relief
income tax tax
Physically handicapped person 270,000 260,000
Severely physically handicapped
400,000 300,000
person
If severally physically
handicapped person is living with 750,000 530,000
the taxpayer
Widow (or widower), divorcee or
270,000 260,000
working student
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 and donations.
3.7.1 Credit for Dividends
This credit is applicable to domestic dividend receipts only. The

amount of the credit is calculated at the following rates:
National
Income band into which the Inhabitant tax
income tax
dividend income falls purposes
purposes
Up to JPY10,000,000
Dividends from shares 10% 2.8%
Distribution from stock
5% 1.4%
investment trusts
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Over JPY10,000,000
Dividends from shares 5% 1.4%
Distribution from stock
2.5% 0.7%
investment trusts
Dividend income is treated as the top slice of a taxpayers 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

separately from ordinary income. In this case, the above tax credit is
not available.
3.7.2 Credit for Withholding Income Tax
Income tax withheld from employment income, from dividends not

subject to separate taxation and from other income reportable in a
final return should be credited against income tax due on the final
tax return. Special reconstruction income tax imposed on such
withholding tax is also creditable against special reconstruction
income tax due on the final tax return.
3.7.3 Credit for Foreign Taxes
Where a resident pays foreign taxes in a year, such foreign taxes

are creditable against their Japanese income tax payable to the
extent of the limit calculated by the following formula:
Foreign source
Creditable Japanese income income
= x
limit tax Entire income
taxable in Japan
Any 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
98
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 income tax credit amount (municipal inhabitant tax)
and 12 percent of the income tax credit amount (prefectural
inhabitant tax).
Any remaining excess of foreign tax suffered can be carried forward

for crediting in the 3 succeeding years. Similarly, any unused
element of the tax credit limitation for income tax and inhabitant tax
purposes can be carried forward for up to 3 years.
3.7.4 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 income tax purposes.
Creditable amount = (a) + (b)

(a) Tax credits for
(i) (Donations to political parties(1) -
donations to
JPY2,000) x 30%
political parties
(The smaller of
(ii) Income tax before tax credits x 25%
either (i) or (ii))
(b) Tax credits for (i) Total of the following:
donations to (Donations to designated NPOs(2) -
authorized JPY2,000) x 40%
NPOs/public (Donations to certain public interest
interest entities entities(3) - JPY2,000) x 40%
(The smaller of
either (i) or (ii)) (ii) 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
2019)
99
(2)
Donations to authorized NPOs (where donations are qualified
under certain 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.
(2) Inhabitant Tax
For inhabitant tax purposes, the following tax credits are available:
Creditable amount = (a) + (b)

(a) Basic tax credit (Total amount(1) of eligible donations(2) -
JPY2,000) x 10%
(b) Additional tax (i) (Total amount of donations to local
credit governments JPY2,000) x (90% -
(The smaller of marginal income tax rate for the
either (i) or (ii)) individual x 102.1%(3))
(ii) Inhabitant tax before tax credits x 10%
(1)
Subject to a ceiling of 30 percent of the total assessable income
(2)
The eligible donations are donations to local governments and
donations designated by the Minister of Internal Affairs and
Communications and local governments.
(3)
2.1 percent is an equivalent of the special construction income
tax.
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3.8 Remuneration Paid Outside Japan
As discussed at section 3.2 above, expatriates with not more than 5

years residence in Japan are generally treated as non-permanent
residents and are liable for Japanese taxes only on income from
sources within Japan (plus any income from sources abroad which
is deemed to be paid in Japan or is 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
administered and paid outside Japan (offshore payroll).
Where an offshore payroll is used, the element of the expatriates

employment income treated as non-Japan source can be
determined 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 in Japan to be repaid outside Japan, etc. Where
an offshore payroll arrangement is utilized, it is necessary for
relevant employees to keep a record 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 be taxed in Japan on their worldwide
income.
An additional benefit from the utilization of an offshore payroll is

that payments made outside Japan should not be subject to
Japanese withholding tax. In such cases, the tax liabilities would be
settled by filing an income tax return and the associated tax
payment dates would be as discussed in 3.9.
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3.9 Filing Tax Returns and Tax Payments
3.9.1 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 an individual has an obligation to lodge their income tax return and

their total income exceeds JPY20 million for a calendar year, the
individual must submit a Statement of Assets/Liabilities together
with their income tax return to declare the type, number and value
of assets and amount of liabilities as of the end of the calendar year.
If the remuneration subject to withholding tax does not exceed

JPY20 million and the amount of other income is less than
JPY200,000, the person is not required to file a tax return since the
tax liabilities are settled 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 the year-end adjustment procedures, a
tax return should be filed to declare such deductions.
(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 July and November. The estimated tax payments are
generally equal to one-third of the net of the income tax amount for
the previous year less withholding 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
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net amount and special reconstruction income tax thereon is less
than JPY150,000, prepayments are not required.
(3) 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 of Overseas Assets to report their overseas assets by
15 March of the following 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.
3.9.2 Inhabitant Taxes
Generally, an inhabitant tax return is not required to be filed since

the information 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

on such income is paid to a municipal office through the employer
as discussed in 3.10.2. 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.
3.10 Employers Obligations
3.10.1 National Income Taxes
(1) Withholding tax on remuneration
The employer company is required to withhold monthly from

salaries, wages, remuneration, bonuses and other employment
income, including taxable economic benefits paid and/or provided in
Japan to officers and employees, such tax amounts as are provided
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for in the tax tables and to pay such tax amounts so withheld to the
government by the 10th of the following month.
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 a permanent establishment in Japan, employment
income paid to such non-resident outside Japan is regarded as
having been paid by the permanent establishment and the 20
percent tax thereon is required to be paid to the government by the
end of the month following the month of 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
(see section 3.8 above). However, in such situations it can often be
the case that certain taxable economic benefits continue to be
provided in Japan and these would give rise to withholding tax
administration obligations. Such economic 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

the compensation 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 for the calendar year concerned in connection with the
last payment of salaries or bonuses for that year so that the total tax
withheld from each payment should be the national income tax to
be imposed on the annual compensation.
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 the Japanese subsidiary are directly or indirectly held by the
foreign company) 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 the directors/employees and details of the
stock-based compensation to the competent tax office by 31 March
of the following year.
3.10.2 Inhabitant Tax
Payers of employment income are required to submit a report on

the employment income subjected to withholding income tax for
the preceding year, in respect of officers and employees of such
payers as of 1 January of the current year, to the appropriate offices
of the municipalities in which the officers and employees resided as
of such date.
The municipal offices are to assess inhabitant tax to be collected

from the officers and employees in 12 equal installments, from
June of the current year to May of the following year. The payers of
the officers and employees 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
4.1.1 Outline
A Japanese company holding a Foreign Subsidiary is generally

entitled to the foreign dividend exclusion (FDE). The tax treatment
under the FDE is as follows:
95 percent of dividends (before deduction of withholding taxes

thereon) from a Foreign Subsidiary are exempt from corporate
income tax in the hands of the Japanese parent company.
Foreign withholding taxes on dividends from Foreign

Subsidiaries are not creditable regardless of whether the FDE is
applied to the dividends.
Foreign withholding taxes on dividends from Foreign

Subsidiaries are not deductible if the FDE is applied to the
dividends.
Attaching a schedule to the final corporate tax returns and retention

of certain related documents is required in order to apply the FDE.
4.1.2 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 Japanese

company. The holding ratio for this purpose is determined based on
the number of outstanding shares or the number of shares with
voting rights.
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Where a tax treaty with Japan and the country of residence of the
foreign company has a reduced holding threshold for indirect
foreign tax credits (FTC) 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 (in terms of shares with voting rights only), Australia and the
Netherlands, 15 percent for France).
For Japanese companies applying the tax consolidation system, the

holding ratio can be determined by the holding ratio of the
consolidated group. Note that in this case, the reduced holding
ratios under tax treaties are not available.
(2) 6 Month Test
The 25 percent test should be continuously satisfied for at least 6

months prior to the point in time when the obligation to pay the
dividends 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.
In the case of a tax-qualified reorganization (such as a tax-qualified

merger), if 25 percent or more of the outstanding shares or the
voting rights held by the merged company are transferred to the
surviving company, the holding period before the reorganization
should be counted.
4.2 Foreign Tax Credits
4.2.1 Basic Rules
Under the FTC system, a Japanese company is allowed to take

credits for foreign corporation tax or counterpart of Japanese
corporation tax, including foreign local tax and withholding tax,
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suffered directly by the Japanese company.
For fiscal years beginning on or after 1 April 2016, a foreign

company having a PE in Japan will also be entitled to take a foreign
tax credit.
4.2.2 Creditable Limit
The amount of foreign tax for which credit can be taken is limited to
the lower of:
(i) the adjusted creditable foreign tax; and

(ii) the creditable limit.
In calculating adjusted creditable foreign tax, certain foreign taxes

such as 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:
[Japanese company]
Foreign source income

Japanese corporation tax x
Total taxable income
[Foreign company having a PE]
Foreign source income

Japanese corporation tax
included in income attributable
on income attributable to x
to the PE
the PE
Income attributable to the PE
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.
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- Foreign source income for the fiscal year should be reduced by
five-sixths (100 percent for fiscal years beginning on or after 1
April 2014) of the amount of foreign source income which is
exempted from foreign taxation.
- The ratio of foreign source income to total taxable income

(income attributable to the PE for a foreign company) for the
purposes of the calculation is limited to a maximum of 90
percent.
- Any allocation of expenses between domestic source and

foreign source income should be done on a reasonable basis.
- If the amount of the adjusted creditable foreign tax is over the

creditable limit for corporation tax purposes, such excess
amount is creditable against special reconstruction corporation
tax and local corporation tax to the extent of the creditable limit
for special reconstruction corporation tax purposes and local
corporation tax purposes, respectively, which is calculated in a
similar way as discussed above.
- Foreign tax credits are also available for prefectural and

municipal inhabitant tax purposes with additional creditable limits
(i.e. the creditable limit indicated in the above formula multiplied
by inhabitant tax rates).
4.2.3 Carry-Forward Systems
If due to the application of the creditable limit restriction there

remains eligible foreign tax which has not been credited in the fiscal
year, this amount 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
year, the residual amount of the creditable limit can be carried
forward for up to 3 years to increase the creditable limit applicable
in subsequent fiscal years.
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4.2.4 Tax Sparing Credits
Tax sparing credit is allowed under a very limited number of the

double 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 Japans recent tax treaty
policy.
4.3 Transfer Pricing
The transfer pricing legislation is set out under the Special Taxation
Measures Law for the purpose of preventing tax avoidance by
companies through transactions with their Related Overseas
Companies.
4.3.1 Transactions subject to Transfer Pricing Legislation
The sale of assets, purchase of assets, rendering of services and

any other transactions with Related Overseas Companies which do
not meet the arms-length concept are subject to the transfer
pricing legislation. Transactions with Related Overseas Companies
conducted through unrelated companies could also be subject to
this legislation.
4.3.2 Related Overseas Companies
A Related Overseas Company for these purposes is a foreign

company which has any of the following specific relationships with
a Japanese company:
(i) Shareholding relationship
- a relationship between two companies in which one company
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owns directly or indirectly 50 percent or more of the total issued
shares of the 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
companys business 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

relationship
4.3.3 Arms-Length Price
The transfer pricing legislation provides for five methods to reach an

arms length price: (1) comparable uncontrolled price method, (2)
resale price method, (3) cost-plus method, (4) profit split method
and (5) transactional net margin method.
(1) Comparable Uncontrolled Price Method
Under this method the price is determined based upon the pricing
of a transaction carried out between unrelated parties which is
similar in nature to the subject transaction. Where there are
differences in the conditions between the comparable transaction
and the subject transaction, price adjustments should be taken into
account.
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With respect to comparable transactions for this purpose, there are
two types: (i) transactions made by one of the related companies
with an unrelated company, and (ii) transactions made between
third parties.
(2) Resale Price Method
Under this method the price is calculated based on the selling price
of the buyer to unrelated companies minus a gross profit which is
applicable to similar 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 with

Related 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
amount of expenses, fixed assets or other reasonable factors.
(5) Transactional Net Margin Method
Under this method the price is determined by reference to net profit

on comparable uncontrolled transactions expressed as a percentage
of a base factor (e.g. cost, sales).
4.3.4 Submission of Information and Documents
If a company has any transactions with Related Overseas

Companies, the company must attach to its corporation tax return
statement providing information on the Related Overseas
Companies and details of the transactions as follows:
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Information concerning Related Overseas Companies:
- name
- address of head office or principal office
- main business
- total number of employees
- amount of paid-in 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 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
- receipt or payment of royalties for intangible assets and the
- receipt or payment of interest on loans and the transfer pricing
method
- Advance Pricing Agreement (APA) status
For the purpose of recalculation of income derived from the

transactions based on the arms-length concept, the tax authorities
may ask the company to submit necessary documents maintained
by the Related Overseas Companies. In this event, the company
must make efforts to submit such information or documents
requested by the tax authorities as soon as possible.
If the company does not take immediate action on the request, the
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tax authorities may assess the arms-length price based on an
appropriate general transfer pricing methodology and recalculate
taxable income as a result of such changes. If the company does
not agree with the price so determined and the assessment made
by the tax authorities, the company has the responsibility to prove
that the price applied to the transactions with the Related Overseas
Companies is arms-length in nature.
4.3.5 Miscellaneous
In a case where the transactions subject to this legislation are

those with Specified Foreign Subsidiaries (SFSs), the taxable
income of the SFS should be calculated based on the adjusted
arms-length price in order to eliminate double taxation.
The statute of limitations in relation to tax investigations of

transfer pricing issues is 6 years, while the statute of limitations
for non-transfer pricing issues is normally 5 years.
The tax authorities are allowed to investigate the books of

account of companies engaged in the same business in relation
to the investigation of a taxpayer company in certain
circumstances.
A grace period for the payment of corporate tax and penalties

thereon may be granted for those requesting a Mutual
Agreement Procedure (MAP) under the relevant tax treaty.
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4.4 Thin-Capitalization Rules
4.4.1 Safe Harbor of Debt-Equity Ratio
The thin capitalization rules are applicable if the debt-equity ratios in

(i) and (ii) below for a Japanese company are both more than 3:1.
Debt Equity
Interest-Bearing Debts
Net Equity owned
(i) due to Overseas Controlling
by Overseas Controlling
Shareholders
Shareholders
and Specified Third Parties
Net Equity
(ii) Total Interest-Bearing Debts
of 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.
4.4.2 Definitions of Keywords
The definitions of the keywords under the thin capitalization rules

are as 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
both individuals and companies are very similar. Where the person
is a foreign company, 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
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company in which the same person owns directly or indirectly 50
percent or more of the total outstanding shares in both
companies

company in which the foreign company can, in substance,
engage in decision making regarding the Japanese companys
business affairs due to shared directors, substantial business
transactions, financing, etc.
(2) Specified Third Parties
If a person falls under either of the following, that person is treated

as a Specified Third Party:
a third party who provides a loan to a Japanese company under a

back-to-back loan arrangement with an Overseas Controlling
Shareholder of the Japanese company
a third party who provides a loan to a Japanese company

guaranteed by an Overseas Controlling Shareholder of the
Japanese company
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
Japanese company, and a third party (B) who provides a loan to
the Japanese company by taking the above bonds as collateral
(3) Interest-Bearing Debts
Interest-Bearing Debts means the average balance (daily, monthly

or quarterly average) of interest-bearing debts.
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(4) Net Equity
The average balance of the net of total assets minus total liabilities.
If the net is less than the total of paid-in capital and capital surplus
(for tax purposes), the latter is treated as net equity for the purpose
of this rule.
4.4.3 Amount to be Disallowed
The amount to be disallowed under the thin capitalization rules is

calculated as follows:
Cases Disallowed amount

{ (A) + (B) + (C) (D) }
{ (A) + (B) } (D) (c) x
(C)
{ (A) + (B) (D) }
{ (A) + (B) } > (D) (c) + { (a) + (b) + (b) } x
{ (A) + (B) }
The letters used in the above formula refer to the following

amounts:
Interest-Bearing Debt due to Overseas Controlling

Shareholders
(A)
(where interest is not subject to income tax/corporation tax
in Japan)
Interest-Bearing Debt due to Specified Third Parties
(B) (where interest is not subject to income tax/corporation tax
in Japan)
Interest-Bearing Debt due to Specified Third Parties
(C) (where interest is subject to income tax/corporation tax in
Japan)
Net Equity owned by Overseas Controlling Shareholders x 3
(D)
(or comparable ratio)
(a) Interest on (A)
(b) Interest on (B)
(b) Guarantee fees/bond borrowing fees relating to (B)
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(where they are not subject to income tax/corporation tax in
Japan)
Guarantee fees/bond borrowing fees relating to (C)
(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 permanent establishment in Japan should be not
subject to income tax/corporation tax in Japan, regardless of
whether Japanese withholding tax is imposed on the interest.
Interest includes discounts on bills/notes, redemption losses on

bonds and other payments whose economic characteristics are
equivalent to interest.
4.4.4 Miscellaneous
The amount to be disallowed for corporation tax purposes is not

treated as a dividend for withholding income tax purposes.
Where bonds borrowed under a cash-secured bond lending

transaction (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 under another 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.
Although a foreign company carrying on business in Japan

through a PE is also subject to the thin capitalization rules, this
section covers only the tax treatment for a Japanese company.
By virtue of the 2014 tax reform, the interest deduction for a

foreign company having a PE will be restricted by another new
rule, not by the thin capitalization rules, for fiscal years beginning
on or after 1 April 2016. Under the new rule, when the amount
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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 will not be allowed in
calculating income attributable to the PE.
4.5 Earnings Stripping Rules
4.5.1 Limitation on Deductions for Excessive Interest

Payments
When a Japanese companys Net Interest Payments to Related

Persons exceed 50 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

-
to Related Persons(*) x 50%
(*)
Net Interest Payments to Related Persons means Interest
Payments to Related Persons less Eligible Interest Income.
4.5.2 Definitions of Keywords
The definitions of the keywords under the Japanese earnings

stripping rules are as follows:
(1) 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 in (ii) below. Note that while taxable income can
be negative, Adjusted Taxable Income cannot.
(i) Main provisions not applied in calculating Adjusted Taxable

Income
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deduction for domestic dividends received
foreign dividends exclusion
certain valuation losses
disallowance of deductions for income tax/foreign tax credited
against corporation tax
deduction of carried-forward tax losses
deduction of dividends paid by tax qualified special purpose
companies
thin capitalization rules
earnings stripping rules
(ii) Items to be added back in calculating Adjusted Taxable Income
Net Interest Payments to Related Persons

tax deductible depreciation
tax deductible bad debt losses
(2) Related Persons
Related Person means any person described in (i) and (ii) below:
(i) Any person with a specified relationship
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 and companies 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
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
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a relationship between two companies in which one company
can, in substance, engage in decision making regarding the other
companys business affairs due to shared directors, substantial
business transactions, financing, etc.
(ii) Certain third parties
a third party who provides a loan to a Japanese company under a

back-to-back loan arrangement with a Related Person of the
Japanese company as described in (i)
a third party who provides a loan to a Japanese company

guaranteed by a Related Person of the Japanese company as
described in (i)
a third party who provides a loan to a Japanese company by

taking bonds the Japanese company has borrowed from a
Related Person of the Japanese company as described in (i) as
collateral
a third party (A) who lends bonds to a Japanese company which

are guaranteed by a Related Person of the Japanese company as
described in (i), and a third party (B) who provides a loan to the
Japanese company by taking the above bonds as collateral
(3) Interest Payments to Related Persons
Interest Payments to Related Persons means interest paid by a

Japanese company to its Related Persons, excluding payments
subject to income tax/corporation tax in Japan. Note that subject to
income tax/corporation tax broadly means declared as taxable
income in a Japanese tax return, and thus interest paid to a Related
Person who is a non-resident individual/foreign company not having
a permanent establishment in Japan is included in Interest
Payments to Related Persons, regardless of whether Japanese
withholding tax is imposed on the interest.
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(4) Eligible Interest Income
Eligible Interest Income for a fiscal year is calculated as follows:
Total Interest Payments

Total Interest to Related Persons
x
Income
Total Interest Payments
If a Japanese company receives interest from a Domestic Related

Person (a Related Person who is a Japanese resident
individual/Japanese company or a non-resident individual/foreign
company having a permanent establishment 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 is neither the Japanese company nor another Domestic
Related Person
The purpose of this rule is to close a loophole whereby a Japanese

company provides a loan to a Domestic Related Person for the
purposes of: (i) reducing its Net Interest Payments to Related
Persons amount; and (ii) reducing taxable income for the Domestic
Related Person.
(5) Interest Payments and Interest Income
The scope of Interest Payments and Interest Income for the

purpose of the earnings stripping rules 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)
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redemption losses on bonds
guarantee fees and bond borrowing fees paid to Related Persons
in the cases described in (2)(ii) above
amortization of premiums on securities having a maturity date or
a fixed redemption price
other payments whose economic characteristics are equivalent
to interest
(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 to
interest
4.5.3 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
Japanese earnings stripping rules in such fiscal year provided the
relevant schedules are attached to its tax returns and documents
relating to the calculation of excess interest are retained.
Net Interest Payments

(i) JPY10 million
to Related Persons
Interest Payments
(ii) Total Interest Payments(*) x 50%
to Related Persons
(*)
Excluding interest paid to Related Persons where the interest is
subject to Japanese income tax/corporation tax.
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4.5.4 Deductions of Disallowed Interest Payments
When a Japanese companys Net Interest Payments to Related

Persons are less than 50 percent of Adjusted Taxable Income for a
given fiscal year, disallowed interest payments incurred in the past
7 years are deductible in such fiscal year up to the 50 percent
threshold provided certain conditions are satisfied, e.g. relevant
schedules are attached to the tax returns for all fiscal years from the
fiscal year in which the oldest disallowed interest payments were
incurred.
4.5.5 Miscellaneous
If both the earnings stripping rules and the thin capitalization

rules described in 4.4 are applicable in a fiscal year, only the
larger of the disallowed amounts (after applying the de mininis
rule discussed in 4.5.3) under either will be applied. As there is
no carry forward of the disallowed amount under the thin
capitalization rules, recognizing disallowed interest under the
earnings stripping rules 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 lending

transaction (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 under another bond gensaki transaction to a
Related Person, interest income and interest payments through
these transactions will be excluded in calculating the extent of
deductible interest payments.
Although a foreign company carrying on business in Japan

through a PE is also subject to the Japanese earnings stripping
rules, this section covers only the tax treatment for Japanese
companies.
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4.6 Anti-Tax Haven (CFC) Rules
Although the anti-tax haven rules can be applied to Japanese

individual residents, this section covers only the tax treatment for
Japanese companies.
4.6.1 Outline of Aggregate Tax Rules
Where a Japanese company holds an interest of at least 10 percent

in a Specified Foreign Subsidiary (SFS), either of the following rules
may be applied:
(1) Aggregate Tax Rule on an Entity Basis
If the SFS does not satisfy the Exception Conditions, the Japanese
company is required to report, as taxable income, its proportionate
share of the taxable income of the SFS.
(2) Passive Income Aggregation Tax Rule
If the SFS satisfies the Exception Conditions, the Japanese

company needs to report, as taxable income, its proportionate share
of the Passive Income of the SFS, if any.
***
Under the Aggregate Tax Rules, income of an SFS 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 SFS.
4.6.2 Scope of Specified Foreign Subsidiary (SFS)
An SFS is a foreign related company which either:
- has its main or head office in a country which does not impose
tax on income; or
- has an effective income tax rate of 20 percent or less.
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(A foreign related company means a foreign company more than 50
percent of which is directly or indirectly owned by Japanese
companies, Japanese resident individuals and non-resident
individuals having a special relationship with the Japanese
companies or the Japanese resident individuals.)
The effective income tax rate for a foreign related company is

calculated by (A)/(B) where:
(A) = (i) + (ii):
(i) foreign corporate taxes paid on income in the country in which

the foreign related companys head office is located and other
countries
(ii) foreign corporate taxes deemed to be paid using tax sparing

credits
(B) = (i) + (ii) (iii):
(i) taxable income calculated in accordance with the tax laws of the
country where the foreign related companys head office is
located
(ii) non-taxable income calculated in accordance with the tax laws of

the country where the foreign related companys head office is
located
(iii) other adjustments
In calculating (ii), it is not necessary to add back the following items

even if these are not taxed in the country where the foreign related
companys head office is located:
- domestic dividends
- foreign dividends
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4.6.3 Scope of Taxpayers
The scope of taxpayers subject to the Aggregate Tax Rules is a

Japanese company, or a Japanese company belonging to a family
company group, holding directly or indirectly at least 10 percent of
an SFS.
4.6.4 Taxable Income under Aggregate Tax Rule on an

Entity Basis
In calculating taxable income under the Aggregate Tax Rule on an

entity basis, the following items are deducted:
the following dividends that the SFS receives:
- dividends from another SFS of the Japanese company

- dividends received from a subsidiary, 25 percent or more of
whose outstanding shares are held by the SFS continuously
for 6 months or longer as at the date on which the obligation
to pay the dividends is determined
tax losses incurred in the previous 7 years
foreign corporate taxes paid on income in the country in which

the foreign related companys head office is located and other
countries
4.6.5 Exception Conditions
If an SFS satisfies all of the following four conditions for a fiscal year,
the Aggregate Tax Rule on an entity basis is not applied to the SFS
for that fiscal year (provided that a schedule is attached to the
corporate final tax returns and certain documents are retained):
(1) Business Purpose Test
The primary business of the SFS is not any of the following

businesses:
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holding of share certificates or bonds
licensing of industrial rights or copyrights
leasing of vessels or aircraft
(2) Substance Test
The SFS maintains an office, store, factory, or other fixed place of

business necessary to conduct its primary business in the country
where the head office of the SFS is located.
(3) Administration and Control Test
The SFS functions with its own administration, control, and

management in the country where the head office of the SFS is
located.
(4) Unrelated Party Test/Country of Location Test
Depending on the primary business of the SFS, either of the

following is applied:
(i) Unrelated party test
(businesses subject to this test: wholesale business, banking

business, trust business, financial instruments business, insurance
business, ocean transport or air transport business)
The business of the SFS is conducted primarily (more than 50

percent) with unrelated parties.
(ii) Country of location test
(businesses subject to this test: other than businesses listed in (i))
The business of the SFS is conducted primarily in the country

where the head office of the SFS is located.
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4.6.6 Exception Conditions for Regional Headquarters
Companies
The Exception Conditions are relaxed when an SFS is a Regional

Headquarters Company (RHQ). If an SFS satisfies the Exception
Conditions as an RHQ, a schedule including details of the RHQ and
its Controlled Companies (CCs) and a structure diagram showing
the equity relationship need to be attached to the corporate final tax
returns, and certain documents need to be retained.
(1) Regional Holding Company
Even when an RHQs primary business is holding shares, if the

book value of shares in its CCs is more than 50 percent of the total
book value of share investments of an RHQ at the end of the RHQs
fiscal year, the RHQ is considered to satisfy the business purpose
test.
Also, under the substance test and the country of location test, the
primary business of such RHQ is treated as providing management
services to its CCs.
(2) Regional Logistic Management Company
If an RHQ is primarily engaged in wholesale businesses,

transactions between the RHQ and its CCs are treated as
transactions with unrelated parties for the purpose of the unrelated
party test.
(3) Definitions of Keywords
The definitions of an RHQ, CC and management services are as

follows:
RHQ (Regional Headquarters Company)
An RHQ is an SFS satisfying the following:
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(i) 100 percent of the shares of the SFS are directly or indirectly
held by a Japanese company.
(ii) The SFS provides at least two CCs with management services.
(iii) The SFS has a fixed place of business (an office, shop or
factory) and employees (those who are mainly involved with the
management services, excluding directors of the SFS and family
members of the directors) in the country where the head office
of the SFS is located.
CC (Controlled Company)
A CC is a foreign company satisfying the following:
(i) At least 25 percent of the shares and the voting rights of the
foreign company are directly held by an RHQ.
(ii) The foreign company has employees engaged in the business

carried on in the country where its head office is located.
(iii) Either of the following exceeds 50 percent:
(a) total ownership of the foreign company by an RHQ, the

Japanese shareholder company of the RHQ and foreign
companies interposed between the RHQ and the Japanese
shareholder company (Principle Shareholders)
(b) total ownership of the foreign company by its Principle

Shareholders and foreign companies falling under (a)
(c) total ownership of the foreign company by its Principle

Shareholders and foreign companies falling under (a) or (b)
Management Services
Management services are services provided by an SFS in

accordance with a contract between the SFS and its CCs, in
connection with decisions or changes of the CCs business policy,
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which should be essential to its business. The services need to
contribute to the enhancement of the profitability of the CCs by
providing such services collectively to the CCs.
4.6.7 Scope of Passive Income
Even if an SFS satisfies the Exception Conditions, its Japanese

shareholder company needs to report, as its taxable income, a
proportionate share of the Passive Income of the SFS. The Passive
Income to be reported is the total revenue of the following items
less related expenses:
(i) dividends from shares where the SFS holds less than 10
percent of the shares
(ii) interest on bonds
(iii) difference between the redemption price and the acquisition
cost of bonds
(iv) capital gains from sale of shares described in (i) (only when sold
through exchange trades or over-the-counter transactions)
(v) capital gains derived from sale of bonds (only when sold through
exchange trades or over-the-counter transactions)
(vi) royalties from IP (e.g. patents, excluding certain IP such as that
developed by the SFS)
(vii) lease fees of vessels or aircraft
Deductible related expenses are direct expenses related to each

item including withholding taxes. For items from (i) to (iii), interest
expenses attributable to such items are also deductible.
The Passive Income Aggregation Tax Rule is not applicable for

Passive Income falling under items from (i) to (v), if such income is
derived from activities that are fundamental and essential to the
businesses (except for the three businesses listed in the business
purpose test).
If an SFS falls under either of the following cases, the Passive

Income Aggregation Tax Rule is not applied to the SFS (provided
that a schedule is attached to the corporate final tax returns and
certain documents are retained):
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- total revenue of the Passive Income JPY10 million
- total of the Passive Income 5 percent of profits before tax
The maximum amount of the Passive Income of an SFS is the

amount of the income subject to the Aggregate Tax Rule on an
entity basis for the SFS assuming that the SFS did not satisfy the
Exception Conditions.
4.6.8 Foreign Tax Credits for Foreign Taxes on

Aggregate Income
Foreign taxes levied on an SFSs income that is also taxed in the

hands of its Japanese shareholder company under the Aggregate
Tax Rules are subject to foreign tax credits in Japan.
4.6.9 Tax Treatment of Dividends Received by a Japanese

Company
There are rules to prevent double taxation where an SFSs income

taxed under the Aggregate Tax Rules is taxed again when the SFS
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 which has the Specified Taxed Amount, such dividends
are fully exempt from tax for the Japanese company to the extent
of the amount of the Specified Taxed Amount. Foreign withholding
taxes imposed on such dividends are deductible.
The Specified Taxed Amount is the amount that has been taxed
under the Aggregate Tax Rules in the fiscal year the dividend is
received (the dividend receiving year) and the fiscal years beginning
within 10 years before the commencement of the dividend
receiving year.
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(2) Dividends from a Second Tier Foreign Company
When a Japanese company receives dividends from a foreign

company (i.e. a first tier foreign company) which has an Indirect
Specified Taxed Amount, such dividends (excluding the amount
covered by (1)) are fully exempt from tax for the Japanese company
to the extent of the amount of the Indirect Specified Taxed Amount.
Foreign withholding taxes imposed on such dividends are
deductible.
The Indirect Specified Taxed Amount is the smaller of the following:
Dividends(1)
The Japanese companys
that the first tier foreign
direct holding ratio for the
company received from the
(i) x first tier foreign company
second tier foreign
(on the record date for the
company within the past 3
latest dividend)
years(2)
The second tier foreign The Japanese companys
companys income which indirect holding ratio for
has been aggregated to the the second tier foreign
(ii) x
Japanese companys company (at the end of
income within the past 3 fiscal year of the second
years tier foreign company)
(1)
Excludes certain dividends, such as those which were received
in the years before the year when the aggregated taxable
income of the second tier foreign company was derived.
(2)
Past 3 years means the fiscal year in which the Japanese
company received the dividend from the foreign company (the
dividend receiving year) and fiscal years beginning within 2 years
before the commencement of the dividend receiving year.
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4.7 Corporate Inversion
Triangular mergers may enable a Japanese company to become a

subsidiary of a foreign company located in a low-tax jurisdiction and
to reduce the global effective tax rate of the group. This is a so
called corporate inversion.
If certain conditions (e.g. the foreign parent company is a paper

company) are met, such reorganization is treated as a non-qualified
reorganization and the deferral of the recognition of capital gains
from the transfer of shares is not applicable.
Moreover, under certain circumstances, a Japanese shareholder of

the foreign 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 the Japanese shareholder is less than 10 percent.
4.8 Taxation of Foreign Companies and Individuals

/ Tax Treaties
This section covers the main items of the tax treatment of foreign
companies and non-resident individuals not having a permanent
establishment (PE) in Japan and the effect of relevant tax treaties.
Chapter 2 covers the taxation of income derived through a

partnership and 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.
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4.8.1 Tax Treaties
Japan has concluded tax treaties with the following

countries/regions as at the time of writing (1 September 2014):
Australia France Netherlands Sri Lanka

Austria Germany New Zealand Sweden
Bangladesh Hong Kong Norway Switzerland
Belgium Hungary Oman(*) Thailand
Brazil India Pakistan Turkey
Brunei Indonesia Philippines UAE(*)
Darussalam
Bulgaria Ireland Poland UK
Canada Israel Portugal US
China (PRC) Italy Romania USSR (2)
Czechoslovakia Kazakhstan Saudi Arabia Vietnam
(1)
Denmark Kuwait Singapore Zambia

Egypt Luxembourg South Africa
Fiji Malaysia South Korea
Finland Mexico Spain
Agreements centered on the exchange of information are not

included in the above.
(1)
Covers Czech Republic and Slovak Republic
(2)
Covers Russia, Georgia, Kyrgyz, Tajikistan, Uzbekistan, Ukraine,
Turkmenistan, Armenia, Moldova, Azerbaijan and Belarus
(*)
Concluded but not yet applicable as at the time of writing (1
September 2014).
Recently, the Japanese government has been actively updating the

existing tax treaties and concluding new tax treaties as follows:
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Effective dates of the
Status amendments for
Japanese taxes
Saudi Arabia Tax treaty signed in - WHT: 1 January 2012
November 2010 - Tax other than WHT:
Taxable years beginning
on or after 1 January
2012
Hong Kong Tax treaty signed in - WHT: 1 January 2012
November 2010 - Tax other than WHT:
2012
Switzerland Revised tax treaty - WHT: 1 January 2012
signed in May 2010 - Tax other than WHT:
2012
Netherlands Revised tax treaty - WHT: 1 January 2012
signed in August - Tax other than WHT:
2010 Taxable years beginning
2012
(A 1-year grandfathering
rule is available)
Kuwait Tax treaty - WHT: 1 January 2014
signed in February - Tax other than WHT:
2014
Portugal Tax treaty - WHT: 1 January 2014
signed in December - Tax other than WHT:
2014
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New Zealand Revised tax treaty - WHT: 1 January 2014
signed in December - Tax other than WHT:
2014
Oman Tax treaty signed in - WHT: 1 January 2015
January 2014 - Tax other than WHT:
2015
US Revised tax treaty
signed in January
2013
UAE Tax treaty signed in
May 2013
UK Basic agreement on
the revised tax treaty
reached in March
2013
Sweden Basic agreement on
the revised tax treaty
reached in June
2013
Germany Negotiation to revise
the tax treaty
started in December
2011
The tax treaties entered into by Japan generally accord with the
principles of the OECD Model Tax Treaty 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, anti-conduit provisions and main-purpose test
provisions).
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
137
which generally include provisions on the allocation of taking rights
with respect to certain income of individuals with the following
countries/regions:
The Bahamas
Bermuda
The Cayman Islands
Guernsey
The Isle of Man
Jersey
Macao
Principality of Liechtenstein
Samoa
4.8.2 Dividends, Interest and Royalties
Japanese withholding income tax is ordinarily imposed on dividend,

interest and royalty payments to foreign companies and non-
resident individuals. The normal withholding rate is 20.42 percent
including special reconstruction income tax that is imposed on
withholding tax at 2.1 percent from 2013 to 2037 (in certain limited
cases for interest, 15.315 percent), however reduced tax rates are
available under Japans 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 investors agent should, before the date of payment, submit an
application form for relief from Japanese income tax to the chief of
the relevant district tax office through the payer of the income.
The rates of withholding tax under the respective tax treaties are as
set out below. Note that 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 to qualify for the reduced
parent/subsidiary tax rate.
Where a reduced withholding tax rate or exemption is applied under

a tax treaty, the special reconstruction income tax will not be
imposed.
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Dividends
Name of country Between Parent and Interest Royalties
Other
Subsidiary
Australia 0% (80%) 10% 0-10% 5%
5% (10%)
Austria 10% (50%) 20% 10% 10%
Bangladesh 10% (25%) 15% 10% 10%
Belgium 10% (25%) 15% 10% 10%
Brazil 12.5% 12.5% 12.5% 12.5-
25%
Brunei 5% (10%) 10% 10% 10%
Darussalam
Bulgaria 10% (25%) 15% 10% 10%
Canada 5% (25%) 15% 10% 10%
China (PRC) 10% 10% 10% 10%
Czechoslovakia 10% (25%) 15% 10% 0-10%(5)
(1)
Denmark 10% (25%) 15% 10% 10%

Egypt 15% 15% - 15%
Fiji (2) - - - - 10%
Finland 10% (25%) 15% 10% 10%
France 0% (15% 10% 0-10% 0%
directly or-
25%
directly or
indirectly)
5% (10%)
Germany 10% (25%) 15% 10% 10%
Hong Kong 5% (10%) 10% 10% 5%
Hungary 10% 10% 10% 0-10%(5)
India 10% 10% 10% 10%
Indonesia 10% (25%) 15% 10% 10%
Ireland 10% (25%) 15% 10% 10%
Israel 5% (25%) 15% 10% 10%
Italy 10% (25%) 15% 10% 10%
Kazakhstan 5% (10%) 15% 10% 5%
Kuwait 5% (10%) 10% 10% 10%
Luxembourg 5% (25%) 15% 10% 10%
Malaysia 5% (25%) 15% 10% 10%
Mexico 0-5% (25%) 15% 10-15% 10%
Netherlands 0% (50%) 10% 0-10% 0%
5% (10%)
139
New Zealand 0% (10%) 15% 0-10% 5%
Norway 5% (25%) 15% 10% 10%
Oman 5% (10%) 10% 10% 10%
Pakistan 5% (50%) 10% 10% 10%
7.5% (25%)
Philippines 10% (10%) 15% 10% 10-15%
Poland 10% 10% 10% 0-10%(5)
Portugal 5% (10%) 10% 5-10% 5%
Romania 10% 10% 10% 10-15%
Saudi Arabia 5% (10%) 10% 10% 5-10%
Singapore 5% (25%) 15% 10% 10%
South Africa 5% (25%) 15% 10% 10%
South Korea 5% (25%) 15% 10% 10%
Spain 10% (25%) 15% 10% 10%
Sri Lanka 20% 20% - 0-10% (4)
Sweden 0-5% (25%) 15% 10% 10%
(current)
Sweden 0 (10%) 10% 0% 0%
(revised)
Switzerland 0% (50%) 10% 0-10% 0%
5% (10%)
Thailand 15-20% (25%) - 10-25% 15%
Turkey 10% (25%) 15% 10-15% 10%
UAE 5% (10%) 10% 10% 10%
UK (current) 0% (50%) 10% 0-10% 0%
5% (10%)
UK (revised) 0% (10%) 10% 0% 0%
US (current) 0% (50%) 10% 0-10% 0%
5% (10%)
US (revised) 0% (50%) 10% 0% 0%
5% (10%)
USSR (3) 15% 15% 10% 0-10%(5)
Vietnam 10% 10% 10% 10%
Zambia 0% 0% 10% 10%
(1)
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.
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(3)
Covers Russia, Georgia, Kyrgyz, Tajikistan, Uzbekistan, Ukraine,
Turkmenistan, Armenia, Moldova, Azerbaijan and Belarus
(4)
50 percent of certain royalties are exempt and royalties for
copyright or cinema films are fully exempt.
(5)
Cultural royalties are exempt.
4.8.3 Real Estate
Capital gains from the transfer of real estate located in Japan by a

non-resident individual or a foreign company are subject to income
tax or national corporation tax (and local corporation tax for fiscal
years beginning on or after 1 October 2014), respectively. The law
also provides for a surtax on such gains for companies at a rate in
the range 5-10 percent. However, this surtax is currently suspended
until 31 March 2017.
Withholding tax at 10 percent (10.21 percent from 2013 to 2037

including a 2.1-percent special reconstruction income tax) is
generally assessed on the proceeds from a transfer of real estate by
a non-resident individual or foreign company. Final settlement of the
tax liability on any capital gain arising will be computed on an
individual or corporation tax return. The income tax withheld from
the sale proceeds will be creditable on this return against the final
tax liability, or will be refundable to the extent that the withholding
tax amount is greater than the tax on the capital gain.
Japans tax treaties have no provisions to reduce the tax burden

under the domestic tax law as detailed above.
4.8.4 Shares in a Real Estate Holding Company
(1) Taxation under Japanese Domestic 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 income tax or national corporation tax (and local
corporation tax for fiscal years beginning on or after 1 October
141
2014), respectively.
Real estate holding company
A real estate holding company is defined as a company where the

fair market value of its real property interests prescribed below
equals or exceeds 50 percent of the fair market value of its total
assets. Either Japanese companies or foreign companies can be
real estate holding companies.
(i) land, buildings, attachments to buildings and structures situated

in 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 the
real 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
for unlisted companies) of the total issued shares of the company,
the foreign investor is not taxed on capital gains on a disposal of
shares in real estate holding companies.
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 an

individual)
(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
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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 another
company, the latter company is treated as being controlled by
the former company.
(2)
The definition of NK-type partnerships for the purposes of this
rule is the same as that described in Chapter 2 above.
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 that the aggregate shareholding in a real estate
holding company does not include shares that these other
partners hold not through those partnerships.
(2) Taxation under Tax Treaties
The tax treaties which Japan has concluded with the following
countries protect foreign shareholders fully from Japanese tax on
capital gains from sales of shares in a real estate holding company.
Belgium Hungary Romania

Brazil Indonesia Spain
Czechoslovakia Ireland Zambia
Finland Italy
Germany Poland
The following countries and Japan have concludes tax treaties

which give the taxing right to Japan only when the real estate
company is a Japanese company.
Bulgaria Korea US (*)

India USSR
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(*)
Under the revised tax treaty that was signed in January 2013,
Japan is given the right to impose Japanese tax on capital gains
from sales of shares in a real estate holding company that is
either a Japanese company or a foreign company.
A foreign investor who is a resident of the following countries will

be liable to Japanese tax on capital gains from sale of a real estate
holding company only if the foreign shareholder falls under the
substantial shareholder criteria discussed in 4.8.5. and the real
estate holding company is a Japanese company.
Austria Denmark
4.8.5 Shares in a Japanese Company
(1) Taxation under Japanese Domestic Tax Law
Capital gains from the sale of shares in a Japanese company by a

non-resident individual or a foreign company are subject to income
tax or national corporation tax (and local corporation tax for fiscal
years beginning on or after 1 October 2014), respectively in the
circumstances described below:
(i) gains arising from the sale of forestalled shares (shares acquired
for the purpose of a takeover of a company or a demand sale of
such shares) in a Japanese company
(ii) gains arising from the sale of a substantial interest in a Japanese

company, being a sale made by a foreign investor of 5 percent or
more of the outstanding shares of a Japanese company within 1
fiscal year, where the seller investor has held 25 percent or more
of such outstanding shares at any time during the fiscal year of
sale or during the 2 preceding fiscal years
When judging the threshold of 25 percent and 5 percent in (ii) above,

the judgment should be made by looking at the aggregate
shareholding in the Japanese company of the foreign shareholder
and related persons of the foreign shareholder.
144
Related persons of the foreign investor in the above are as
follows:
(i) family relatives of a foreign shareholder (if the shareholder is an

individual)
(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 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 another
company, the latter company is treated as being controlled by
the former company.
(2)
The definition of NK-type partnerships for the purposes of this
rule is the same as that described in Chapter 2.
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. Note that the aggregate shareholding in a Japanese
company does not include shares that these other partners hold
not through those partnerships.
However, in either of the following cases, related persons of a

foreign investor do not include other partners of the partnership
in determining the shareholding ratio, except for cases where
the holding period of the shares is less than 1 year, or where
shares in a bankrupt financial institution are transferred:
(i) disposals of shares by a Specified Foreign Partner(*) through

an Investment Fund(*)
145
(ii) disposals of shares by a foreign partner of an Investment
Fund(*) through the Investment Fund, provided that the
foreign partner has no PE in Japan, and has been a limited
partner of the Investment Fund and has not been involved in
the operation of the Investment Fund for the year of disposal
and the past 3 years
(*)
Please see Chapter 2 (2.1.2) for the definition of the
Specified Foreign Partner and Investment Fund.
(2) Taxation under Tax Treaties
If a foreign investor is a resident of a country that has concluded a

tax treaty with Japan and the tax treaty provides for protection from
Japanese taxation on capital gains from a disposal of shares,
taxation in Japan will be avoided.
Certain modifications and limitations on the above rules regarding

taxation of capital gains on the sales of shares in Japanese
companies are included under a number of Japans double tax
treaties. Full exemption from Japanese taxation on capital gains on
the sale of shares exists in Japans double tax treaties with the
following countries:
Australia (1) Indonesia Portugal (2)

Belgium Ireland Romania
Brazil Italy Spain
Czechoslovakia Kuwait (2) Switzerland (2)
Finland Netherlands (2) UK (1)
Germany New Zealand (2) US (2)
Hong Kong (2) Philippines (2) Zambia
Hungary Poland
(1)
Exemption is available if the Japanese company in which shares
are sold is not a real estate holding company and the capital
gains are subject to tax in the foreign investors country of
residence. Note that due to a UK domestic tax rule, the capital
gains on shares in a Japanese subsidiary are most likely not
subject to tax in the UK.
146
(2)
Exemption is not applicable in relation to real estate holding
companies.
The tax treaty with Oman and the revised tax treaty with the UK
that are not yet applicable also provide for exemption unless the
Japanese company is a real estate holding company.
Furthermore, some tax treaties such as those with the US, Hong
Kong, the Netherlands and Switzerland include a clause to give a
source country the taxing right on capital gains from shares of
distressed financial institutions.
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5 Indirect Tax
5.1 Consumption Tax
Japanese consumption tax is a sales based tax applied on supplies

of certain goods and services within Japan. It is similar in nature to
European VAT and Australian GST.
5.1.1 Taxable Transactions
Taxable transactions for consumption tax purposes are the

following transactions when carried out for consideration as part of
a business carried on by an individual or a company:
(i) the sale or lease of an asset in Japan

(ii) the supply of services in Japan
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-
club membership rights and other similar items, but including
foreign securities)
monetary transactions including loans, guarantees, distributions
from joint operation trusts or other investment trusts and
insurance premiums
transfers of postage stamps, revenue stamps, etc. by the central
and local governments (including foreign postage stamps, etc.)
specified activities carried out by the central and local
governments, such as registration and certification activities, as
well as handling charges for foreign-exchange transactions
medical treatment under public medical insurance law
social welfare activities
school tuition and examination services
rental of housing
148
services related to childbirth, burial, homehelp 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
for the importer.
5.1.2 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.
Services provided to a non-resident will also be treated as export

transactions, except in the case of transport or storage of assets in
Japan, provision of accommodation and food in Japan, or provision
of services of a similar nature in Japan.
5.1.3 Taxpayers Required to File a Consumption Tax

Return
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 taxpayer for
149
consumption tax purposes specifically relates only to those
companies or individuals which are required to file a consumption
tax return to the Japanese government.
(1) Principle Rules for Taxpayer Status
In principle, a business operators taxpayer status is determined

depending on the amount of taxable sales (domestic taxable sales
and export exempt sales) in the past as follows:
Taxable sales Taxable sales Taxpayer

in the base period(1) in the specified period(2) status
over JPY10 million - Taxpayer
over JPY10 million Taxpayer
JPY10 million or less
JPY10 million or less Not taxpayer
(1)
The base period generally means the fiscal year 2 years prior to
the current fiscal year for a corporate taxpayer. Where the base
period is not 1 year, the annualized value of the taxable sales in
the base period is used. For an individual taxpayer, 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 the
previous fiscal year for a corporate taxpayer. For an individual
taxpayer, it means the period from January to June of the
previous year.
(2) Election for Taxpayer Status
Regardless of the rules described in (1), a business operator is able

to become a taxpayer by an election for consumption taxpayer
status.
An application must ordinarily be submitted prior to the

commencement 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 is made prior to the end of that taxable period. An election
150
is irrevocable generally for a period of 2 years.
If a taxpayer who made an election for taxpayer status acquires

certain fixed assets (the acquisition cost of which is JPY1 million or
more) within this 2-year period (excluding taxable periods in which
the simplified tax credit system has been applied), the taxpayer
status must continue for 3 years beginning from the taxable period
in which the fixed assets are acquired.
(3) Newly Established Companies
Even if a business operator is not treated as a consumption

taxpayer under the rules described in (1) or (2), if it is a newly
established company falling under either of the following tests, the
company will have mandatory taxpayer status in fiscal years with no
base period (generally, for the first 2 fiscal years).
(i) The newly established companys paid-in capital at the beginning

of the fiscal year is JPY10 million or more.
(ii) The newly established company meets both of the following:
- The newly established company is controlled (e.g. the

majority of the outstanding shares of which are directly or
indirectly held) by a 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
as controlling the newly established company or the amount
of the taxable sales for a company related to that person
exceeds JPY500 million in the period corresponding to the
theoretical base period of the fiscal year of the newly
established company.
Note that the test described in (ii) above applies to companies

established on or after 1 April 2014.
If a company having mandatory taxpayer status under the above

tests acquires certain fixed assets (the acquisition cost of which is
151
JPY1 million or more) 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 taxpayer for 3 years
beginning from the taxable period in which the fixed assets are
acquired.
5.1.4 Taxpayers as an Importer
For the purposes of import taxable transactions, an importer (any

individual or company importing goods into Japan) must pay
consumption tax to the government (Customs Office) unless the
importation is tax-exempt under a threshold rule.
Consumption tax on importation is imposed on any importer

regardless of 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 become a consumption taxpayer required to file a
consumption tax return.
5.1.5 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

value of the imported goods for customs duty purposes (i.e.
normally, the CIF price) plus the amount of any customs duties and
other excise taxes.
5.1.6 Tax Rate
The current consumption tax rate is 8 percent that was increased

from 5 percent on 1 April 2014. By virtue of a bill passed in August
2012, the tax rate is slated to be increased again to 10 percent on 1
October 2015.would make a decision within 2014 on whether the
increase to 10 percent should be implemented. It is expected that
the Japanese government will make a final decision within 2014 on
152
whether to raise the consumption tax rate to 10 percent as
scheduled.
5.1.7 Computation of Consumption Tax to be Paid
Consumption tax to be declared in a consumption tax return and to

be paid over to the government by a consumption taxpayer should
generally be calculated based on the net of consumption tax
received on domestic taxable sales transactions for the taxable
period (output tax) minus consumption tax suffered on domestic
taxable purchase transactions and import taxable transactions for
the same taxable period (input tax), but to the extent of the
creditable amount. When creditable input tax suffered in a taxable
period exceeds the output tax in the same period, a refund of the
difference will be made.
The creditable input tax is calculated depending on the taxable

revenue ratio and the taxable sales as follows:
Taxable Taxable sales

Creditable input tax
revenue ratio for the taxable period(*)
Total input tax
JPY500 million or less
95% or more (i.e. fully creditable)
over JPY500 million Creditable input tax is
calculated by
[1] Individual method,
less than 95% - or
[2] Pro-rata method
(*)
Where the taxable period is shorter than 1 year, the annualized
value of the amount of the taxable sales (domestic taxable sales
and export exempt sales) will be used.
153
Taxable revenue ratio
Domestic taxable sales + Export exempt sales

Domestic Export Domestic
+ +
taxable sales exempt sales non-taxable sales(*)
The amounts 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.
Total input tax
Total gross value of domestic Input tax on

taxable purchase transactions x 8/108(*) + import
(including input tax) transactions
(*)
10/110 will be applied to transactions carried out on or after 1
October 2015 except for those covered by the transitional
measures.
Individual method
(a) + (c) x Taxable revenue ratio(*)
(a) input tax relating to the acquisition of goods/services solely

attributable to sales transactions other than domestic non-taxable
sales transactions
(b) input tax relating to the acquisition of goods/services solely
attributable to domestic non-taxable sales transactions
(c) input tax other than above
(*)
An appropriate alternative ratio may be utilized where this is
approved in advance by the tax authorities
154
Pro-rata method
Total input tax x Taxable revenue ratio
If this method is chosen, it should be used at least for 2 years.
5.1.8 Simplified Calculation Method
A simplified calculation method, as described below, is applicable to

individual and corporate taxpayers the annualized value of whose
taxable sales (domestic taxable sales and export exempt sales) for
the base period was JPY50 million or less. The taxpayer must
submit an appropriate report to the competent tax office in order to
utilize this method and once applied, this method must be put to
use for at least 2 years.
Under the simplified calculation method, the tax payable is

calculated by using the following formula:
Domestic taxable Assumed profit Consumption tax

x x
sales margin rate
The assumed profit margin differs depending on the taxpayers

business as follows:
Assumed profit margin

Taxable period beginning
Taxpayers business
before 1 on or after 1
April 2015 April 2015
Wholesale 10% 10%
Retail 20% 20%
Manufacturing, construction,
30% 30%
mining, agriculture and fishing
155
Transportation,
communication 50%
Service, etc. and services 50%
Real estate 60%
Food services,
40%
Other than etc.
40%
above Financial or
50%
insurance services
5.1.9 Taxable Period
The taxable period is the respective fiscal year for a corporate

taxpayer and the calendar year for an individual taxpayer.
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 the commencement date of the respective fiscal year for a
corporate taxpayer and the periods from January to March, April to
June, July to September, and October to December for an individual
taxpayer). A monthly taxable period is also available upon election.
5.1.10 Tax Returns and Tax Payments
(1) Final Tax Return and Tax Payment
A taxpayer is required to file its final consumption tax return and pay
tax due within 2 months after the end of the taxable period.
(2) Interim Tax Returns and Tax Payments
A taxpayer who has not elected for a quarterly or monthly taxable

period may be required to make interim payments depending on the
amount of the consumption tax payable for the previous taxable
period (the annualized value if the previous taxable period is shorter
than 1 year) described as follows within 2 months after the end of
each interim period:
156
Amount of the consumption tax payable
Interim payments
for the previous taxable period
over JPY60 million Monthly basis
over JPY5 million but JPY60 million or less Quarterly basis
over JPY600,000 but JPY5 million or less Semi-annual basis
Note that the above thresholds will be increased as follows, due to

increase to 8 percent in the consumption tax rate.
Amount of the consumption tax payable

Interim payments
for the previous taxable period
over JPY60,952,300 Monthly basis
over JPY5,079,300 but JPY60,952,300 or
Quarterly basis
less
over JPY609,500 but JPY5,079,300 or less Semi-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
each interim period. However, if interim consumption tax payable is
calculated on a pro-rata basis, filing can be skipped.
5.2 Customs Duty
Customs duty is levied on goods entering Japan. The rates vary by

product type.
5.3 Excise Duty
Excise duty is imposed on gasoline, tobacco, and liquor, etc.
157
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 as of 1

September 2014, as shown below.
(JPY)
Employee Employer Maximum
share share premium
Health Insurance(1)
On salaries(2) 4.985% 4.985% 120,637/month
On bonuses 4.985% 4.985% 538,380/year
Health Insurance(1)
(including nursing
care premium)
On salaries(2) 5.845% 5.845% 141,449/month
On bonuses 5.845% 5.845% 631,260/year
Welfare pension
insurance
On salaries(2) 8.737% 8.737% 108,338.80/month
On bonuses 8.737% 8.737% 262,110/month
Labour insurance(3)
Employment 0.5-0.6% 0.85- -
insurance 1.05%
Workmans
accident
compensation:
- Non- - 0.25- -
manufacturing 0.35%
(generally)
- Manufacturing - Variable -
158
(1)
A variable premium rate in the range of 9.85 percent to 10.16
percent is set in each prefecture depending on the domicile of
the employers office. Rates and maximum monthly/annual
premiums above are those for offices located in Tokyo.
(2)
Applied to standard monthly remuneration amount
(3)
Applied to total salary, bonus and other compensation paid to
employees
Contributors who are 40 years of age or older are required to join a

supplementary health insurance system, the nursing care insurance
system (Kaigo Hoken), to support elderly residents.
6.2 Stamp Duty
Stamp duty is imposed on certain taxable documents such as deeds

and contracts. 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 property and depreciable

assets which are in use in a business as at 1 January each year. The
tax is levied at 1.4 percent of the higher of the net book value and
the assessed value of depreciable assets, and 1.4 percent of the
assessed value of real estate.
In addition, city planning tax is assessable on real property 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:
159
6.4.1 Taxpayer
Taxpayers for business occupancy tax purposes are companies or

individuals operating a business at a place of business in a
designated city.
6.4.2 Taxable Basis and Tax Rate
Taxable basis Tax rate

JPY600 per square meter
Size of premises for
(not assessable where the total space is
business use
not more than 1,000 square meters)
0.25%
(not assessable where the number of
Gross payroll
staff members, including officers, is not
more than 100)
6.4.3 Method of Collection of Business Occupancy Tax
(1) Companies
A return is required to be filed within 2 months after the end of

each fiscal year and the tax paid thereon.
(2) Individuals
A return is required to be filed for each calendar year by 15 March

of the following year and the tax paid thereon.
6.5 Registration and Real Property Acquisition Tax
When certain information is legally registered, this is subject to a

registration tax. Key registration events giving rise to such tax
include the registration of a Japanese company or a branch of a
foreign company and registration of a change in the legal ownership
of real estate.
160
The following registration taxes apply on the establishment of an
ordinary Japanese company or branch:
Kabushiki Kaisha 0.7 percent of paid-in capital (minimum

JPY150,000)
Godo Kaisha 0.7 percent of paid-in capital (minimum

JPY60,000)
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 will

depend upon the nature of the transfer. The tax rates applied to the
appraised value of the property are summarized below.
As of September 2014
1.5% (Land)(1)
Transfer of ownership by sale
2% (Buildings)
Transfer of ownership by merger 0.4%
0.3% (Land)(2)
Entrusting of real estate
0.4% (Buildings)
(1)
Applicable for the period through 31 March 2015 (It will be
increased to 2 percent from 1 April 2015 onwards.)
(2)
Applicable for the period through 31 March 2015 (It will be
increased to 0.4 percent from 1 April 2015 onwards.)
On the acquisition of real estate, a local tax, real estate acquisition

tax, will also be applied. This tax is levied at 4 percent of the
appraised value of the property, however this has been reduced to
3 percent until 31 March 2015 for land and residential buildings.
Furthermore, when land is acquired by 31 March 2015, the tax base
of such land will be reduced by 50 percent.
161
6.6 Inheritance and Gift Taxes
Inheritance tax and gift tax are levied on an heir who acquired
properties by inheritance and an individual (donee) who acquired
properties from another individual (donor) as a gift, respectively. The
scope of taxable properties depends on whether the heir/donee
holds Japanese nationality and whether the heir/donee or the
decedent/donor has or had a domicile in Japan.
No domicile in Japan
Heir
Japanese nationality
Donee
Domicile No No
Domicile in
in Japan domicile in Japanese
Japan
Decedent Japan nationality
within past
Donor within past
5 years
5 years
Domicile in Japan
No domicile in Japan
Domicile in
Japan within
All properties
past 5 years
No domicile
in Japan Properties located
within past 5 in Japan
years
Rates for both taxes range from 10 percent to 50 percent (55

percent from 2015).
162
KPMG Tax Corporation
Tokyo Office
Izumi GardenTower,
1-6-1 Roppongi, Minato-ku,
Tokyo106-6012
Tel 03-6229-8000
Fax 03-5575-0766
Osaka Office
Osaka Nakanoshima Building 15F,
2-2-2 Nakanoshima, Kita-ku,
Osaka 530-0005
Tel06-4708-5150
Fax 06-4706 3881
Nagoya Office
Nagoya Lucent Tower 30F,
6-1 Ushijima-cho, Nishi-ku,
Nagoya 451-6030
Tel 052-569-5420
Fax 052-551-0580
www.kpmg.com/jp/tax
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or
entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as
of the date it is received 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.
2014 KPMG Tax Corporation, a tax corporation incorporated under the Japanese CPTA Law and a member firm of the KPMG network
of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

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Taxation

KPMG TAX CORPORATION

This booklet is intended to provide a general overview of the taxation

While the information contained in this booklet may assist in gaining a

Further information on matters in this booklet can be obtained from

KPMG Tax Corporation

Osaka Nakanoshima Building 15F, 2-2-2 Nakanoshima, Kita-ku,

Nagoya Lucent Tower 30F, 6-1 Ushijima-cho, Nishi-ku,

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

1.2 Tax Status of Companies.................................................. 1

1.3 Tax Rates ......................................................................... 5

1.4 Taxable Year of Companies ............................................ 14

1.6 Capital Gains .................................................................. 16

1.7 Treatment of Excess Tax Losses.................................... 18

1.8 Deduction of Expenses .................................................. 20

1.9 Tax Depreciation............................................................. 33

1.11 Tax Credits ..................................................................... 41

1.12 Administrative Overview ................................................ 48

1.13 Group Taxation Regime .................................................. 50

1.15 Corporate Reorganizations ............................................. 60

2 Taxation of Partnerships ................................................. 68

2.2 Tokumei Kumiai .............................................................. 71

2.3 Limitation on Utilization of Losses Derived from

3 Taxation of Individuals .................................................... 76

3.2 Taxpayers ....................................................................... 76

3.3 Tax Rates ....................................................................... 78

3.4 Assessable Income ........................................................ 85

3.5 Allowable Deductions ..................................................... 91

3.6 Personal Reliefs.............................................................. 96

3.8 Remuneration Paid Outside Japan ............................... 101

3.10 Employers Obligations................................................. 103

4 International Tax ........................................................... 106

4.2 Foreign Tax Credits ...................................................... 107

4.3 Transfer Pricing ............................................................ 110

4.4 Thin-Capitalization Rules ............................................... 115

4.5 Earnings Stripping Rules............................................... 119

4.6 Anti-Tax Haven (CFC) Rules .......................................... 125

4.7 Corporate Inversion ...................................................... 134

5 Indirect Tax................................................................... 148

5.2 Customs Duty .............................................................. 157

6 Other Taxes and Surcharges ........................................ 158

6.4 Business Occupancy Tax.............................................. 159

6.5 Registration and Real Property Acquisition Tax ............ 160

Japanese corporate income taxes consist of:

corporation tax (national tax)

In addition to the normal corporate income taxes, certain closely

Furthermore, a special reconstruction corporation tax is imposed for

1.2 Tax Status of Companies

In determining the residency of a company for tax purposes, Japan

1.2.2 Branch of a Foreign Company vs. Japanese

Generally, there is no material difference between a branch of a

However, a branch and a Japanese company have differing legal

Scope of taxable income: please see 1.5.

1.2.3 Permanent Establishment (PE)

Even where a foreign company has not established a registered

Branch, factory or other fixed place of business in Japan including

a branch, sub-branch, a place of business or office, factory or

However, the following exemptions from treatment as a PE exist:

a fixed place of business solely for the purpose of purchasing

Construction, installation or assembly projects or similar activities or