Editors: IBFD. Visitors address: Rietlandpark DW Amsterdam The Netherlands. Postal address: P.O. Box HE Amsterdam The Netherlands

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1 DOING BUSINESS IN JAPAN 2018

2 Editors: Africa: Ridha Hamzaoui, Emily Muyaa Asia-Pacific: Mei-June Soo, Nina Umar Caribbean: Priscilla Lachman, Sandy van Thol Europe: Larisa Gerzova, Adrián Grant Hap, Ivana Kireta, Magdalena Olejnicka, Andreas Perdelwitz, Marnix Schellekens, Kristina Trouch, Ruxandra Vlasceanu Middle East: Ridha Hamzaoui Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Diana Calderón Manrique, Lydia Ogazón Juárez North America: John Rienstra, Julie Rogers-Glabush IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Tel.: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on IBFD s part. In no event shall IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher.

3 DOING BUSINESS IN ARGENTINA JAPAN JANUARY

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5 DOING BUSINESS IN JAPAN 2018 INTRODUCTION This publication has been prepared by the International Bureau of Fiscal Documentation (IBFD) on behalf of BDO, its clients and prospective clients. Its aim is to provide the essential background information on the taxation aspects of setting up and running a business in this country. It is of use to anyone who is thinking of establishing a business in this country as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or live permanently in this country. This publication covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. We have endeavoured to include the most important issues, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO firm(s) with which you normally deal. Your adviser will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned at the heading of each chapter. About BDO BDO is an international network of public accounting, tax and advisory firms which perform professional services under the name of BDO. The global fee income of BDO firms, including the members of their exclusive alliances, was US$8.1 billion in These firms have representation in 162 countries and territories, with over 73,800 people working out of 1,500 offices worldwide. BDO s brand promise is to be the leader for exceptional client service - always, and everywhere. When you choose to work with BDO you quickly discover why we re different from the rest. BDO offers a comprehensive collection of high quality tax services and assets designed to support exceptional performance, and all our tax engagements benefit from the hands-on involvement of experienced professionals, backed by world-class resources. We are agile enough to handle the biggest and the smallest names in the industries we serve, and our relationship-driven culture means that we can provide responsive and personalised advice to all our clients. We work hard to understand our clients businesses and ensure that we match both our service offering and our people to their complex individual needs. We believe that providing our clients with access to experienced professionals who are actively engaged in addressing their tax and business issues is the most reliable way to provide exceptional service, always with a strong focus on trust and transparency. Regardless of your location, size or international ambitions we can provide effective support as you expand into new areas of the world. In an ever-evolving economic environment, businesses need a global organisation that provides exceptional, bespoke service combined with local knowledge and expertise. BDO is uniquely positioned to serve this demand, providing effective support and a truly global integrated global footprint. 3

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7 DOING BUSINESS IN JAPAN 2018 TABLE OF CONTENTS CORPORATE TAXATION... 9 INTRODUCTION CORPORATE INCOME TAX TYPE OF TAX SYSTEM TAXABLE PERSONS Residence TAXABLE INCOME General Exempt income Deductions Depreciation and amortization Reserves and provisions CAPITAL GAINS LOSSES Ordinary losses Capital losses RATES Income and capital gains Withholding taxes on domestic payments INCENTIVES Research and development Tax incentives for equipment of small and medium-sized companies Tax incentives for energy rationalization Tax credits for increased number of employees Tax credits for salary growth Special measures for investment in regional areas ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings TRANSACTIONS BETWEEN RESIDENT COMPANIES GROUP TREATMENT Consolidated tax return filing system Special regime for transactions among 100% group companies INTERCOMPANY DIVIDENDS OTHER TAXES ON INCOME BUSINESS TAX INHABITANT TAX ACCUMULATED EARNINGS TAX FOR A SPECIAL CLOSELY HELD COMPANY SPECIAL RECONSTRUCTION TAX TAXES ON PAYROLL PAYROLL TAX SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WORTH TAX REAL ESTATE TAX INTERNATIONAL ASPECTS RESIDENT COMPANIES Foreign income and capital gains Foreign losses

8 DOING BUSINESS IN JAPAN 2018 TABLE OF CONTENTS Foreign capital Double taxation relief NON-RESIDENT COMPANIES Taxes on income and capital gains Taxes on capital Administration WITHHOLDING TAXES ON PAYMENTS TO NON-RESIDENT COMPANIES Dividends Interest Royalties Other Withholding tax rates chart ANTI-AVOIDANCE GENERAL TRANSFER PRICING THIN CAPITALIZATION CONTROLLED FOREIGN COMPANY OTHER ANTI-AVOIDANCE RULES CONSUMPTION TAX GENERAL TAXABLE PERSONS TAXABLE EVENTS TAXABLE AMOUNT RATES EXEMPTIONS NON-RESIDENTS MISCELLANEOUS TAXES CAPITAL DUTY TRANSFER TAX Immovable property Shares, bonds and other securities STAMP DUTY CUSTOMS DUTY EXCISE DUTY OTHER TAXES INDIVIDUAL TAXATION INTRODUCTION INDIVIDUAL INCOME TAX TAXABLE PERSONS TAXABLE INCOME General Exempt income EMPLOYMENT INCOME Salary Benefits in kind Company housing Company car Home leave transportation Stock options Pension income Directors remuneration BUSINESS AND PROFESSIONAL INCOME INVESTMENT INCOME

9 TABLE OF CONTENTS DOING BUSINESS IN JAPAN CAPITAL GAINS PERSONAL DEDUCTIONS, ALLOWANCES AND CREDITS Deductions Casualty losses Medical expenses Social insurance premiums Life insurance premiums Earthquake insurance premiums Donations Allowances Credits LOSSES Offsetting losses Loss carry-forward Loss carry-back RATES Income and capital gains Withholding taxes Employment and pension income Professional fees Investment income ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings OTHER TAXES ON INCOME BUSINESS TAX INHABITANT TAX SPECIAL RECONSTRUCTION TAX SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WEALTH TAX REAL ESTATE TAX INHERITANCE AND GIFT TAXES TAXABLE PERSONS Inheritance tax Gift tax TAXABLE BASE Inheritance tax Gift tax PERSONAL ALLOWANCES Inheritance tax Gift tax RATES Inheritance tax Gift tax DOUBLE TAXATION RELIEF Inheritance tax Gift tax INTERNATIONAL ASPECTS RESIDENT INDIVIDUALS Foreign income and capital gains Foreign capital

10 DOING BUSINESS IN JAPAN 2018 TABLE OF CONTENTS Double taxation relief EXPATRIATE INDIVIDUALS Inward expatriates Outward expatriates NON-RESIDENT INDIVIDUALS Taxes on income and capital gains Employment income Business and professional income Investment income Capital gains Taxes on capital Inheritance and gift taxes Administration KEY FEATURES

11 CORPORATE TAXATION DOING BUSINESS IN JAPAN 2018 JAPAN This chapter is based on information available up to 1 January Introduction Taxes in Japan are imposed by both the national government and local authorities. Companies are subject to corporation tax (national income tax), business tax (local tax) and prefectural and municipal inhabitant taxes (local tax). A size-based business tax is also payable by a company with capital exceeding 100 million. In addition, a special family company tax applies to certain closely held companies. Capital gains are treated as ordinary income and subject to income tax, and as such there is no separate capital gains tax. A VAT-style consumption tax applies. A special reconstruction corporation tax is imposed on corporation tax liability from 2012 to 2014, and a special reconstruction income tax on income tax liability from 2013 to Corporation tax is imposed under the Corporation Tax Act (Hôjinzei Hô, Law 34 of 1965), while withholding tax is levied under the Income Tax Act (Shotokuzei Hô, Law 33 of 1965) and consumption tax is levied under the Consumption Tax Act (Shôhizei Hô, Law 108 of 1988). Local tax is assessed by each local authority in accordance with the Local Tax Act (Chihôzei Hô, Law 226 of 1950) which provides the framework for the basic outlines and limits of local taxes. These laws are usually amended every year. The primary legislation is supplemented by numerous Cabinet Orders, Ministry of Finance Ordinances, and administrative circulars and guidance. National taxes are administered, levied and collected by the National Tax Agency (NTA). Employers are required to make social security contributions. The currency is the Japanese yen ( ). 1. Corporate Income Tax 1.1. Type of tax system Japan has a classical system of corporate taxation. Profits are taxed at corporate tax rates at the corporate level and may be taxed again in the hands of its shareholders when they are distributed. However, dividends from resident companies may be fully or partly exempt under the Dividend Received Deduction rule (see section 2.2.), and dividends from certain non-resident companies may be 95% or fully exempt under the Foreign Dividend Exclusion rule (see section ) and the anti-tax haven rule (see section 7.5.). Individual shareholders may be entitled to a credit for dividends received Taxable persons Corporate tax is levied on both resident and non-resident companies as well as certain types of trusts. Public corporations (kôkyô hôjin) are fully exempt from corporate tax, while public interest corporations (kôeki hôjin) are exempt from corporate tax if the income is not derived from profit-making activities. This chapter is restricted to Japanese-incorporated joint-stock companies (kabushiki kaisha) and limited liability companies (gôdô kaisha), other than tax-exempt companies such as public corporations and public interest corporations. These entities are referred to in this chapter as companies. 9

12 DOING BUSINESS IN JAPAN 2018 CORPORATE TAXATION The various forms of partnerships which do not have legal personalities (general and silent partnerships, investment limited partnerships and limited liability partnerships) are transparent for tax purposes in general Residence A company is resident in Japan if its head office or main office is in Japan. A resident company is called a domestic corporation. The effective place of management is not relevant Taxable income General Generally, resident companies are subject to corporation tax on their worldwide income. Non-resident companies operating through a branch or any other permanent establishment are, in principal, subject to corporation tax on Japanese-source income only (see section 6.2.). All types of income and capital gains are not separately categorized for tax computation purposes. In general, tax is levied on total corporate net income, after adjusting annual profits and losses in accordance with tax rules. Annual profits and losses are calculated based on Japanese generally accepted accounting principles on an accruals basis Exempt income See section 2.2. for exemptions on dividends from resident companies, and sections and 7.5. for exemptions on dividends from non-resident companies Deductions General business expenses are tax deductible if the expenses are wholly and exclusively incurred for business purposes. In general, accrued/prepaid expenses are deductible if the services for such expenses have been provided and the amount can be reasonably estimated. Dividends are not deductible except in certain limited cases such as dividends from a tokutei mokuteki kaisha (TMK, a special purpose company established under the Japanese Asset Liquidation Law) or a tôshi hôjin (TH, a special purpose company established under the Investment Trust and Investment Corporation Act) under certain conditions. Interest and royalties are generally deductible. The following payments to directors are deductible if they satisfy certain conditions: periodic remuneration, remuneration notified in advance, profit-related compensation, retirement allowances (on or after 1 October 2017), compensation using listed shares or stock options (on or after 1 October 2017) and payments to an employeedirector that relate to the employee portion. Directors remuneration other than these, or directors remuneration exceeding a reasonable level, is not deductible. 10

13 CORPORATE TAXATION DOING BUSINESS IN JAPAN 2018 Entertainment expenses over the deductible limit are disallowed. The deductible limit is as follows: Fiscal years beginning before 31 March 2014 Fiscal years beginning on or after 1 April 2014 Small and medium-sized companies 8 million 8 million or 50% of food and drink expenses (by election) Companies other than small and medium-sized companies 0 50% of food and drink expenses For the purposes of this rule, a small and medium-sized company is a company whose capital is not more than 100 million, excluding where 100% of the shares of the company are directly or indirectly held by one large-sized company (a company whose paid-in capital is 500 million or more), or where 100% of the shares of the company are directly or indirectly held by two or more large-sized companies in a 100% group (as defined in section ). All donations and charitable contributions made to national or local governments are fully deductible while such contributions to other organizations are subject to a limit on deduction, calculated based on the amount of paid-in capital and taxable income for the fiscal year. No deductions are allowed in respect of donations made to overseas related parties or donations made between resident companies in a 100% group (see section ) Depreciation and amortization In general, a company may select either the straight-line method or the decliningbalance method to compute the depreciation of each class of tangible assets. The default depreciation method for most assets is the declining-balance method. However, for buildings and certain leased assets, the straight-line method must be used. Intangible assets must also be amortized using the straight-line method. Once the depreciation methods are selected, the same methods must be applied consistently every year. A company may change its depreciation methods but an application must generally be sent to the tax office for approval before the changes are made. The depreciation and amortization allowable for tax purposes must be computed in accordance with the statutory useful lives of the assets provided in the Ministry of Finance Ordinance. Intangible assets can be fully amortized over the statutory useful lives. As for tangible assets, the total depreciable amount is the acquisition cost less 1. The acquisition cost should include any incidental expenses incurred in making the assets available for use. Under prior rules for assets put into use before 1 April 2007, the total depreciation amount was 95% of the acquisition cost. The remaining value (i.e. the remaining 5% of the acquisition cost) of these assets can be depreciated over 5 years from the year following that in which 95% of the asset has been depreciated under the old depreciation method. The depreciation must be recorded in the books of account. The amount of depreciation in excess of the allowable limit for tax purposes must be added back to the profits in calculating taxable income. If the book depreciation amount is less than the allowable amount for tax purposes, no adjustment is required, and effectively the asset has 11

14 DOING BUSINESS IN JAPAN 2018 CORPORATE TAXATION an extension of its useful life for tax purposes. If, for some reason, no depreciation is recorded in the accounts, no tax deduction would be available. This could effectively result in a postponement of depreciation, but audit issues may arise. Assets that cost less than 100,000 or with an economic useful life of not more than 1 year can be fully written off in the year of acquisition. Assets that cost less than 200,000 can be depreciated over 3 years. Special depreciation may be claimed by companies filing blue tax returns (see section ), i.e. increased first year depreciation or accelerated depreciation. Only certain assets qualify for special depreciation. Under the 2017 tax reforms, it is proposed that accelerated depreciation will also be granted for investment in equipment and buildings used in businesses in specified regions, until 31 March Valuation of inventory Inventory must be recorded at its actual cost of acquisition or manufacturing at the time of acquisition. The valuation methods allowable for tax purposes are: the cost method (specific identification, FIFO, weighted average, moving average, recent purchase, or retail method); or the lower of cost or market value method. A company must apply the same valuation method consistently every year, and a change to the valuation method must be approved by the tax office before it becomes effective Reserves and provisions Reserves and provisions for estimated or potential liabilities are generally not tax deductible, except for some specific reserves and provisions. A specific provision for doubtful debts based on specific events (such as bankruptcy) is deductible with a certain limitation dependent upon specific events. A general provision for doubtful debts is also deductible up to a certain limit calculated based on the ratio of actual bad debt losses incurred in the prior 3 years. By virtue of the 2011 tax reform, provisions for doubtful debts will be allowable only for companies categorized under (A) or (B), as follows for tax purposes for fiscal years beginning on or after 1 April 2012: Category Companies A small and medium-sized companies (as defined in section ) banks, insurance companies and similar companies B certain companies that hold certain monetary claims (e.g. receivables incurred in finance lease transactions) For companies categorized under (B), the provision for bad debts for tax purposes will be limited to only certain receivables (e.g. finance lease receivables, etc.). There is a 3-year transitional measure whereby the following amounts should be allowed for companies categorized under (B) or companies not categorized under (A) or (B): fiscal years commencing from 1 April 2012 to 31 March 2013: allowable limit before the 2011 tax reform 3/4; 12

15 CORPORATE TAXATION DOING BUSINESS IN JAPAN 2018 fiscal years commencing from 1 April 2013 to 31 March 2014: allowable limit before the 2011 tax reform 2/4; fiscal years commencing from 1 April 2014 to 31 March 2015: allowable limit before the 2011 tax reform 1/4. For small and medium-sized companies (as defined in section ), a statutory percentage based on the type of industry may be used as an alternative method to calculate its allowable general doubtful debt provision. Provisions for returned sales and reserves for special repairs are allowable subject to a limit Capital gains There is no separate tax on capital gains. Companies are liable for corporation tax on capital gains at the same tax rates as those for ordinary income. Generally, capital gains are calculated by deducting the tax base of the transferred assets and related costs from the sale proceeds. Rollover relief is provided for in the following transactions: transfer of assets and liabilities from a merged company to the surviving company under a tax qualified merger (this is also applicable to other types of reorganizations, such as corporate divisions, contributions in kind and spin-offs); surrender of the shares in a merged company by its shareholders, provided that the shareholders receive only shares in the surviving company under a merger (this is also applicable to other types of reorganizations, such as corporate divisions, contributions in kind and share-for-share exchanges); surrender of the shares in a merged company by its shareholders, provided that the shareholders receive only shares in the parent company owning 100% of the surviving company under certain conditions in a triangular merger (this is also applicable to other types of reorganizations, such as corporate divisions and share-for-share exchanges); transfer of assets (excluding inventory and small assets) within a 100% group (see section ); sale of a piece of land within 10 years after another piece of land is acquired in 2009 and/or The maximum amount of deferred capital gains is 80% of the capital gains (60% if the land is acquired in 2010); and transfer of assets when replacement property is acquired using government subsidies, etc Losses Ordinary losses Tax losses may be carried forward for 9 years (proposed to be increased to 10 years for losses incurred in fiscal years beginning on or after 1 April 2018). The utilization of tax losses is limited to 60% of taxable income in the fiscal year beginning on or after 1 April 2016, and is decreased to 55% in the fiscal year beginning on or after 1 April 2017, and to 50% in the fiscal years beginning on or after 1 April 2018, except for small and medium-sized companies (as defined in section ) and TMKs (see section ), etc. A company can generally carry forward its tax losses only if the company has a blue tax return filing status (see section ). 13

16 DOING BUSINESS IN JAPAN 2018 CORPORATE TAXATION Restrictions apply on the carry-forward of losses where there has been a change of ownership of the company, i.e. when there is a change of more than 50% of the ultimate shareholders. These restrictions only apply where within 5 years following the change of ownership, one of several specified events occurs, such as the commencement of business by a company that was a dormant company at the time of the ownership change. The tax law allows for losses to be carried back for 1 year. However, since 1 April 1992 this provision has been suspended since 1 April 1992, and the end date is currently set on 31 March 2020 except in certain limited cases, e.g. in the dissolution of a company, and for small and medium-sized companies (as defined in section ) Capital losses There is no distinction between ordinary losses and losses of a capital nature Rates Income and capital gains Taking all the national and local taxes (see section 3.) in Tokyo into account, generally an effective statutory tax rate of 30.86% applies to companies (the figure is planned to be decreased to below 30% in future). Note that companies with paid-in capital of more than 100 million are also liable to a size-based business tax (see section 3.1.). Corporation tax (national tax) is levied at the following rates: Taxable income ( ) Marginal rate (%) Small and medium-sized companies (as Other companies defined in section ) First 8,000, Over 8,000, % is applied for fiscal years beginning on or after 1 April Capital gains are also subject to corporation tax at the same rates as for ordinary income. When a company realizes a capital gain from the sale of land, a special surtax is imposed on the gain at 5% or 10% depending on the length of the holding period. However, the surtax has been suspended until 31 March Withholding taxes on domestic payments Dividends received by a resident corporate shareholder from an unlisted resident company are subject to withholding tax at 20%. If the dividend-paying company is a listed company, the withholding tax rate can be reduced to 15%. Interest on bank deposits and company/government bonds is generally subject to withholding tax at 20% (15% for national tax and 5% for inhabitant tax (see section 3.2.)). By virtue of the 2013 tax reform, inhabitant tax of 5% on interest to be received on or after 1 January 2016 will be abolished. Interest on loans paid to another resident company is not subject to withholding tax. A special reconstruction income tax of 2.1% is imposed on the national withholding tax liability from 2013 to 2037 (see section 3.4.). The withholding tax is not a final tax, and is generally creditable against the corporation tax liability. Excess payments are refundable. See section 6.3. for withholding tax on payments to non-resident companies. 14

17 CORPORATE TAXATION DOING BUSINESS IN JAPAN Incentives Research and development Several types of tax credits are available for research and development (R&D). For fiscal years beginning on or after 1 April 2015, a cap of 25% is applied for the R&D tax credit, another extra cap of 10% is applied for the elected additional tax credit on R&D expenditure, and an extra cap of 5% is applied for the open innovation tax credit. Research and development tax credits A company filing a blue tax return (see section ) is eligible for R&D tax credits. The amount of tax credit depends on the size of the companies and the R&D increase/decrease ratio, which is calculated as: (total R&D expenditure average R&D expenditure for the preceding 3 years) average R&D expenditure for the preceding 3 years For large-scale companies (generally, paid-in capital of more than 100 million): where the increase/decrease ratio is more than 5%, the tax credit is 9% + (increase/decrease ratio 5%) 0.3, subject to a maximum of 10% (14% up to 31 March 2019); where the increase/decrease ratio is between -25% and 5%, the tax credit is 9% (5% increase/decrease ratio) 0.1; and where the increase/decrease ratio is lower than -25%, the tax credit is 6%. For small and medium-sized companies (paid-in capital of not more than 100 million and not a subsidiary of a company with paid-in capital of more than 100 million, etc.), the tax credit is 12% of total R&D expenditure. Under the 2017 tax reforms, the tax credit will remain 12% for small and medium-sized companies, but is increased up to 17% where the increase in R&D costs is more than 5%. In addition, R&D costs for Industry 4.0 will be eligible for the R&D tax credit. Additional tax credit on R&D expenditure Tax credit on incremental R&D expenditure If R&D expenditure in the year is larger than (i) the annual average of R&D for the preceding 3 fiscal years; and (ii) the highest annual R&D expenditure for the preceding 2 fiscal years, the company is eligible for an additional tax credit of 5% to 30% for incremental R&D expenditure (R&D expenditure in the year less the amount in (i)). The tax credit is calculated based on the incremental ratio, i.e. the ratio of the incremental R&D expenditure to the amount in (i), with a cap of 30%. If the increased ratio is 5% or less, the tax credit for incremental R&D expenditure will not be applicable under this rule. Tax credit for the excess of R&D expenditure over 10% of average sales proceeds If R&D expenditure in the year is over 10% of average sales proceeds, the company is eligible for an additional tax credit for the excess R&D expenditure. The creditable amount is calculated by the following formula: (R&D expenditure Average sales proceeds 10%) (R&D ratio 10%) 0.2 The maximum creditable amount is 10% of the corporation tax liability for the fiscal year. 15

18 DOING BUSINESS IN JAPAN 2018 CORPORATE TAXATION Open innovation tax credits If a company carries out joint R&D with experimental and research institutions, universities, etc., 20% or 30% of the special experiment and research expenditure can be added to the tax credit Tax incentives for equipment of small and medium-sized companies A small and medium-sized company (paid-in capital of not more than 100 million and not a subsidiary of a company with paid-in capital of more than 100 million, etc.) filing a blue tax return (see section ) is eligible for increased initial depreciation of 30% of the acquisition cost of certain new machinery, equipment, software and vehicles, provided the asset is purchased or produced and placed into use for specified business activities in Japan in the period to 31 March If the amount of the paid-in capital of the small and medium-sized company is 30 million or less, instead of the increased initial depreciation, a tax credit of 7% of the acquisition cost is applicable. The maximum creditable amount is 20% of the corporation tax liability for the fiscal year. If the acquired assets are Productivity Improvement Facilities, the above incentives (increased initial depreciation and tax credit) may be more preferential Tax incentives for energy rationalization A company filing a blue tax return (see section ) may claim increased initial depreciation of 30% of the acquisition cost of new advanced low-carbon and energysaving equipment, provided that the asset is purchased or produced in the period from 1 June 2011 to 31 March 2018 and placed into use for business in Japan within 1 year. In connection with the enforcement of the Act on Purchase of Renewable Energy Sourced Electricity by Electric Utilities, the total acquisition cost will be expensed if a solar photovoltaic power facility or a wind power facility qualified under the Act is acquired during the period from 29 May 2012 to 31 March Cogeneration equipment acquired on or after 1 April 2013 is also eligible for a one-time full depreciation. A tax credit equivalent to 7% of the cost of acquiring the equipment is also applicable to small and medium-sized companies (paid-in capital of not more than 100 million and not a subsidiary of a company with paid-in capital of more than 100 million, etc.) instead of the increased initial depreciation, up to the limitation of 20% of the company s tax liability. From 1 April 2013, equipment acquired with subsidies is excluded from the equipment that is eligible for the tax incentives Tax credits for increased number of employees A company filing a blue tax return (see section ) may claim a tax credit, if the company submits a plan to a public job placement agency to increase the number of employees and satisfies all of the following conditions: the number of employees is increased by at least five (two for small and mediumsized companies (paid-in capital of not more than 100 million and not a subsidiary of a company with paid-in capital of more than 100 million, etc.)), and by 10% or more, compared to the preceding fiscal year; 16

19 CORPORATE TAXATION DOING BUSINESS IN JAPAN 2018 the company did not fire any employees due to the company s reasons in the current and the preceding fiscal year; and the amount of salary paid to employees in the current year is reasonably increased from the amount paid in the preceding fiscal year. The creditable amount is 400,000 (increased from 200,000 under the 2013 tax reform, for fiscal years commencing on or after 1 April 2013) per additional employee. The maximum creditable amount is 10% (20% for a small and medium-sized company) of the corporation tax liability for the fiscal year. This tax credit will be applicable for all fiscal years commencing between 1 April 2011 and 31 March Tax credits for salary growth A company filing a blue tax return (see section ) may claim a tax credit for fiscal years commencing between 1 April 2013 and 31 March 2018 if the company satisfies all of the following conditions: the amount of salary paid to employees in the current year was increased by 5% or more compared to the base year (generally, the fiscal year preceding the first fiscal year commencing on or after 1 April 2013) (under the 2014 and 2015 tax reform, this condition was relaxed, by reducing the percentage increase to 2% for the first two fiscal years, to 3% for the third year and to 4% for the fourth year of the five applicable fiscal years for other than small and medium-sized companies; to 2% for the first two fiscal years and to 3% for the third to fifth years of the five applicable fiscal years for small and medium-sized companies); the amount of salary paid to employees in the current year was not less than the amount paid in the preceding fiscal year; and the average of salary paid to employees in the current year was not less than the average of salary paid in the preceding fiscal year. The creditable amount is 10% of the amount of increase in salary paid in the relevant fiscal year from the base year. The maximum creditable amount is 10% (20% for a small and medium-sized company) of the corporation tax liability for the fiscal year. Under the 2017 tax reforms, an extra tax credit of 2% (12% for a small and medium-sized company) is given if requirements are met. This rule is not applicable where the tax credits for an increased number of employees (see section ) are applied Special measures for investment in regional areas Certain machinery, equipment, buildings and their related facilities that are used for core business in specified regions are allowed either a 40% special depreciation on acquisition costs (20% for buildings and related facilities) or a tax credit of 4% of the acquisition cost (2% for buildings and related facilities) which is limited to 20% of the corporation tax liability. This incentive is applicable until 31 March Administration Taxable period The taxable period of a company is the same as its accounting period. A taxable period cannot exceed 12 months but can be less than 12 months. Corporation tax is imposed on a current year basis, i.e. the tax for a year is assessed on income earned in the same year. 17

20 DOING BUSINESS IN JAPAN 2018 CORPORATE TAXATION Tax returns and assessment Japan has a self-assessment system. Tax returns are categorized as white (regular) returns and blue returns (aoiro shinkoku). A company is entitled to file a blue return with the approval of the relevant tax office, if its books are properly maintained. Companies filing blue returns are eligible for certain tax privileges and benefits, including special and accelerated depreciation (see section ), carry-forward of tax losses (see section ) and tax credits (see section 1.7.). A company with a fiscal year longer than 6 months should file an interim tax return within 2 months from 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 6 and divided by the number of months of the preceding fiscal year is 100,000 or 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 (see section 3.1.) 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. Final tax returns must be filed within 2 months from the end of the fiscal year. From April 2017, the filing deadline for qualifying companies may be extended by 4 months (for business tax, the extension may be granted for 6 months). Tax returns may be filed electronically. The tax authorities may enquire into a company s tax returns and make any necessary adjustments within the following statute of limitations: adjustments relating to under-reporting of taxable income: 5 years; adjustments relating to amendment of excess tax losses: 9 years (10 years for fiscal years beginning on or after 1 April 2018); adjustments relating to transfer pricing issues: 6 years; and adjustments relating to fraud: 7 years Payment of tax A company is required to make an interim tax payment if it is required to file an interim tax return. The due date for payment is the same as the due date for filing the interim tax return (see section ). The final tax liability is due within 2 months from the end of the fiscal year. No extension is available for the payment of tax Rulings A written advance ruling system (jizen-shôkai) was introduced in September 2001 and has been continuously revised since then. There are two procedures: written advance ruling for an individual case raised by a taxpayer, and written advance ruling for a transaction exclusively related to a particular industry raised by an industry association and the like. Rulings do not cover certain cases, e.g. cases based on hypothetical facts and cases where the main purpose is tax saving. Rulings are generally made public. 18

21 CORPORATE TAXATION DOING BUSINESS IN JAPAN Transactions between Resident Companies 2.1. Group treatment Consolidated tax return filing system A group of companies may elect to file consolidated tax returns. A group is made up of a resident parent company and its 100% directly or indirectly owned resident subsidiaries. Non-resident companies are excluded from the consolidated group. In order to become a consolidated group, an election needs to be made to the tax office in advance. The tax consolidation system is applicable to national corporation tax only. Each company in a consolidated group is required to file local tax returns individually. Consolidation allows for the effective offset of losses incurred by one company against profits of other companies in the same group. Consolidated tax losses can be carried forward and set off against future consolidated profits for up to 9 years (proposed to be increased to 10 years for losses incurred in fiscal years beginning on or after 1 April 2018). If the paid-in capital of the consolidated parent company is more than 100 million, etc. the utilization of tax losses is limited to 80% of the total consolidated taxable income for consolidated fiscal years beginning on or after 1 April 2012 (decreased to 65% in the fiscal year beginning on or after 1 April 2015, 60% in the fiscal year beginning on or after 1 April 2016, 55% in the fiscal year beginning on or after 1 April 2017, and 50% in fiscal years beginning on or after 1 April 2018). Special rules and restrictions apply to existing losses of subsidiaries upon joining a group and in the event of a company leaving a group. Prior to the 2010 tax reform, in most cases losses incurred by subsidiaries prior to joining the group expired upon joining. Under the 2010 tax reform, the rule was relaxed, e.g. prior losses incurred by a subsidiary that is not required to recognize built-in gains/losses upon consolidation will be utilized under the consolidated group up to the amount of post-consolidation income generated by the subsidiary. At the time of joining a consolidated group, a subsidiary is required to revalue its assets to fair market value and pay tax on the built-in gains except in certain cases, including where the subsidiary has been held by the parent company for over 5 years Special regime for transactions among 100% group companies Under the 2010 tax reform, a new special regime was introduced for certain transactions carried out between companies in a 100% group (companies that have a direct or indirect 100% shareholding relationship), including a tax consolidated group. Unlike the tax consolidation system, resident companies as well as non-resident companies and individuals can form a 100% group, although most provisions under the new group taxation regime apply only to transactions between resident companies. Transactions between companies in a 100% group should be based on fair market value. However, capital gains and losses arising on transfers of assets within a 100% group (excluding inventory and small assets with a tax base of 10 million or less) are deferred generally until the assets leave the group or are written off. Donations between companies in a 100% group will not constitute taxable income for the recipient company and are non-deductible expenses for the company paying the donation. 19

22 DOING BUSINESS IN JAPAN 2018 CORPORATE TAXATION Domestic dividends paid between group companies are fully excluded from taxable income without deduction of associate interest expense. In the case of dividends in kind paid in a 100% group, no capital gains/losses from the transfer of assets are recognized. In certain cases, including when a company repurchases its own shares from another company in a 100% group or when a company liquidates and distributes its assets to another company in a 100% group, the shareholder company will not recognize capital gains/losses on surrendering the shares. Tax losses incurred by a liquidated company within 9 years (proposed to be increased to 10 years for losses incurred in fiscal years beginning on or after 1 April 2018) prior to liquidation may be transferred to its shareholder company upon liquidation Intercompany dividends Domestic dividends are exempt to the extent of dividends received less interest expenses incurred in relation to holding the shares under the Dividend Received Deduction rule. For shareholdings of at least 25% held for 6 months or more, 100% of the net amount of dividends received less interest expense is exempt from corporation tax, and a 50% exemption applies in all other cases. For fiscal years beginning on or after 1 April 2015, a 100% exemption applies if the recipient holds more than 33.3% of the shares of the payer, a 20% exemption applies for shareholdings of 5% or less (a 40% exemption applies if the shareholder is an insurance company), and a 50% exemption applies in all other cases. Domestic dividends paid in a 100% group are fully exempt, without deducting the related interest expense. See sections and 7.5. for exemptions on dividends from non-resident subsidiaries. 3. Other Taxes on Income 3.1. Business tax Business tax is a local tax imposed by prefectures. The applicable rate depends on the prefecture, which can set a rate between the specified standard and maximum rates. Business tax is deductible for both corporation tax and business tax purposes. Business tax is usually calculated on taxable net income, but business tax for companies in specified industries such as insurance and gas/electric utilities is calculated on gross revenue with different tax rates. Size-based business tax Companies with paid-in capital exceeding 100 million are also subject to a size-based business tax. Special local corporate tax A national tax, the special local corporate tax (chihô-hôjin-tokubetsu-zei) is imposed for fiscal years beginning on or after 1 October Tax revenues from the special local corporate tax are reallocated by the national government to local governments, in order to reduce the gap in tax revenue between urban and rural areas. This is a temporary measure until an overhaul of the tax system is implemented at a future date. This measure was planned to be abolished but the application is suspended to fiscal years beginning on or before 30 September

23 CORPORATE TAXATION DOING BUSINESS IN JAPAN 2018 Tax rates The marginal standard tax rates and maximum tax rates for small corporations (capital up to 100 million) and large corporations for fiscal years beginning on or after 1 April 2017 are as follows: Paid-in capital up to 100,000,000 Paid-in capital exceeding 100,000,000 Standard Maximum Standard Maximum rate (%) rate (%) rate (%) rate (%) Income component Up to 4,000, (Taxable income ( )) 4 8,000, Over 8,000, Added value component 1.26 Capital component Special local corporate tax Inhabitant tax Inhabitant tax is a local tax imposed by prefectures and municipalities. Prefectural and municipal inhabitant taxes consist of two elements: an income tax calculated based on corporation tax liability and a per capita tax. The rates of inhabitant tax on corporation tax liability range from 5% to 6% for prefectural tax purposes and from 12.3% to 14.7% for municipal tax purposes. The above tax rates will be reduced for fiscal years beginning on or after 1 October 2014, i.e. the range for prefectural tax purposes is from 3.2% to 4.2% and the range for municipal tax purposes is from 9.7% to 12.1%. With the reduction in the inhabitant tax rates, a newly introduced national tax, the local corporate tax (chihô-hôjin-zei) will be imposed on corporation tax liabilities at 4.4% for fiscal years beginning on or after 1 October Tax revenues from the local corporate tax are reallocated by the national government to local governments, in order to reduce the gap in tax revenue between urban and rural areas Accumulated earnings tax for a special closely held company A special closely held company which is controlled by one shareholder and related persons of the shareholder may be liable to a special tax on retained earnings. This is to prevent shareholders from trying to avoid or defer individual income tax by not making dividend distributions. For the purposes of this rule, a family company is defined as a company where more than 50% of its shares are held by one person, or by individuals or corporations affiliated to that person. A specific formula is used to calculate taxable retained earnings. The additional tax is calculated at the rates of 10% (up to 30 million income), 15% ( million) and 20% (over 100 million) depending on the brackets of income. A small and medium-sized company (as defined in section ) is exempt from this additional tax Special reconstruction tax A special reconstruction income tax of 2.1% of income tax liability (including withholding tax, and before foreign tax credits) is imposed from 2013 to 2037 for reconstruction funding after the 2011 earthquake. The special reconstruction tax will not be imposed if Japanese income tax is reduced or exempted under a tax treaty. 21