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Tax Specialist Group
Corporate Tax Guide: Japan
Japan

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The information is valid for the entire country except where indicated. For example, in the case of Malaysia, Labuan is part of Malaysia but has a special tax regime, so this is noted.
Japan
The corporate tax rate shown is the typical corporate tax rate that a domestic corporation owned by non-resident persons would pay. The tax rate does not include withholding tax on dividends, but does include a distribution tax shown separately if applicable. Certain countries have a low corporate tax rate, but charge an additional tax when a dividend is distributed. Because this tax is paid by the corporation, and not deducted from the amount of the dividend itself, it is not a dividend withholding tax. As a result, it typically cannot be reduced by an international tax treaty.
30.86% - 34.81%, depending upon the size of capital amount.
The basis of taxation for a corporation will typically be one of:
  • World income (i.e. income from all sources)
  • Territorial (i.e. only income from within the jurisdiction)
  • Territorial and remittance (income earned within the jurisdiction and income remitted into the jurisdiction)
Other basis of taxation are possible, and, if applicable, they are noted.
World income.
Where non-resident corporation carries on business in a country, business profits may be subject to corporate tax. In addition, a branch profits tax may apply in lieu of dividend withholding tax. This branch profits tax applies to the after tax profits, typically at a fixed percentage. An international tax treaty may reduce the rate of branch profits tax, typically to the rate provided for dividend withholding.
No.
The common forms of business entity are noted. In addition, the entities which are flow through entities for U.S. tax purposes are indicated.
Limited Liability Company (“Kabushi Kaisha” and “Godo Kaisha”), Partnership (“NK” and “TK”).
Capital gains may be fully taxed, partially taxed or not at all. In certain countries, an exemption, called the participation exemption, will apply to exempt from tax a capital gain from disposition of a substantial holding of shares of a subsidiary. Where a participation exemption is applicable, it is noted together with a summary of the main conditions.
Capital Gains are subject to normal corporate income tax regardless of holding periods.
Certain countries allow group taxation, otherwise known as consolidated tax filing. Here the tax returns of a group of corporations in the country may be combined together, which can be useful. If group taxation is permitted, it is noted along with the main conditions.
Group Taxation applies to certain transactions carried out among companies where 100% shareholding ownerships between parent-subsidiary shareholding ownerships are established; where 100% of the outstanding shares are held directly or indirectly by a person, corporation, etc. It allows for tax-free capital gain on asset transfer among group companies.
Countries offer various kinds of special exemptions and incentives. Examples are a reduced tax rate, a tax holiday, a tax credit on the purchase of equipment, special accelerated deductions for deprecation, incentives for R&D, and various others. Here the major items are noted.
  • Reduced tax rate: No.
  • Tax Holiday: No.
  • Tax Credit: Foreign tax credit is available.
  • Special Depreciation: Available for machinery and equipment, housing, etc. per political requirements such as industrial investments, green energy policy, and residential housing for aged person, and others.
  • Special exemption for mining reserves.
  • Special exemption for expropriation of land.
Many countries have thin capitalization rules which limit or deny the deduction of interest expense in certain circumstances. For example, if debt exceeds three times equity, a proportionate amount of interest expense may not be deductible. Limitations take various forms, restricting the interest expense deduction to a percentage of profit, deeming the debt to be equity and the interest to be a payment of dividends, and various other rules which may blend of these principles. Where a country has thin capitalization rules, they are briefly described.
Yes. 3:1 debt to equity ratio, excess interest deemed as dividend. Debt relates to borrowings from overseas controlling shareholders.
Many countries have transfer pricing rules. They very often follow the OECD guidelines and the arms length principle. Some countries have specific rules which apply in certain cases. In addition, some countries allow for a selection of the most appropriate transfer pricing methodology in the circumstances, while other countries follow a hierarchy of methods, with the CUP method (comparable uncontrolled price) often ranking first. The transfer pricing rules are briefly explained.
The sale of assets, purchase of assets, rendering of services and other transactions with related overseas companies without fulfilling the arm’s length price are subject to the transfer price law. The transfer price law provides four methods to evaluate the arm’s length price; (1) CUP, (2) RP, (3) Cost Plus and (4) TNMM.
Many countries tax passive income earned in controlled foreign corporations (CFC’s) on an imputation basis while active income is not taxed. Such CFC rules are usually complex and vary significantly in what is considered passive income, and how foreign tax paid is taken into account. Some countries approach CFC rules on the basis of whether or not the foreign corporation is resident in a low tax jurisdiction or a tax haven. This may be done through a black list of countries.
The general overview of CFC rules is described in simple terms.
When a domestic corporation set up the nominal subsidiary within the tax haven jurisdiction; no tax or up to 20% corporate income tax in definition, the income generated at the subsidiary should be added to that of the domestic parent, and taxed in the same manner.
Profits repatriated by way of dividends from a subsidiary to a parent company are typically taxed in one of three ways:
  • The dividends are exempt of tax.
  • The dividends are deductible from taxable income, but not fully (90%, for example, of the dividend is deductible).
  • The dividend is taxable, grossed up to the pre-tax amount, and a foreign tax credit claimed for foreign taxes paid.
The applicable method is noted.
Income after corporate tax can be remitted to the shareholder as “dividend” up to the limitation established by the commercial code. The remittance amount is subject to the withholding income tax; tax treaty overrides the domestic law regarding the percentage. Income after corporate tax can be remitted to a head office without any withholding income tax. There is no branch profit tax.
Most countries allow a foreign tax credit based on a formula, typically net foreign income over the net income times taxes payable. This limits the foreign tax credit to roughly the domestic tax otherwise applicable to the foreign income. There are numerous variations and technical rules in the details of foreign tax credit calculations. Where a foreign tax credit is allowed, the general principles are described.
Indirect FTC is repealed by the introduction of foreign income exemption. Direct FTC is still available. Effective as from 1 April 2016, a foreign company having a PE can also utilize FTC. 3 years carry-forward.
14. Losses
Losses typically can be carried forwards for a period of years, and sometimes can be carried back. Losses may be segregated into capital losses and non capital losses.
Complicated. Basically 10 years carry forward for the losses accrued in fiscal year beginning on or after 1 April 1 2017. There is limitation for loss utilization; up to 50% of taxable income for the fiscal year beginning on or after 2017. Exception for SMEs.
It is not practical to list all of the tax treaties which a country has in a simple guide like this. Accordingly, a link is provided in each case to the tax treaties.
Some countries have entered into Tax Information Exchange Agreements (TIEA).
Treaties are more and more containing provisions that limit benefits (LOB provisions).
Yes.
  • Tax treaties: 66
  • TIEA: 10
  • LOB provisions: 9
Withholding tax rates vary considerably from treaty to treaty, and countries may have domestic exemptions applicable in certain circumstances (for example copyright royalties, interest paid to arm’s length persons, etc.). A table shows the typical rates but cannot adequately summarize all of the details. The applicable treaty should be consulted.
TREATYNON-TREATY
Interest0%20.42%
Dividends5% - 15%15.315%
Royalty0%20.42%
Management Fees0%0%
Some countries allow for the selection of year-end while other countries specify a particular year-end which all business entities must have. Normally the taxation year cannot exceed 12 months. Where it can exceed 12 months, this is noted.
Any fiscal year can be chosen.
Cannot exceed 12 months but can be less than 12 months.
This is the due date for filing a tax return. Where extensions are available, this is noted.
Due within two months after the fiscal year-end. Extension of up to three months is applicable due to audit, etc. The extension of filing does not extend the tax payment.
The typical tax instalment requirements are noted.
For corporations whose fiscal year exceeds six months, filing and payment for the interim tax return must be completed within two months after the end of six months of the fiscal year under certain conditions.
This is the date when the corporate tax owing for the year must be paid. It may be different from the tax return filing due date.
Within two months from the fiscal year-end.
This is the period after which the tax department cannot in normal circumstances reassess a taxation year. It is sometimes referenced to the end of the taxation year and sometimes to the date of the first assessment of that taxation year.
  • Five years after the due for tax filing.
  • Seven years if the filing involved deceit, fraud and other misdeed.
If a country has exchange controls, this is noted, together with the main requirements.
No.
23. VAT
A VAT tax system typically provides that the supply of goods and services is classified as taxable, tax exempt, or zero rated. Where a business is engaged in an activity which is taxable, it must charge VAT on its revenue, and can claim a refund of VAT on its expenditures. Where the activity is exempt, it does not charge VAT on its revenue, and cannot claim back VAT paid. Where the entity is engaged in activities which are zero rated (typically agriculture, food services and exports), then it can claim back VAT which it has paid on its expenditures, and does not charge VAT on its revenue.
If a country has a typical VAT system, this is noted. If a country has no VAT system but a sales tax system, this is indicated. Some countries may have a mixture, and taxes may apply at different levels (federal and state for example).
8%. Imposed on consumption of goods and services within Japan. The general rule is similar to European VAT.
Stamp duty, or land transfer tax, can apply on such things as the transfer of shares, land, or the issuance of bonds or debentures. This is described together with the applicable rates.
Stamp Duty is imposed on certain taxable documents such as deeds and contracts. Tax rate of Land Transfer Tax varies depending upon the character of transfer: 1.5% of Land and 2% of building for sale-type transfer, 0.4% for merger-type transfer.
If capital tax is payable, this is described. Capital tax may apply in specialized industries, such as banking and insurance, even if a country does not generally apply a capital tax to corporations.
Generally none.
Where significant, other taxes are noted.
Both national and local taxes. Various types of taxes.
Anti-Avoidance Rules take many forms, the most common ones are a general anti-avoidance rule, treaty shopping limitations, the requirement for economic substance (or a business purpose in carrying out transaction) and specific anti-avoidance rules for particular purposes. A very brief overview of the anti-avoidance rules is described.
Tax code specifies tax avoidance penalties for any unreasonable (1) transactions among family companies, (2) transfer of assets or liabilities among companies under merger, demerger, in-kind contribution and other company reorganization, and (3) consolidated tax returns.
Where a non-resident person holds shares of a corporation established in the country listed, the capital gain which results may be taxable or not taxable depending on the circumstances and, possibly, the existences of an international tax treaty. The general rules are noted.
Sale of shares by non-resident who does not have a PE in Japan is taxable if over half of value is derived from Japanese real estate, or when more than 25% shares are held within last three years, following more than 5% out of 25% shares sold at one time.
Where a corporation is acquired through the purchase of shares, sometimes a step up is allowed so that the cost of its assets can be revalued. The main rules are briefly summarized.
The residual value that cannot attribute to intangible assets will be recognized as good will.
In some countries, rulings are commonly used (and sometimes even required). In other countries the system is either unavailable or not commonly used except in special circumstances.
Advance ruling does not exist.
31. Other
Other important aspects of the tax system are noted.
N/A