Japan Introduces Changes to Corporate Tax Regime


Japan’s 2018 tax reform package, most of which came into effect on April 1, 2018, introduced, amongst other things, a number of amendments to the country’s corporate tax regime. This blog highlights the most important changes.

Permanent establishment

The definition of a permanent establishment (PE) has been amended, largely in line with Article 5 of the OECD Model Tax Treaty (November 2017 version) and following the recommendations by the OECD in Action 7 of the BEPS final report. For fiscal years beginning on or after January 1, 2019, the three types of PEs provided for are:  

  • an office, branch or other fixed place of business (this includes mines, quarries or other places of mineral-resource extraction but excludes a specified place used by a non-resident or foreign corporation only for the purpose of storage, display or delivery of goods or merchandise belonging to it and any other activities of a preparatory or auxiliary character);
  • a construction, installation or assembly project carried on for more than one year (excluding a specified place used by a non-resident or foreign corporation only for the purpose of storage, display or delivery of goods or merchandise belonging to it and any other activities of a preparatory or auxiliary character); and
  • a dependent agent, namely a person who habitually concludes, or habitually plays a principal role leading to the conclusion of, contracts transferring the ownership of property belonging to a nonresident or foreign corporation to another person. 

Tax credit for increasing wages

For fiscal years beginning on or after April 1, 2018 and ending on or before March 31, 2021, the tax credit introduced in 2015 for companies that increase their employees’ wages takes effect where wages are increased by:  

  • 1.5 percent (for small and medium-sized companies); and
  • 3 percent (for all other companies). 

R&D expenses

Six to 14 percent of research and development expenses (12 to 17 percent for small and medium-sized companies) can be credited to corporate tax liability – up to a maximum of 25 percent of the total liability. However, until March 31, 2019, the credit for the portion exceeding 10 percent (12 percent for small and medium-sized companies) is limited and the cap is temporarily increased from 25 percent to 35 percent.

Tax rates

The effective corporate tax rates for fiscal years beginning on or after April 1, 2018 are: 

  • 30.62 percent (reduced from 30.86 percent), for large corporations (ie those corporations with paid-in capital of over 100 million yen) in the Tokyo area;
  • 29.74 percent (reduced from 29.97 percent), for large corporations outside the Tokyo area;
  • 34.60 percent (reduced from 34.81 percent), for small and medium-sized enterprises in the Tokyo area; and
  • 33.59 percent (reduced from 33.80 percent), for small and medium-sized enterprises outside the Tokyo area. 

Further coverage of the corporate tax regime in Japan is provided in the Bloomberg Tax Country Guides.

 

By Stephen Hetherington, Technical Editor, Bloomberg Tax

To access the Country Guides, and more in-depth analysis and expertise, request a free trial of Bloomberg Tax.