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Japan Corporate - Tax credits and incentives

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Foreign tax credit

A Japanese corporation is subject to Japanese corporate income taxes on its worldwide income. However, to avoid double taxation of foreign-source income, Japanese corporations are allowed to claim a tax credit against corporation and inhabitant’s taxes for foreign income taxes paid directly.

Creditable foreign taxes are defined as taxes that (i) are incurred directly by the taxpayer; (ii) are levied by foreign governments and local authorities in accordance with local tax laws; (iii) are levied on corporate income; and (iv) have the same characteristics as Japanese income tax, corporation tax, and local income-based taxes. A tax for which a refund can be claimed optionally by the taxpayer after the tax payment, or a tax whose payment grace period can be decided by the taxpayer, is not regarded as a foreign tax.

In order to prevent the credit from reducing corporation tax on Japan-source income, certain limitations are set on the amount of foreign taxes that can actually be credited. The ceiling is currently 35% for the foreign taxes paid.

A foreign tax credit is not applicable for enterprise tax purposes, although foreign branch income attributable to a business executed outside Japan is exempt from enterprise tax.

Generally speaking, the foreign tax credit system does not apply to the extent the dividend income from the foreign subsidiary is subject to the dividend exemption system.

Foreign corporations with a PE in Japan should note that when a foreign corporation’s PE in Japan is subject to taxation in Japan as well as in jurisdictions other than its country of residence, double taxation may arise. To alleviate an unfair tax burden, a foreign tax credit regime is also applicable to PEs in Japan similar to that which applies to Japanese corporations. However, foreign tax (including WHT) paid in the enterprise’s country of residency would not, in principle, be creditable under consequential changes to the foreign tax credit regime.

Tax credit for research and development (R&D) cost

The R&D tax incentive is the largest incentive in terms of tax benefit in the Japanese corporate tax system. With the rapid technology progress under the ‘Industry 4.0’, the 2017 Tax Reform Act reviewed the R&D incentive to reward increases in R&D spending rather than support existing spending and investment in the development of new service-type business by broadening the scope of R&D activities. The amendments are illustrated as follows:

The amendments apply for tax years beginning on or after 1 April 2017.

Category Before amendments After amendments
Permanent incentive (gross R&D cost base is changed to incremental basis) A credit against national corporate tax is allowed.  

Credit amount: 8% to 10% of the gross R&D cost (rate depends upon the R&D costs, including special R&D costs).   

Limitation of credit: 25% of corporate tax before credit.   

Carry over: Carry over is not applicable.
Credit amount: 8% to 10% (14% until 31 March 2019) of the gross R&D cost (rate depends on the increase or decrease ratio).   

Limitation of credit: 25% (35% until 31 March 2019) of corporate tax before credit.
Special R&D cost based credit Scope of special R&D cost: Royalty payments to SMEs shall be included in special R&D cost.    

Credit amount: Increased to 30% of the gross special R&D cost for the joint R&D with university or public research institution (20% for the joint R&D with other non-public corporations).

A credit against local inhabitant’s tax is also allowed for SMEs.

Limitation of credit: 5% of corporate tax before credit (separately from other gross R&D cost credit).
Scope of special R&D cost: Broadened to include any costs incurred due to R&D activities.
Gross R&D cost based credit for an SME A credit against national corporate tax and local inhabitant’s tax is allowed.

Credit amount: 12% of the gross R&D cost.

Limitation of credit: 30% of corporate tax before credit.

Carry over: Carry over is not applicable.
Credit amount: 12% (17% until 31 March 2019) of the gross R&D cost.

 

Limitation of credit: 25% (35% until 31 March 2019) of corporate tax before credit.
Temporary incentive (incremental R&D cost base) A credit against national corporate tax is allowed for a tax year commencing from 1 April 2013 to 31 March 2017.    

Credit amount: A credit against national corporate tax is allowed for the higher of (i) and (ii) but subject to the limitation of 10% of tax liability before the credit.
  1. 5% to 30% of incremental R&D costs or
  2. R&D costs in excess of 10% of the average sales, times the ‘tax credit ratio’ (ratio is a mechanical calculation that increases the credit depending upon the relationship between the amount of R&D costs and average annual sales).
Limitation of credit: 10% of corporate tax before credit.
A credit against national corporate tax is allowed for a tax year commencing from 1 April 2013 to 31 March 2019.

Credit amount: A credit against national corporate tax is allowed for R&D costs below but subject to the limitation of 10% of tax liability before the credit.

  1. R&D costs in excess of 10% of the average sales, times the ‘tax credit ratio’ (ratio is a mechanical calculation that increases the credit depending upon the relationship between the amount of R&D costs and average annual sales).

Limitation of credit: 10% of corporate tax before credit.

Special tax treatment for investment in certain equipment

SMEs filing 'blue form' tax returns may elect, under certain conditions, to claim accelerated depreciation of 100% of the base acquisition cost or a special tax credit equivalent to 10% of the base acquisition cost on designated equipment to the extent that it is acquired between 1 April 2014 and 31 March 2019. The maximum tax credit is limited to 20% of the taxpayers’ corporate tax liability.

The 'Incentive for New Investment into Production Facilities' is applicable to any industry that invests in new production facilities (30% special depreciation or 3% tax credit on acquisition cost, up to 20% of corporate tax liability, etc., and subject to certain conditions). In addition, an investment incentive applies to SMEs that invest in equipment and furnishings pursuant to certain facility remodelling (30% special depreciation or 7% tax credit on acquisition cost, up to 20% of corporate tax liability [one-year carryforward of any excess], and subject to certain conditions). The SME tax incentive is granted to an SME engaged in the distribution, retailing, service, and/or agriculture business. This incentive is effective for tax years beginning on or after 1 April 2013 through 31 March 2019.

Employment promotion taxation

If qualifying corporations increase the number of employees subject to employment insurance by 10% or more and by five people (two in the case of SMEs) or more from the end of the prior tax year, the qualifying corporations will be eligible for a tax credit equal to the increased number of the employees multiplied by JPY 400,000 with the limitation of 10% (20% in the case of SMEs) of the tax liability before the credit, subject to certain conditions for the tax years that commence from 1 April 2011 (excluding years ending before 30 June 2011) to 31 March 2018.

Another tax incentive allows an employer corporation to claim a tax credit based on increases in salary payments (tax credit equal to 10% of the increased salary amount with a limitation of 10% [20% in case of SME] of the tax liability, subject to certain conditions). The employer corporation is allowed to claim a credit by either increased employment incentive or employment promotion incentive as explained above. To take a credit, the employer corporation must be a ‘blue form’ filer. The credit is effective for tax years commencing from 1 April 2013 to 31 March 2018.

Incentive for venture capital investment

To assist venture capital investment, certain procedures to accredit venture capital partnerships were legislated in the Industrial Competitiveness Enhancement Law. Investment tax incentives were also introduced to allow corporate investors the ability to take a loss from a venture capital investment on an accelerated basis compared to current rules. A qualified investor is allowed to deduct a tax reserve for the investment loss at up to 50% (under the 2017 Tax Reform Act, the percentage was lowered from 80% to 50%) of the book value of the investment. This incentive is effective for investors into a qualified partnership designated on or before 31 March 2018.

Incentives for the revitalisation of local ‘hubs’

A taxpayer is eligible for certain tax incentives if it relates to or expands certain kinds of operations in local areas (generally other than Tokyo, Osaka, or Nagoya). Details as to the kinds of operations eligible will be included in a future Revised Regional Revitalization Law.

Any qualifying investments have the following depreciation incentives with respect to investments in buildings:

Depreciation incentives Investment pursuant to an approved relocation plan Investment pursuant to expanding an existing operation
Type of depreciation (if plan is approved prior to 31 March 2018 and asset is acquired within two years of approval). Additional first year depreciation of 25% of the acquisition cost (depreciation is accelerated). Additional first year depreciation of 15% of the acquisition cost (depreciation is accelerated).

Alternatively, a taxpayer may choose to take a tax credit rather than accelerated depreciation, as follows:

Tax credits Investment pursuant to an approved relocation plan Investment pursuant to expanding an existing operation
Tax credits (if plan is approved and asset acquired prior to 31 March 2018) Acquisition costs x 7% Acquisition costs x 4%

Minimum investment is JPY 20 million for large corporations and JPY 10 million for SMEs.

In addition, an employment-related tax credit is allowed for increased employment in a local hub if hired within two years of the plan approval. The credit shall be JPY 500,000 times the number of increased employees at a maximum (if certain conditions are not met, the credit becomes JPY 200,000 per employee).

In total, the amount of the above tax credits can only offset up to 30% of a corporation’s tax liability.

Local government contributions

As part of the Regional Revitalization Act, ‘blue form’ corporate tax filers who make donations to approved regional donation plans up until 31 March 2020 will be able to claim a tax credit against corporate, enterprise, and inhabitant’s taxes in addition to taking a deduction from the corporate tax. This is known as the corporate hometown tax, or furusato nozei system.

National strategic zones

For a ‘blue form’ filing corporation with an approved plan for qualified investment in a National Strategic Special Area up until 31 March 2018, a deduction of 20% of income is available for five years from the date of establishment.


Last Reviewed - 30 November 2017

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