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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

Pursuant to the 2015 Tax Reform, the R&D tax credit system was amended whereby the credit limit was increased and the ‘Open Innovation’ type R&D credit was expanded. The 2017 Tax Reform was built on these changes as follows:

  • The credit rates will increase in line with an increase of R&D expenditures.
  • R&D expenditures to develop certain kinds of new service-type businesses will be brought within the scope of the R&D tax credit in order to support the development of new business opportunities from the ‘Internet of Things’ (IoT), ‘Big Data’, artificial intelligence (AI), etc.
  • Conditions for claiming the ‘Open Innovation’ type of R&D credit will be relaxed.

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

Salary increase tax credits

Under the 2018 Tax Act, the salary increase tax credits are amended for large corporations so that only those corporations increasing domestic investment would be eligible for the credits. The salary increase tax credits will be available for corporations filing ‘blue form’ tax returns that meet the conditions described below. The revised salary increase tax credit rules will be applicable for fiscal years beginning on or after 1 April 2018 until 31 March 2021.

  Before the amendments After the amendments
Conditions 1 (Increased salary payment / Salary payment to employees in base year) ≥ 5% Abolished
2 Salary payment in the current fiscal year ≥ Salary payment in the preceding fiscal year Salary payment in the current fiscal year ≥ Salary payment in the preceding fiscal year
3 (Average salary payment in the current fiscal year – Average salary payment in the preceding fiscal year) / Average salary payment in the preceding fiscal year ≥ 2% (Average salary payment in the current fiscal year – Average salary payment in the preceding fiscal year) / Average salary payment in the preceding fiscal year ≥ 3%
4 N/A Domestic capital expenditure ≥ 90% x Total depreciation
Tax credit 10% of the increased salary payment + 2% of the salary payment made in the preceding year 15% of increased salary payment (20% if training costs have increased by 20% or more)
Limitation on tax credit Up to 10% of the corporate tax liability Up to 20% of the corporate tax liability

Internet of Things (IoT) investment tax incentive

A tax incentive (either accelerated depreciation or tax credit) for costs related to the development of certain data gathering and analytic information systems under the Special Measures Act for the Improvement of Productivity (Productivity Act) is available to companies that file blue form tax returns and have obtained approval of an ‘innovative data utilization plan’. Companies will be eligible for either accelerated depreciation (30%) or tax credit (3% or 5%) if they have acquired software as well as machinery or equipment worth JPY 50 million or more pursuant to the approved plan. The IoT investment tax incentive will be applicable from the effective date of the Productivity Act (6 June 2018) until 31 March 2021.

The amount of tax credit available will be higher for companies that satisfy a ‘salary increase condition’ (i.e. the average salary for employees of the company is increased for the year by more than 3%).

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.

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% of the book value of the investment. This incentive is effective for investors into a qualified partnership designated on or before 31 March 2019.

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 2020 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 prior to 31 March 2020 and asset is acquired within two years of approval) Acquisition costs x 7% Acquisition costs x 4%

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

Alternate to the investment incentive above, 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 either tax incentive, the amount of the above tax credits can only offset up to 20% 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 2020, 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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