Depreciation and amortisation
Depreciation is deductible in the calculation of taxable income for corporation tax purposes. Depreciable assets include tangible property (e.g. buildings, attachments to buildings, structures, machinery and equipment). Certain intangible assets are also eligible for amortisation (e.g. goodwill, patents, trademarks).
With regard to depreciation methods, a taxpayer may adopt one of the allowable methods for each of the type of depreciable property, except for buildings and structures and attachments to buildings. For selected structural improvements acquired on or after 1 April 2016, only the straight-line method will be permitted (i.e. the declining-balance accelerated depreciation method will no longer be allowed). Tangible property is generally depreciated using either the straight-line method or the declining-balance method. Intangible property is generally amortised under the straight-line method.
Useful lives for assets are set forth on the table in detail. For reference, the following is the brief table of useful lives for typical assets.
|Types of assets||Useful lives (years)|
|Concrete buildings||21 to 50 (depending on uses)|
|Metal building||12 to 38 (depending on uses)|
|Electrical facilities and lighting||15|
|Heating and air conditioning||15|
|Motor vehicles||3 to 6 (depending on uses)|
|Digital telephone equipment||6|
|Machinery and equipment||3 to 22 (depending on uses)|
|Software||3 or 5 (depending on uses)|
Start-up expenses, such as corporation organisation costs and opening costs (i.e. costs to begin business after the corporation is established), are treated as deferred assets and allowed to be amortised on a voluntary basis.
Interest expenses on borrowing are deductible in the calculation of taxable income in principle. However, the interest payment to related parties in the corporate group may be disallowed to be deducted to some extent in certain cases. See ‘Thin capitalisation’ and ‘Interest expense deduction limitation’ in the Group taxation section.
Reserves recorded in the books of accounts, except for reserves for doubtful receivables and return of goods not sold, are not deductible for corporate tax purposes.
Reserve for doubtful receivables
A reserve for doubtful receivables is available to SMEs, banks, insurance companies, and other similar financial corporations.
The deductibility of a reserve for doubtful receivables is limited by the following two components: (i) an estimate of irrecoverable amounts from a debtor and (ii) a calculation of the limit in the aggregate based on either the actual historical bad debt percentage or statutory percentage (reduced for large corporations), excluding the irrecoverable amount of receivable in (i) above.
Reserve for return of goods not sold
A deductible reserve for return of goods not sold is available to corporations such as publishers, wholesalers of books, and others, provided that the corporation sells the merchandise under an unconditional repurchase agreement.
Under the 2018 Tax Reform Act, the deductible reserve for return of goods not sold will be abolished with a transitional period (years beginning from 1 April 2021 thru 31 March 2030).
Except for certain designated donations, the tax deduction for charitable contributions is limited to certain amounts, as follows:
|General donation||((0.25% of capital plus capital surplus*) + (2.5% of income)) x 1/4|
|Donation made to designated public purpose companies||((0.375% of capital plus capital surplus*) + (6.25% of income)) x 1/2|
* Note that the definition of capital surplus was amended by the 2020 Tax Reform Act from the tax law purpose to the accounting purpose.
Donations subject to this limitation include economic benefits considered to be given as a subsidy. Donations to foreign affiliates are not fully deductible.
In cases where a donation occurs between group companies (as defined), there will be no tax implications for either the donor or donee (i.e. no deduction for the donor and no taxation for the donee).
The remuneration paid to directors is deductible only in the following four cases:
- Fixed monthly payments.
- Fixed payments (either cash amount or the number of shares or stock options) in accordance with an advance notice to the tax office.
- Performance bonuses, either in the form of cash, stocks, or stock options, paid in proportion to the company’s performance (sales, earnings, stock value, etc.) to directors who engage in the operation of the company’s business, to the extent that certain requirements are met.
- Retirement compensation (where the amount is calculated by the service period but not on a performance basis).
If the amount of remuneration is deemed unreasonable by the tax authority, only the reasonable amount is deductible for tax purposes.
In principle, entertainment expenses are not deductible for tax purposes. However, an SME, defined as a company with paid-in capital of JPY 100 million or less (except for a company wholly owned by a company that has paid-in capital of JPY 500 million or more after the group taxation regime is effective) may take a tax deduction up to the smaller of the actual disbursement for the entertainment expense or JPY 8 million. With regard to expenses for eating and drinking, a company may deduct such expenses as far as the expense does not exceed JPY 5,000 per person (excluding expenditures for internal purposes) for tax purposes since such expense does not fall under the category or the entertainment expense.
As tentative measures, corporations, regardless of size, will be able to deduct 50% of the entertainment expenses for food and drink (excluding entertainment for internal purposes). The 2020 Tax Reform Act amended the applicability of this rule by excluding corporations with capital amounts of greater than JPY 10 billion and extended the rules through 31 March 2022.
Fines and penalties
Fines and penalties are not deductible.
Enterprise tax and business premises tax are deductible in the calculation of the taxable income for corporation tax purposes on a cash basis. However, corporation tax and inhabitant’s tax are not deductible. Fixed assets tax and other taxes are deductible, when assessed. Foreign income taxes also may be deductible if the Japanese corporation does not elect to claim a foreign tax credit.
Net operating losses
For corporation tax and enterprise tax purposes (indirectly for inhabitant’s tax purposes), a tax loss can be carried forward to offset future income in the case that a taxpayer files a ‘blue form’ tax return (see Tax returns in the Tax administration section) or if the tax loss is incurred as a result of certain disaster events.
Based on the 2016 Tax Reform Act, changes in the limitation for the net operating loss deduction will be implemented over three years. Thereafter, the limitation will be reduced to 50%, although the limitation carryover period will be extended from the current nine years to ten years for losses incurred on or after years beginning on or after 1 April 2018. SMEs are not subject to the loss deduction limitation.
|Tax year 2015 (1)||Tax year 2016||Tax year 2017||Tax year 2018|
|Limitation ratio for large corporations||65%||60%||55%||50% (2)|
|Carryover period for loss utilisation as well as assessment by tax authorities and request for downward adjustment by taxpayer (assuming loss period financial documentation is maintained)||9 years||9 years||9 years||10 years (2)|
- For tax years beginning on or after 1 April 2015 and before 1 April 2016 in which the taxpayer claims a net operating loss deduction.
- Applicable to tax losses incurred in tax years beginning on or after 1 April 2018.
Certain newly established corporations and companies coming out of a rehabilitation process will not be subject to the loss limitation rules for a certain period.
|Type of corporation applicable||Years in which full deduction is allowable||Years where regular limitation applies even if full deduction otherwise allowable|
|Newly established corporations (1) and corporations coming out of the rehabilitation process (2)||Seven years from establishment of the corporation or seven years from the decision of the court to exit the rehabilitation process.||For years ending on or after (i) a company is listed on a stock exchange, or (ii) the company is deemed to be rehabilitated.|
- SMEs, 100% subsidiary of larger corporations, or 100% parent corporation after share transfer are excluded.
- SMEs are excluded.
Where there is a change in ownership of a corporation followed by certain events, such as the cessation of business or a significant change in its business within a five-year period following a business acquisition, the utilisation of its tax loss is restricted.
Carryback of tax losses is generally available for one year for national corporation tax purposes. This carryback rule is suspended until the tax year ending 31 March 2020 (except in specified circumstances, e.g. year of liquidation).
No carryback of losses is allowed for enterprise tax and inhabitant’s tax.
Payments to foreign affiliates
In order to support a deduction in Japan for expenses incurred by a foreign affiliate and charged to a Japanese corporation, in general, it should be demonstrated that the service arrangement between the foreign affiliate and the Japanese corporation satisfies arm's-length criteria for purposes of Japan's transfer pricing laws and regulations.
Generally, fees that are paid by a Japanese subsidiary to a foreign affiliate should be deductible for Japanese tax purposes if the following conditions are met:
- The services should have the same character as services that take place between non-related companies or such services are essential to Japan's activities.
- There is a written service agreement.
- The services were requested by the Japanese corporation.
- The rendering of services is documented with evidence (e.g. requests for services from the Japanese subsidiary, regular invoices sent by the foreign affiliate).
- The service charges are reasonable.