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, 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 for tax depreciation purposes are proscribed in detail. For reference, the following is a list of the useful lives of typical assets.
|Types of assets
|Useful life (years)
|21 to 50 (depending on use)
|12 to 38 (depending on use)
|Electrical facilities and lighting
|Heating and air conditioning
|3 to 6 (depending on use)
|Digital telephone equipment
|Machinery and equipment
|3 to 22 (depending on use)
|3 or 5 (depending on use)
Start-up expenses, such as corporation organisation costs and opening costs (i.e. costs to begin the 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, interest payments to related parties in the corporate group may be disallowed 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 the irrecoverable amounts from the 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 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.
The deductible reserve for return of goods not sold will be abolished after a transitional period (fiscal years beginning from 1 April 2021 to 31 March 2030), during which the deduction limitation will be reduced by one tenth annually over ten years to zero.
Except for certain designated donations, the tax deduction for charitable contributions is limited, as follows:
|((0.25% of capital plus capital surplus for JGAAP purpose) + (2.5% of income)) x ¼
|Donation made to designated public purpose company
|((0.375% of capital plus capital surplus for JGAAP purpose) + (6.25% of income)) x ½
|Donation to foreign affiliate
In cases where a donation occurs between domestic group companies, 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 (the amount is calculated by the service period not on a performance basis).
Notwithstanding the above, if the amount of remuneration is deemed unreasonable by the tax authority, only the amount deemed reasonable 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) 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 of entertainment expense.
Fines and penalties
Fines and penalties are not deductible.
Enterprise tax and business premises tax are deductible in the calculation of 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 a tax loss is incurred as a result of certain disasters.
Limitations on the amount of carryforward losses that can be utilised against current taxable income, together with the carryforward period, are shown in the table below. SMEs are not subject to the loss deduction limitation.
|Tax year 2015*
|Tax year 2016*
|Tax year 2017*
|Tax year 2018*
|Limitation ratio for large corporations
|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)
* Tax years beginning on or after 1 April of the year shown.
Certain newly established corporations and companies coming out of a rehabilitation process will not be subject to the loss limitation rules for a limited 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* and corporations coming out of the rehabilitation process**
|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% subsidiaries of large corporations, or 100% parent corporations after a share transfer has occurred are excluded.
** SMEs are excluded.
Where there is a change in ownership of a corporation followed by certain trigger events, such as the cessation of business or a significant change in the business within a five-year period following a business acquisition, the utilisation of any carryforward tax loss is restricted.
SMEs may carry back tax losses for one year for national corporation tax purposes. Large corporations may only carry back tax losses incurred in the year(s) of liquidation or dissolution or for disaster losses. 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 transaction between the foreign affiliate and the Japanese corporation satisfies the arm's-length principle as described in Japan's transfer pricing laws and regulations.