Corporate - Income determination

Last reviewed - 19 January 2023

The taxable income of a corporation is the aggregate income from all sources. There is no specific requirement to differentiate between the types of income. In principle, accounting for tax purposes follows Generally Accepted Accounting Principles (GAAP) in Japan, and income of a corporation is determined on an accrual basis.

Inventory valuation

Inventory cost should be determined by applying one of the following methods accepted for corporate tax purposes: actual individual cost, first in first out (FIFO), weighted average, moving average, most recent retail, selling price reduction, and lower of cost or market.

Capital gains

Capital gains and losses are classified as ordinary income and losses, respectively.

Under certain circumstances (e.g. qualified reinvestment, exchange property), taxes generally levied on capital gains may be deferred (i.e. provided rollover relief) as long as certain requirements are met. A special relief is available in the case of expropriation of real property by either the national or local government.

The recognition of capital gains or losses from the transfer of certain assets between group companies are to be deferred until the asset is transferred to another group company or a non-group company.

Dividend income

The threshold ownership percentage for corporate dividend exclusion is illustrated in the following table.

The holding period of six months or more until the tax year-end for which the dividend will be paid is required to apply the dividend income exclusion for the ownership of more than 1/3 to 100%. The dividend income exclusion for an ‘other domestic corporation‘ and ‘portfolio investment’ is allowed by reference to the ownership percentage as of the tax year-end for which the dividend will be paid.

Type of investment Ownership % Exclusion %
Wholly owned domestic subsidiary 100% 100%
Affiliated domestic corporation More than 1/3 100% less allocable interest (1)
Other domestic corporation More than 5% but less than 1/3 50%
Portfolio investment Less than 5% 20% (2)
Exchange trust fund (ETF) 20% (treated as a portfolio investment)
Other investment trusts 0%


  1. Under certain simplified calculations to determine allocable interest, the ‘base period’ is the tax years beginning between 1 April 2015 and 31 March 2017.
  2. For dividends from portfolio investments received by insurance companies, the exclusion percentage will be 40%.

95% of dividends received by a company from a foreign company in which it has held at least 25% of the outstanding shares for a continuous period of six months or more, ending on the date on which the dividend is declared, can be excluded from the company’s taxable income.

If the foreign company is resident in a country with which Japan has concluded a tax treaty for the avoidance of double taxation, and such treaty provides for the allowance of an indirect foreign tax credit for taxes paid by the foreign company on the profits out of which the dividend is paid where the company holds a certain percentage of the foreign company’s outstanding shares (e.g. 10% based on the tax treaty between the United States [US] and Japan), that percentage will apply for the purpose of determining the availability of the above exemption to the extent that it is lower than 25%.

The Base Erosion and Profit Shifting (BEPS) Action Plan 2 proposed that measures be taken to neutralise the tax effects of so-called ‘hybrid mismatch’ arrangements where, because of differences in the treatment of certain payments between jurisdictions, an item of income is not taxed in either the payer or the payee country because the payment is deductible in the payer country but not taxable in the recipient country. Thus, the recommendation in the BEPS Action Plan is to modify local tax law in order for the recipient country to tax the receipt.

Based upon the recommendation of the BEPS Action Plan 2, the 2015 Tax Reform Act excludes such types of dividends from the dividend exclusion regime. As a result, any dividends paid to Japanese corporate taxpayers under so-called ‘mandatorily redeemable preferred shares’ (MRPS) issued by Australian affiliates or by Brazilian affiliates where the dividends are paid in a manner similar to interest and deductible for Brazilian tax purposes will no longer be excluded from taxation in Japan.

To the extent any portion of the dividend is deductible for foreign tax purposes, the general principle is that all of the dividend should be taxable in Japan. However, if a portion of the dividend is not tax deductible in the foreign jurisdiction, dividend exclusion will be allowed only if the taxpayer discloses all of the appropriate information regarding the portion of the dividend that is not deductible in the foreign jurisdiction and backup details for the calculation in a timely filed tax return and maintains the relevant documents for inspection by the tax authorities.

Any foreign tax imposed on the taxable dividend in Japan will be eligible for foreign tax credit relief.

The new rules apply for any dividends received by a Japanese corporate taxpayer whose tax year began on or after 1 April 2016. However, if the Japanese corporate taxpayer owned the stock of the foreign affiliate as of 1 April 2016, dividends received for years beginning between 1 April 2016 and 31 March 2018 will be subject to the old rules (i.e. still eligible for exclusion).

The WHT for dividends is applicable at a rate of 15% national tax and 5% local tax or 20% (national tax) depending on the type of stock from which the dividends were received, and a tax credit may also be available for such WHT. The WHT (national tax) is subject to the income surtax of 2.1%, which is levied for the income earned for the period from 1 January 2013 through 31 December 2037.

Interest income

Interest received is included in taxable income. The WHT for interest is applicable at a rate of 15% national tax and 5% local tax, and a tax credit may be available for such WHT. As with dividend income, the WHT (national tax) is subject to the income surtax of 2.1%, which is levied for the income earned for the period from 1 January 2013 through 31 December 2037.

Royalty income

Royalty income is subject to the corporate taxation in the same manner as other income. 

Foreign income

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. See Foreign tax credit in the Tax credits and incentives section for more information.

Undistributed profits of a foreign subsidiary (i.e. controlled foreign company [CFC]) to which an applicable tax rate is 30% (in case of a shell company) or 20% are included in the Japanese parent company’s taxable income under certain conditions. See Anti-tax haven (CFC) rules in the Group taxation section for more information.