The Impact of the 2024 Japan Tax Reforms for Inbound Businesses

The fiscal year 2024 tax reform outline was released on 14 December 2023. In this alert, we provide an overview of the major reforms and revised provisions contained in the outline. Please note that provisions may be amended, deleted or added to during Diet deliberations regarding the reform bill.

The 2024 tax reforms reflect the Japanese government’s economic strategy aimed at achieving growth and increased productivity through investment in human resources, science and technological innovations, start-ups, and the “green” and digital transformations. Tax incentives included in the proposals specifically encourage investments in these areas.

Additionally, there are also a number of measures that are intended as anti-tax abuse measures. As well as general changes and updates related to the impact of national and global developments, and the on-going discussions in relation to BEPS implementation. 

Corporate taxation

1) Tax credit to promote domestic production in strategic sectors

As part of the efforts to increase economic growth, special measures will be introduced to promote domestic production in certain sectors where strategic long-term investment is considered to be essential for Japan. 

The measures target investment in areas involving green transformation (“GX”) and digital transformation (“DX”) to encourage the production of goods including electric vehicles (fuel cells/storage batteries), “green” steel, “green” chemicals, sustainable aviation fuel (“SAF”), and semiconductors. 

The proposals introduce a new tax credit, which in the interest of increasing the predictability of mid-to-long term investments conducted by companies, will be available for an exceptionally extended period of ten years.  The tax credit will be applicable for each fiscal year after the date of certification of an approved business plan under the (yet to be) amended “Industrial Competitiveness Enhancement Act” but before 31 March 2027.

The tax credit will be the lower of:

1. An amount based on the quantity of goods sold within the applicable 10 year period. Separate unit values will be set for each of the goods; OR
2. The acquisition cost of qualified assets, i.e., the entire production facility, including buildings, machinery and equipment, for producing goods under the plan.

The maximum credit for any year is 40% (20% for assets producing semiconductors) of the corporate tax liability in the fiscal year. There will be a 4 year carry forward period (3 years for semiconductors) for any “excess" tax credit in a period. 

The tax credit will not be available in fiscal years if certain thresholds for wage increases or capital investment are not satisfied.

2) Creation of an “Innovation box” regime

In regard to patent rights or copyrights for AI-related software resulting from in-house R&D, an Innovation Box regime will be introduced where a 30% income deduction will be granted for “qualified income” from domestic transfers or domestic/international licensing of such intellectual property. 

Under this regime, income derived from intellectual property will be segmented from total income and be eligible for the tax incentive, consequently supporting further investment in intangible assets by Japanese companies. However, to reduce “double dipping” of tax benefits, the availability of R&D tax credits will be limited for companies applying the Innovation Box tax incentive.

The tax measure will apply to certain patent rights and copyrights related to AI technology acquired or produced on or after 1 April 2024, and qualified income from 1 April 2025 to 31 March 2032. Qualified income will generally be the revenue from the patents, copyrights, etc., multiplied by a formula/percentage, which is based on the taxpayer’s qualified R&D expenses and total amount of R&D expenses. The scope of the tax system will be reviewed in the future depending on the situation. 

3) Revisions to tax incentives encouraging wage increases

In order to further incentivize greater wage increases, large enterprises that increase wages by a minimum of 7% over the prior year will be able to enjoy a corporate tax credit of 25% of the increase. Companies that encourage and foster an environment for women's initiatives or childcare support will be eligible for an additional tax credit, provided that certain requirements are met. The credit rate for large enterprises and medium-sized companies will be capped at 35%. The credit rate for SMEs will be increased to 45%, and credits can be carried forward for five years in the event a company is unable to enjoy the credits due to losses.

4) Revisions to tax credit system promoting carbon neutral investment

The carbon neutrality tax credit will be extended. Companies that have their Business Adaptation Plan certified before 31 March 2026, and put the qualifying assets into use within 3 years after the date of this certification, can utilize the tax credit or accelerated depreciation on those assets.  At the same time, the revised rules will also require a higher carbon productivity improvement rate of 15% or higher (10% or higher for SMEs) from the current 7% minimum. 

5) Revision to the size-based enterprise tax (“Gaikei Hyojun Kazei”).

The current criteria (e.g., stated capital of more than JPY100 million) for corporations subject to size-based taxation under the enterprise tax (a type of local corporate income tax) will be maintained, but supplementary criteria will be added.

Even if a company that was subject to size-based enterprise tax in the previous year reduces its capital below JPY100 million in the current year, it will remain subject to sized-based enterprise tax if the total of its capital and capital surplus exceeds JPY1 billion. This reform will be effective as of 1 April 2025, and will apply to fiscal years beginning on or after this date. Measures to address last-minute capital reduction will also be established.

6) Other corporate tax revisions

• Crypto assets held long-term by third parties other than the issuer will not be subject to mark-to-market valuation at the end of a period provided that certain requirements are met.
• The applicable period of spin-off tax rules in which partial spin-offs are treated as qualified share distributions will be revised and extended by four years.
• The applicable period of the tax incentive to promote open innovation will be extended by two years.
• Reserves for SME business reorganization investment losses will be expanded.
• Requirements for the non-applicability measures of specified tax credit rules will be made more stringent.
• The maximum amount of certain food and beverages expenses that may be excluded from the scope of entertainment expenses will be increased from the current JPY5,000 per person to JPY10,000 per person.

International taxation

1) Global minimum tax

The Income Inclusion Rule (“IIR”) introduced in the 2023 tax reform will be reviewed as necessary. Items expected to be discussed in detail, including the Qualified Domestic Minimum Top-up Tax (“QDMTT”), by the OECD during and after 2024 are being considered for legislation in the 2025 tax reform at the earliest.

2) Establishment of reporting system for the automatic exchange of information requests related to crypto asset transactions of non-residents

A system which obligates domestic crypto asset transaction businesses to report transactions and other information of non-residents to the tax authorities will be established, with the aim of enabling the automatic exchange of such information with tax authorities of other countries according to tax treaties and preventing international tax evasion or avoidance via the use of crypto assets.

3) Other international tax revisions

• There will be revisions to the foreign subsidiary income inclusion tax rules (controlled foreign company (“CFC”) rules). Under the current CFC rules, there are certain exceptions that permit a foreign affiliate (potential CFC) to not be considered a “paper company” and hence not subject to the main CFC rules. Under the 2024 tax reforms, if there is no income in the CFC’s tax year, the percentage of income determination for that tax year will no longer be required as part of satisfying the exemption considerations.
• Contributions in-kind where domestic entities transfer intangible assets to the head office of a foreign company will not be considered as qualified contributions-in-kind. There will be also revisions to the regulations for domestic/foreign attribution of transferred assets.
• The carry-forward period of excess interest under the earnings stripping rules will be extended from 7 years to 10 years.
• There will be revisions to the special measures for the reduction of book value of subsidiary shares.
   

Consumption taxation

1) Platform operators

A system that obligates platform operators to remit consumption taxes on behalf of foreign digital services businesses will be introduced. Platform operators of a certain scale that offer platform services to such foreign businesses with Japanese customers will be subject to the system.

2) Small business exemption

Revisions will be made to necessary systems in order to prevent tax avoidance by businesses through their inappropriate use of the small business exemption or the simplified calculation rules.

3) Export exemption for foreign tourists

In regard to the consumption tax exemption rules for foreign tourists, revisions will be made to only exempt purchases from consumption tax when Japanese customs confirm the purchased items are taken out of Japan. Details of this revision will be included in the 2025 tax reforms.
 

Individual income taxation, asset taxation and tax administration

1) Individual income taxation

• A flat-rate tax reduction of JPY 30,000 for income tax and JPY 10,000 for inhabitant tax per person will be introduced. In addition to taxpayers, spouses and dependents will also be eligible, but there will be an income limit.
• Eligibility for child allowances will be expanded to high school age children, but the dependent deduction for children of age 16 to 18 will be reduced.
• The limit for the housing loan tax credit, which was to be reduced, will be maintained for 2024 only for households with young couples and households with children.
• The borrowing limit for the housing loan tax credit which was scheduled to be decreased will instead be maintained, limited to young married couples and families with children.
• The upper limit of the exercise price eligible for tax incentives and offered by the stock option rules will be increased from the current JPY12 million to JPY36 million under certain conditions.

2) Asset taxation

• The burden adjustment measure for fixed asset taxes will be extended through FY2024 to FY2026.
• In regard to the business succession tax rules (special measures), the due date for the submission of the specially approved succession plan will be extended by two years, to 31 March 2026.

3) Tax administration

• The submission of a request for corrections based on acts of concealment or falsification will be added to the situations subject to heavy additional (penalty) taxes (“juukasanzei”).
• In regard to representatives of companies who commit fraudulent acts and disperse company assets to avoid tax obligations, measures will be implemented to impose secondary national tax liability on such representatives under certain conditions.