February 7, 2024
Japan | Impact of 2024 tax reforms for inbound businesses
Japan's fiscal year 2024 tax reform outline was released on 14 December 2023. This Alert provides an overview of the major reforms and revised provisions contained in the outline. Note that provisions may be amended, deleted or added during Diet deliberations regarding the reform bill.
1. Tax credit to promote domestic production in strategic sectors
The measures target investment in areas involving green transformation and digital transformation to encourage the production of goods including electric vehicles (fuel cells/storage batteries), "green" steel, "green" chemicals, sustainable aviation fuel and semiconductors.
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.
2. Creation of an "Innovation box" regime
In regard to patent rights or copyrights for artificial intelligence (AI)-related software resulting from in-house research and development, an Innovation Box regime will be introduced in which a 30% income deduction will be granted for "qualified income" from domestic transfers or domestic/international licensing of such intellectual property.
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.
3. Revision to the size-based enterprise tax ("Gaikei Hyojun Kazei")
The current criteria (e.g., stated capital of more than 100 million Japanese Yen (JPY100m)) 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 JPY100m in the current year, it will remain subject to sized-based enterprise tax if the total of its capital and capital surplus exceeds JPY1b. 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.
1. Global minimum tax
The Income Inclusion Rule (IIR) introduced in Japan's 2023 tax reform will be reviewed as necessary. Items expected to be discussed in detail by the OECD during and after 2024, including the Qualified Domestic Minimum Top-up Tax (QDMTT), are being considered for legislation in the 2025 tax reform at the earliest.
2. Other international tax revisions
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 foreign businesses with Japanese customers will be subject to the system.