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February 7, 2024

Japan | Impact of 2024 tax reforms for inbound businesses

  • Japan released the 2024 tax reform outline on 14 December 2023.
  • Based on the outline, a tax reform bill will be prepared and submitted to the Diet and is expected to be enacted by the end of March 2024.

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.

Corporate taxation

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.

International taxation

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

  • There will be revisions to the foreign subsidiary income inclusion tax rules (controlled foreign company (CFC) rules). Generally, a foreign affiliate without substance that is treated as a "paper company" is subject to CFC rules if the effective tax rate is below a certain tax rate, but there are certain exceptions that can help an entity avoid being treated as a "paper company." Under the 2024 tax reform, 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.
  • In-kind contributions in which domestic entities transfer intangible assets to the head office of a foreign company will not be considered as qualified contributions in-kind. The purpose of this revision is to prevent the adverse tax effects that could flow from transferring overseas any unrealized gains in domestic corporations' assets and to ensure Japanese taxation rights. In addition, there will be revisions to the regulations for domestic/foreign attribution of transferred assets.
  • The carry-forward period for 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. Dividends received in the fiscal year in which the establishment date of a specified control relationship falls (limited to dividends received after the establishment date of a specified control relationship) will also be subject to the special calculation to exclude certain dividends from the calculation of book value reduction.

Consumption taxation

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.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Tax Co., Tokyo

Ernst & Young LLP (United States), Japanese Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor