Taxation in Japan Preface This booklet is intended to provide a general overview of the taxation system in Japan. The contents reflect the information available up to 18 November 2016. While the information contained in this booklet may assist in gaining a better understanding of the tax system in Japan, it is recommended that specific advice be taken as to the tax implications of any proposed or actual transactions. Further information on matters in this booklet can be obtained from KPMG Tax Corporation either through your normal contact at the firm or using the contact details shown below. KPMG Tax Corporation Izumi Garden Tower, 1-6-1 Roppongi, Minato-ku, Tokyo 106-6012, Japan Tel: +81 (3) 6229 8000 Fax: +81 (3) 5575 0766 E-mail: [email protected] Osaka Nakanoshima Building 15F, 2-2-2 Nakanoshima, Kita-ku, Osaka 530-0005, Japan Tel: +81 (6) 4708 5150 Fax: +81 (6) 4706 3881 Dainagoya Building 26F, 3-28-12, Meieki, Nakamura-ku, Nagoya 450-6426, Japan Tel: +81 (52) 569 5420 Fax: +81 (52) 551 0580 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Contents 1 Taxation of Companies ...................................................... 1 1.1 Introduction ...................................................................... 1 1.2 Tax Status of Companies .................................................. 1 1.2.1 Residence ................................................................................ 1 1.2.2 Branch of a Foreign Company vs. Japanese Company ........... 1 1.2.3 Permanent Establishment (PE)................................................ 2 1.3 Tax Rates ......................................................................... 5 1.3.1 Corporation Tax ....................................................................... 5 1.3.2 Business Tax ........................................................................... 6 1.3.3 Prefectural and Municipal Inhabitant Taxes .......................... 10 1.3.4 Special Tax Due by Specified Family Company .................... 12 1.3.5 Effective Statutory Corporate Income Tax Rate.................... 13 1.4 Taxable Year of Companies ............................................ 15 1.5 Taxable Income .............................................................. 16 1.5.1 Japanese Companies ............................................................ 16 1.5.2 Foreign Companies having a PE in Japan ............................. 16 1.6 Capital Gains .................................................................. 18 1.6.1 Capital Gain Rollover Rules ................................................... 18 i 1.6.2 Special Rules for Land Acquired in 2009 and 2010 ............... 18 1.7 Treatment of Excess Tax Losses .................................... 20 1.7.1 Tax Losses Carry-forward ...................................................... 20 1.7.2 Tax Losses Carry-back ........................................................... 22 1.7.3 Change of Control ................................................................. 22 1.8 Deduction of Expenses .................................................. 23 1.8.1 Valuation of Inventories ......................................................... 23 1.8.2 Valuation of Marketable and Investment Securities.............. 24 1.8.3 Provision for Bad Debts ......................................................... 24 1.8.4 Bad Debt Expenses ............................................................... 26 1.8.5 Provision for Retirement Allowance ...................................... 27 1.8.6 Directors’ Compensation ....................................................... 27 1.8.7 Restricted Stock Expenses ................................................... 29 1.8.8 Stock Option Expenses ......................................................... 30 1.8.9 Devaluation Loss ................................................................... 30 1.8.10 Corporate Taxes, etc. ............................................................ 30 1.8.11 Donations/Contributions ........................................................ 31 1.8.12 Entertainment Expenses ....................................................... 32 1.8.13 Interest – Thin Capitalization Rules/Earnings Stripping Rules ...................................................................................... 33 1.8.14 Translation into Japanese Currency (Yen) of Assets/Liabilities in Foreign Currencies ................................ 33 1.8.15 Management Service Fees ................................................... 34 1.8.16 Allocation of Head Office Expenses ...................................... 35 1.9 Tax Depreciation............................................................. 36 1.9.1 Fixed Assets and Depreciation .............................................. 36 1.9.2 Deferred Charges .................................................................. 41 ii 1.10 Revenue to be excluded from Taxable Income ............... 42 1.10.1 Dividends Received from Japanese Companies ................... 42 1.10.2 Revaluation Gain on Assets ................................................... 42 1.10.3 Refunds of Corporate Tax, etc. ............................................. 43 1.11 Tax Credits ..................................................................... 43 1.11.1 Withholding Income Tax Credits ........................................... 43 1.11.2 Foreign Tax Credits ............................................................... 44 1.11.3 Tax Credits for Research and Development (R&D) Expenditure ........................................................................... 44 1.11.4 Tax Credits for Job Creation .................................................. 46 1.11.5 Tax Credits for Salary Growth ............................................... 48 1.11.6 Tax Incentives for Investment in Productivity Improvement Facilities .......................................................... 49 1.12 Administrative Overview ................................................ 50 1.12.1 Tax Returns and Tax Payment ............................................... 50 1.12.2 Tax Audits and the Statute of Limitation ............................... 51 1.13 Group Taxation Regime .................................................. 52 1.13.1 100 Percent Group ................................................................ 52 1.13.2 Dividends Received Deduction (DRD) ................................... 53 1.13.3 Deferral of Capital Gains/Losses ........................................... 54 1.13.4 Donations .............................................................................. 56 1.13.5 Tax Qualified Dividends-in-Kind ............................................. 57 1.13.6 Non-Recognition of Capital Gains/Losses from Transfers of Shares to the Share Issuing Company .............................. 58 1.13.7 Valuation Losses of Liquidating Companies /Merged Companies............................................................................. 59 iii 1.14 Tax Consolidation ........................................................... 60 1.14.1 Tax Consolidated Group ........................................................ 60 1.14.2 Tax Consolidation Rules ........................................................ 60 1.15 Corporate Reorganizations ............................................. 63 1.15.1 Tax Qualified Reorganizations vs. Non Tax Qualified Reorganizations ..................................................................... 63 1.15.2 Pre-Reorganization Losses .................................................... 67 1.15.3 Taxation of Shareholders ....................................................... 69 2 Taxation of Partnerships ................................................. 70 2.1 NK-type Partnerships ...................................................... 70 2.1.1 Definition of NK-type Partnerships ........................................ 70 2.1.2 Taxation of Partners .............................................................. 71 2.2 Tokumei Kumiai .............................................................. 73 2.2.1 Tokumei Kumiai (TK) .............................................................. 73 2.2.2 Taxation of the Operator ....................................................... 74 2.2.3 Taxation of Silent Partners .................................................... 74 2.3 Limitation on Utilization of Losses Derived from Partnerships ................................................................... 75 2.3.1 Corporate Partners of Partnerships other than Japanese LLPs - At-Risk Rule (AR rule) ................................................. 75 2.3.2 Individual Partners of Partnerships other than Japanese LLPs ....................................................................................... 76 2.3.3 Corporate Partners of Japanese LLPs ................................... 77 2.3.4 Individual Partners of Japanese LLPs ................................... 77 3 Taxation of Individuals .................................................... 78 iv 3.1 Introduction .................................................................... 78 3.2 Taxpayers