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In accordance with the Japanese Income Tax Law, individuals are classified into two categories for tax residency status, namely residents and non-residents. Residents are classified further into permanent residents and non-permanent residents. Non-permanent residents are individuals who do not have Japanese nationality and have had a residence or address in Japan for less than five years in the past 10 years. Taxable income subject to income tax is different depending on individuals’ tax residency status.

A blue tax return status corporate taxpayer1 is allowed to carry forward tax losses to the following 10 business years and carry back to the previous one business year, to offset against the following business years’ income or claim a refund of the previous year’s tax. When a company carrying forward tax losses (a “tax loss holding company”) is merged into another company, the question is whether or not the tax losses of the merged company can survive in the merging company. Prior to the 2001 Tax Reform, the succession of tax losses of a merged company to a merging company was not allowed. In the 2001 Tax Reform, tax rules on corporate reorganizations were introduced into the Corporation Tax Law and the succession of tax losses of a merged company to a merging company in a qualified merger2 became possible. As a merger involving a tax loss holding company may be used for tax avoidance, special anti-avoidance rules were implemented in the Corporation Tax Law.

The tax deduction for salary and retirement allowance paid to an officer of a company is disallowed when the amount of salary or retirement allowance is excessive. The reasoning behind this is that excessive salary or retirement allowance paid to an officer is construed as hidden distributions of profits rather than business expenses. The tax authority is generally not aggressive in determining whether salary or retirement allowance paid to an officer is excessive. Where the amount of salary or retirement al lowance paid to an officer is significantly excessive with reference to services provided the officer, the tax authorities may challenge the deductibility.

It is common that a parent company provides a financially distressed subsidiary with financial support in the form of debt forgiveness, sales price discounts or interest-free loans etc. Such financial support is usually treated as a “donation” for tax purposes and its deductibility for tax purposes is restricted. However, when there are rational reasons for a parent company to support its financially distressedsubsidiary, the support is not treated as a donation and is fully tax deductible.

Reorganization has become an indispensable tool for efficient corporate management and business expansion.As one of the methods, the Companies Act provides for a legalframework of business transfer.Business transfers are used to transfer a business to another company in order to improve management efficiency, or to take over another compa ny's business in order to further expand the business.Business transfers may also be used to resolve a company's insolvency.

In Japan, legislation related to stock-based compensation has been developed in recent years, and an increasing number of companies are adopting stock-based compensation. Restricted Stock Units (RSUs), which are considered effective for retention and Long Term Incentives, became deductible under the 2017 tax reform.

When royalties are paid to nonresidents or foreign corporations, withholding tax is generally imposed on the income. The withholding tax on such royalties, may be reduced or exempted by applying a tax treaty, but there are some points that require attention regarding the application and procedures.

The Consumption Tax Law was introduced in 1989. Consumption tax(“JCT”)is a value added tax where a taxable enterprise pays the difference between the output taxes it collects and input taxes it pays during a tax period. In order to claim an input tax credit on taxable purchases, the requirement has been to maintain books and ledgers on taxable purchases and retain evidence such as invoices. From 1 October 2023, the input tax credit is only allowed for taxable purchases that pertain to qualified invoices issued by registered qualified invoice issuing enterprises with some transition rules. The following is an extract from a Q&A regarding the new input tax credit requirements for tax exempt enterprise s in particular, under the Qualified Invoicing System and the transitional provision s by National Tax Agency.

The Consumption Tax Law was introduced in 1989. Consumption tax is VAT, where a taxable enterprise pays the difference between the output taxes it collected and input taxes it paid during a tax period. In order to claim an input tax credit on taxable purchases, the requirement has been to maintain books and ledgers on taxable purchases and retain evidence such as invoices. From October 1, 2023, the input tax credit is only allowed for taxable purchases that have qualified invoices issued by registered qualified invoice issuing enterprises with exceptional transition rules.

Under the 2022 tax reform, the Japanese government will strengthen tax incentives for companies that actively raise wages, in order to encourage companies to return profits to their employees in order to realize a virtuous cycle of growth and distribution.

On 20 January 2022, the OECD released the 2022 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“2022 edition”).

The exit tax was introduced in the 2015 tax reform. The exit tax applies to residents in Japan holding relevant financial assets worth JPY100 million or more (hereinafter referred to as“relevant assets”) and is imposed on the unrealized capital gains of those assets at the time of their departure from Japan.

From 2023 tax year onwards, amendments is scheduled to take effect with regard to Assets and Liabilities Report (Zaisan Saimu Chosho) and Overseas Assets Report (Kokugai Zaisan Chosho).

A tax resident is defined as a person who has (1) domicile or (2) a house for continuously 1 year or more in a place where the Income Tax Law is enforced. Domicile is a person’s centre of living as defined by Article 22 of the Civil Code. A person who satisfies one of the following conditions is deemed to have a domicile in Japan.

When dissolving an insolvent Japanese subsidiary, an unexpected tax charge may arise unless the subsidiary’s tax positions are reviewed and appropriate legal procedures are taken.

Where an individual taxpayer does not have an address and place of residence in Japan, or where a corporate taxpayer does not have a head office or principal office in Japan, they are required to appoint a tax agent who does have an address and place of residence in Japan to submit tax their returns or handle their matters concerning national taxes. When taxpayers appoint a tax agent, they are required to notify the district director of tax office of the appointment.