Anti-tax avoidance rule for intercompany dividend exemption and transfer of a foreign subsidiary shares

Japan's commitment to invigorating its small and medium-sized enterprises (SMEs) took a significant step forward with the announcement of the 2024 fiscal year tax reforms. These reforms, part of the Reiwa 6 year plan, focus on expanding the SME Business Reorganization Investment Loss Reserve System. This policy is tailored to empower SMEs to grow through strategic acquisitions and integrations.

This article explains the impact of the reform of determining a taxable enterprise for consumption tax purposes on foreign owned domestic enterprise and a foreign enterprise for taxable periods beginning after October 2024, based on the amendments.

The size-based business taxation system was introduced in 2004. The size-based business taxation system imposes “a value-added tax” and “a capital-based tax” on companies with stated capital of more than JPY100 million. The taxes are levied even where a corporation is in currently loss position. A value-added tax is levied based on the sum of the distribution of earnings (comprising remuneration and salaries, net interest paid and net rent paid) and profit or loss for a single year, and a capital tax is levied based on the amount of stated capital, capital reserve, other capital surplus etc. as defined by the Corporation Tax Law.