Japan - Corporate - Income determination (2024)

The taxable income of a corporation is the aggregate income from all sources. There is no specific requirement to differentiate between the types of income. In principle, accounting for tax purposes follows Generally Accepted Accounting Principles (GAAP) in Japan, and income of a corporation is determined on an accrual basis.

Inventory valuation

Inventory cost should be determined by applying one of the following methods accepted for corporate tax purposes: actual individual cost, first in first out (FIFO), weighted average, moving average, most recent retail, selling price reduction, and lower of cost or market.

Capital gains

Capital gains and losses are classified as ordinary income and losses, respectively.

Under certain circ*mstances (e.g. qualified reinvestment, exchange of property), taxes generally levied on capital gains may be deferred (i.e. provided rollover relief) as long as certain requirements are met. A special relief is available in the case of expropriation of real property by either the national or a local government.

The recognition of capital gains or losses from the transfer of certain assets between group companies is to be deferred until the asset is transferred to a non-group company.

Dividend income

The threshold ownership percentage for corporate dividend exclusion is illustrated in the following table.

A holding period of six months or more until the tax year-end for which the dividend will be paid is required to be eligible for the dividend income exclusion for ownership percentages of between 1/3 to 100%. The dividend income exclusion for ‘other domestic corporation’ and ‘portfolio investment’ is allowed by reference to the ownership percentage as of the tax year-end for which the dividend will be paid.

* For dividends from portfolio investments received by insurance companies, the exclusion percentage will be 40%.

95% of dividends received by a domestic corporation from a foreign corporation in which it has held at least 25% of the outstanding shares for a continuous period of six months or more, ending on the date on which the dividend is declared, can be excluded from the company’s taxable income. The ownership percentage may be reduced depending on the terms of a tax treaty between Japan and the jurisdiction of the foreign corporation. 100% of dividends received by a domestic corporation from a foreign controlled corporation (CFC) can be excluded from the company’s taxable income to the extent that the dividend is distributed from income of the CFC that was subject to taxation by the Japanese corporation under the CFC regime.

Dividends received from foreign corporations where the dividend is deductible for corporate tax purposes in the foreign corporation’s jurisdiction are outside the scope of the dividend exclusion regime. As a result, any dividends paid to domestic corporations under so-called ‘mandatorily redeemable preferred shares’ issued by Australian or Brazilian subsidiaries, where the dividends are paid in a manner similar to interest and are deductible for local tax purposes, are not excluded from taxation in Japan.

Any foreign tax imposed on a taxable dividend in Japan will be eligible for foreign tax credit relief.

WHT for dividends is applicable at a rate of 15% national tax and 5% local tax (or 20% [national tax] depending on the type of stock from which the dividends were received), and a tax credit may also be available. The national tax portion of the WHT is subject to an income surtax of 2.1%, which is levied for dividends received for the period from 1 January 2013 through 31 December 2037. As a result, total WHT of 20.315% (or 20.42%) is levied.

Effective 1 October 2023, WHT between domestic corporations will be eliminated if the dividends are paid to a Japanese company by the following Japanese companies: (i) a 100% subsidiary or (ii) a company where the recipient directly holds greater than 1/3 of the paying company on the dividend record date.

Interest income

Interest (on bonds or deposits) received is included in taxable income. WHT for interest is applicable at a rate of 15% national tax (for both corporate and individual recipients) and 5% local tax (for individual recipients only), and a tax credit may be available. As with dividend income, the national tax portion of the WHT is subject to an income surtax of 2.1%, which is levied for interest income earned for the period from 1 January 2013 through 31 December 2037. As a result, total WHT of 20.315% is levied for individual recipients and 15.315% for corporate recipients. Interest on loans is only subject to WHT of 20.42% (20% national tax plus surtax) if the recipient is a non-resident or a foreign corporation.

Royalty income

Royalty income is subject to corporate taxation in the same manner as other income. If the recipient is a non-resident or a foreign corporation, WHT on royalty income is applied at the rate of 20% national tax and a surtax of 2.1%, which surtax is levied for royalties received for the period from 1 January 2013 through 31 December 2037. As a result, total WHT of 20.42% is levied.

Real estate rental income

Real estate rental income is subject to corporate taxation in the same manner as other income. If the recipient is a non-resident or a foreign corporation, WHT on real estate rental income is applied at the rate of 20% national tax and a surtax of 2.1%, which surtax is levied for rental income received for the period from 1 January 2013 through 31 December 2037. As a result, total WHT of 20.42% is levied.

Real estate capital gain is subject to corporate taxation in the same manner as other income. If the recipient is a non-resident or a foreign corporation, WHT on real estate capital gain is applied at the rate of 10% national tax and a surtax of 2.1%. Rental income is also subject to a rate of 10% national tax, and a surtax of 2.1% will be applied for rental income received from 1 January 2013 through 31 December 2037. As a result, total WHT of 10.21% is levied.

In contrast to the financial income described above (i.e. interest, dividends, royalties), real estate rental income and capital gains are subject to corporate income tax for a non-resident or a foreign corporation. WHT is creditable from this corporate tax liability by the filing of a corporate tax return.

Foreign income

A domestic corporation is subject to Japanese corporate income taxes on its worldwide income. However, to avoid double taxation of foreign-source income, such corporations are allowed to claim a tax credit against corporation and inhabitants’ taxes for foreign income taxes paid directly. See Foreign tax credit in the Tax credits and incentives section for more information.

Undistributed profits of a foreign subsidiary (i.e. a CFC) for which the applicable tax rate is 30% (in the case of a shell company; the rate will be reduced to 27% for tax years of the Japanese parent beginning on or after 1 April 2024) or 20% are included in the Japanese parent company’s taxable income under certain conditions. See Anti-tax haven (CFC) rules in the Group taxation section for more information.