In some cases, after a company has been dissolved the disposal of its assets or the discharge of its debts result in gains and so a large gain can arise in the financial year during liquidation. The use of tax losses is therefore of key importance. If the carried forward blue tax return losses do not cover the gain on debt forgiveness, the use of expired losses is permitted under certain requirements. Further, where the dissolved company is a large company for tax purposes, use of blue tax return losses is limited 50% of taxable income. It is important to note that if residual assets remain in the last business year, the use of expired losses is not possible. Therefore, from the stage of dissolution, tax planning should be carefully carried out and the timing of asset disposal and debt forgiveness should be considered.
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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.
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.
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.
Tax losses of a corporation that files a blue tax return can be carried forward and will be able to offset against certain taxable income in the future financial years. However, a restriction may be applied in the case of a controlling interest acquisition, in a merger or group relief system.
Due to the prolonged Covid-19 pandemic, more and moreJapanese companies are selling off their headquarter buildings and other real estate holdings in order to secure cash reserves and drastically downsize their office space. Among the buyers are foreignfunds, foreign corporations, and wealthy foreign individuals. In thisbulleting, we will review the tax treatment of a foreign corporation and a non-resident individual that leases office space in Japan to a Japanese company or a Japanese resident.
Under the 2021 tax reform, a tax credit for new employee payroll expenses will be available for corporations that actively recruit human resources through new graduates and mid-career hires and invest in human resource development for fiscal years beginning between April 1, 2021 and March 31, 2023.
In order to achieve corporate transformation (digital transformation) using digital technology during and after the COVID era, it is essential to implement management and digital strategies in an integrated manner. The 2021 tax reform established a system that allows companies to receive support measures for digital-related investments using cloud technology necessary to realize DX after company wide approval has been granted by the competent minister.
The Act on Special Measures for Preservation of National Tax-Related Books and Documents Prepared Using Computers (hereinafter referred to as the "Act on Electronic Preservation System for Books/Documents") has been revised and it will take effect on January 1, 2022.