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Pillar Two presents a complex web of rules, Income Inclusion Rule (IIR), Qualified Domestic Minimum Top-up Tax (QDMTT), and the Undertaxed Profits Rules (UTPR), formerly known as the Undertaxed Payments Rule. Multinational enterprises (MNEs) operating in Japan will need to understand the interaction of each rule enacted under Japan's domestic legislation.

The global tax landscape is experiencing a historic transformation as countries implement the OECD/G20’s Pillar Two framework—an initiative designed to introduce a Global Minimum Tax (GMT) of 15% on large multinational enterprises (MNEs). Japan has taken a proactive role in adopting and legislating this framework, aligning its domestic laws with the OECD’s model rules while tailoring certain elements to suit its national tax policy objectives. This article provides an overview of the Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR), and Qualified Domestic Minimum Top-up Tax (QDMTT) as implemented in Japan, highlights key dates, compares Japan’s approach with OECD recommendations, and explains the rules’ impact on Japanese corporations.

The 2025 fiscal year, known as Reiwa 7 in Japan, brings several changes to the corporate tax landscape. These reforms aim to enhance corporate competitiveness, encourage investment, and ensure fair taxation. This bulletin outlines the key aspects of the Reiwa 7 corporate tax reforms, based on the latest publications by the Japan Ministry of Finance.

In December 2024, The Japan National Tax Agency (NTA) has recently issued an update correction to Form of Statement Concerning Foreign Tax Credit for an individual resident taxpayer for 2022 calendar year and thereafter. This correction is concerning foreign income taxes on distribution of collective investment trust income.

Under the 2024 tax reform, the Japanese government strengthened tax credit for salary increase from the perspective of (a) easing the burden on citizens whose wage increases have not kept pace with rising prices, (b) aiming to achieve an economy where wage increases that fully exceed price increases are sustained and (c) supporting efforts to balance work and child-caring and promote the advancement of women. The main points of the revision are the establishment of a new definition called “medium-sized enterprises” and the raising of the tax credit ratio through the establishment of additional deductions for childcare support and the promotion of women's activities.

If you are planning on doing business in Japan, knowledge of the investment environment and information on legal, accounting, taxation and human resource frameworks are essential to keeping you on the right track. This guide has been prepared for the assistance of those interested in doing business in Japan. It does not cover the subject exhaustively but is intended to answer some of the important, broad questions that may arise. When specific problems occur in practice, it will often be necessary to refer to the laws and regulations of Japan and to obtain appropriate accounting and legal advice. This guide contains only brief notes and includes legislation in force as of November 27, 2024.

The deductibility of entertainment expenses under Japan corporate tax law is a complicated topic. This newsletter explains the deductibility of entertainment expenses in general and also in relation to the special sub-category of entertainment expenses for meals and drinks.

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.

On February 19, 2024, the Organization for Economic Cooperation and Development (OECD) published its final report on Pillar 1 Amount B to simplify and streamline the application of the arm's length principle to baseline marketing and sales activities, with a focus on the needs of countries or regions with low tax enforcement capacity.

In the ever-evolving landscape of international taxation, the Controlled Foreign Company (CFC) regime has emerged as a critical tool for jurisdictions seeking to curb tax avoidance through the strategic allocation of profits to subsidiaries in low-tax jurisdictions. This article aims to unpack the complexities of the CFC regime, with a focus on the recent amendments in Japan, providing a comprehensive understanding for businesses and tax professionals navigating these changes.

On October 8, 2021, it was announced that 136 of the 140 member countries of the OECD/G20 Inclusive Framework on BEPS, representing more than 90% of global GDP, agreed on new international tax rules, which is the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (“digital taxation”). As of November 15, 2023, 140 countries/regions have agreed.This digital taxation consists of “Pillar One” and “Pillar Two” and is a response to the situation where the current principles of international taxation are no longer fully functional as the economy becomes increasingly digitalized.

The National Tax Agency (NTA) in Japan announced on 30 March 2023 a change in interpretation of “the end of the accounting period for which the distribution of profits takes place” under (Article 10, Japan Luxembourg Tax Convention (JLTC)), following a case determined by the Tokyo High Court on 16 February 2023.

For the translation of foreign currency transactions and assets and liabilities held in a foreign currency at the end of the fiscal year, the rate used for conversion and the method of conversion for each asset and liability are defined in detail for Japanese tax purposes. Although there have been no major revisions to the tax treatment of foreign currency transactions in recent years, it is necessary to consider the advantages and disadvantages for tax purposes, including the applicability of a special treatment (the so-called “15% rule”) in the event of large fluctuations in exchange rates due to the recent sharp depreciation of the Yen.

On June 10, 2022, the National Tax Agency revised the Administrative Guidelines on Operation of Transfer Pricing. The revision is intended to clarify Japan's transfer pricing tax treatment of related party transactions in light of the revision of Chapter Ⅷ (Cost contribution arrangement) and Chapter X (Transfer pricing aspects of financial transactions) of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Expatriates residing in Japan for a limited duration may find themselves ineligible for old-age pension benefits, despite having made premium payments during their assignment in the country. To address such cases, the Japan Pension Service offers a Lump-sum Withdrawal Payment from Employees' Pension Insurance.