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A corporation is allowed to deduct monetary claims when they become fully unrecoverable. Corporation Tax Law Basic Circular (“CTLBC”) lists cases where a deduction of monetary claims is allowed.

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 implementation of Japan's new VAT invoicing system on October 1, 2023, has caused significant disruptions, particularly for Tax-Exemption Businesses. In this analysis, we will focus on the impact of the Invoicing System on general VAT taxpayers, with a particular emphasis on foreign enterprises. The complexities surrounding foreign currency transactions and invoicing regulations present unique challenges that demand a thorough understanding of the new system.

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.

The electronic preservation system for books and documents is a system for storing books,receipts, invoices, financial statements,and other national tax related documents that are required to be preserved under tax law in electronic data format instead of paper format, and is divided into the following three categories. The system is stipulated in “ the Act on Special Provisions concerning Preservation Methods for Books and Documents Related to National Tax Prepared by Means of Computers(“the Act").

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.

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.

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.