In the context of the globalized economy, the Japanese government has formulated a series of tax incentive policies for foreign enterprises to attract foreign investment and promote the development of international companies in Japan. These policies cover various aspects such as corporate income tax reduction, R&D expense deduction, accelerated depreciation of fixed assets, etc., aiming to create a favorable tax environment for foreign enterprises operating in Japan. At the same time, these policies also reflect the Japanese government’s strategic orientation to encourage innovation and support the development of high-tech industries.

This article will introduce in detail the main tax incentive policies that foreign enterprises can enjoy in Japan, including but not limited to innovation and entrepreneurship incentives, R&D tax incentives, regional preferential policies, etc., to help foreign enterprises better understand and utilize these preferential measures and gain more development space in the Japanese market.

R&D Related Incentives

1.1 Additional Deduction for R&D Expenses

A Free Trade Agreement (FTA) is an agreement reached between two or more countries

To promote enterprise innovation and technological progress, the Japanese government has implemented an additional deduction policy for R&D expenses, which also applies to foreign-invested enterprises established in Japan. According to Articles 42-4 and 68-9 of the Japanese Special Taxation Measures Law, enterprises can enjoy tax incentives for R&D expenses.

This policy allows enterprises to make additional deductions for eligible R&D expenses when calculating taxable income. Specifically, enterprises can deduct 6-14% of the eligible R&D expenses incurred in the current year from their taxable income. This percentage varies depending on the size of the enterprise and the intensity of R&D investment. For example, for small and medium-sized enterprises, if their R&D expenses account for more than 10% of their income, they can enjoy a maximum additional deduction rate of 14%.

It is worth noting that Japan’s R&D expense additional deduction policy also includes a “multiplication measure”. If an enterprise’s R&D investment increases compared to the previous year, this increased portion can enjoy a higher additional deduction rate, up to 10%. This measure aims to further incentivize enterprises to continuously increase R&D investment.

To enjoy this preferential treatment, enterprises need to keep detailed records of their R&D activities and related expenditures, and submit relevant documents when filing corporate income tax. The scope of R&D expenses includes directly related expenditures such as salaries of R&D personnel, raw material costs, and commissioned R&D expenses.

1.2 Preferential Tax Rate for High-Tech Enterprises

Although Japan does not have a specific preferential tax rate policy for “high-tech enterprises”, it has implemented a series of tax measures to encourage innovation and the development of high-tech industries. These measures also apply to foreign-invested enterprises operating in Japan.

The most notable among these is the tax incentives for specific fields. According to Articles 42-12-7 and 68-15-7 of the Special Taxation Measures Law, enterprises engaged in research and development in specific cutting-edge fields can enjoy special tax credits. These specific fields include artificial intelligence, Internet of Things, big data, robotics technology, etc. Eligible enterprises can use up to 30% of their relevant R&D investment to offset their tax payable.

In addition, Japan has also implemented an “open innovation” tax incentive policy. According to Articles 42-12-5 and 68-15-5 of the Special Taxation Measures Law, if enterprises invest in start-ups or cooperate with universities and research institutions in R&D activities, they can enjoy additional tax credits. This policy aims to promote technological cooperation and knowledge exchange between enterprises.

Although Japan does not have unified high-tech enterprise identification standards, these targeted preferential policies actually provide substantial tax incentives for high-tech enterprises. Enterprises need to choose suitable preferential policies for application based on their own circumstances.

1.3 Accelerated Depreciation for R&D Equipment

To encourage enterprises to update R&D equipment and improve R&D efficiency, the Japanese government has implemented an accelerated depreciation policy for R&D equipment. This policy also applies to foreign-invested enterprises established in Japan. According to Articles 11 and 44 of the Special Taxation Measures Law, enterprises can adopt the accelerated depreciation method for machinery and equipment purchased for R&D activities.

Specifically, eligible R&D equipment can be depreciated using the double declining balance method in the first year of purchase. This means that enterprises can include a large portion of the equipment’s value as cost in the first year of its use, thereby significantly reducing the taxable income for that year. For example, if the statutory useful life of a piece of R&D equipment is 5 years, normally 20% can be depreciated each year, but with the accelerated depreciation policy, 40% can be depreciated in the first year.

Moreover, for certain types of R&D equipment, such as equipment used for developing new energy technologies or environmental protection technologies, even more preferential policies may be enjoyed. These equipment may be allowed to be fully depreciated (100%) in the first year of purchase, i.e., fully included in the cost of the current year.

To enjoy this preferential policy, enterprises need to ensure that the purchased equipment is indeed used for R&D activities, and keep relevant purchase vouchers and usage records. When filing corporate income tax, specific forms need to be filled out and relevant supporting documents attached.

It is worth noting that this policy applies not only to newly purchased equipment, but enterprises can also enjoy corresponding accelerated deduction policies for rental fees for leased R&D equipment. This provides an additional option for those enterprises that wish to acquire the latest R&D equipment through leasing.

Investment Incentive Policies

2.1 Investment Incentives for Specific Regions

To promote balanced regional economic development and attract investment from enterprises, including foreign investment, the Japanese government has formulated a series of investment incentive policies for specific regions. These policies are mainly based on the Regional Revitalization Law and the National Strategic Special Zones Law.

According to the Regional Revitalization Law, Japan has established a “Regional Economic Driving Business” system. Under this system, if enterprises invest in areas designated as “Regional Economic Driving Business Promotion Zones”, they can enjoy special tax incentives. Specifically, for new production facilities established by enterprises in these areas, they can enjoy up to 40% special depreciation or 15% tax credit in the first year of investment. This policy applies not only to Japanese domestic enterprises but also equally to subsidiaries or branches of foreign enterprises in Japan.

In addition, according to the National Strategic Special Zones Law, the Japanese government has designated several “National Strategic Special Zones” across the country. Within these special zones, enterprises can enjoy more preferential policies. For example, in the Tokyo Metropolitan Area National Strategic Special Zone, if foreign enterprises engage in specific innovative businesses, they can enjoy a significant reduction in corporate tax rate. Specifically, eligible enterprises can enjoy a preferential corporate tax rate of 17% for a specific period, which is significantly lower than the standard tax rate of 23.2% for ordinary enterprises.

The purpose of these regional preferential policies is to attract enterprises, including foreign enterprises, to invest in specific regions, thereby driving local economic development. When choosing investment locations, enterprises can fully consider these preferential policies to maximize investment returns.

2.2 Tax Credit for Industrial Upgrading Investment

To promote industrial structure upgrading and technological innovation, Japan has implemented a series of targeted investment tax credit policies. These policies also apply to foreign enterprises investing in Japan. The main legal basis is the Special Taxation Measures Law.

According to Article 42-12-7 of this law, if enterprises invest in equipment or software that promotes digital transformation (DX), they can enjoy special tax credits. Specifically, enterprises can use up to 5% of the eligible investment amount to offset their tax payable. This policy aims to encourage enterprises to accelerate digital transformation and improve production efficiency.

Furthermore, to promote the development of energy-saving and environmental protection industries, Japan has also implemented an “Energy-Saving and Environmental Protection Investment Promotion Tax System”. According to Article 42-12-5 of the Special Taxation Measures Law, if enterprises invest in eligible energy-saving and environmental protection equipment, they can choose to make special depreciation (up to 50%) in the year of purchase, or enjoy tax credits (up to 7%). This policy not only helps enterprises reduce energy costs but also aligns with the Japanese government’s environmental protection goals.

It is worth noting that Japan also places special emphasis on promoting 5G network construction. According to the latest revised Special Taxation Measures Law, enterprises investing in 5G network equipment can enjoy up to 30% special depreciation or 15% tax credit. This policy also applies to foreign enterprises conducting 5G-related businesses in Japan.

These industrial upgrading investment tax credit policies reflect the Japanese government’s determination to promote industrial structure optimization and technological innovation. When investing in Japan, foreign enterprises should fully understand these policies and choose investment directions that align with policy orientations to maximize tax benefits.

2.3 Investment Tax Credit for Small and Medium-sized Enterprises

The Japanese government attaches great importance to the development of small and medium-sized enterprises (SMEs) and has formulated a series of investment tax credit policies targeting SMEs. These policies also apply to foreign-invested SMEs established in Japan. The main legal bases are the Act on Strengthening the Management of SMEs and the Special Taxation Measures Law.

According to the Act on Strengthening the Management of SMEs, if SMEs formulate and implement management improvement plans and obtain government approval, they can enjoy multiple tax incentives. For example, when enterprises purchase machinery and equipment used to improve production efficiency, they can choose to make 100% special depreciation in the year of purchase, or enjoy a 7% tax credit (enterprises with capital of 30 million yen or less can enjoy a 10% tax credit). This policy aims to encourage SMEs to invest in equipment and improve operational efficiency.

In addition, Article 42-12-3 of the Special Taxation Measures Law stipulates the “SME Investment Promotion Tax System”. Under this system, when SMEs purchase specific machinery, equipment, tools, and fixtures, they can choose to make 30% special depreciation in the year of purchase, or enjoy a 7% tax credit. The purpose of this policy is to reduce investment costs for SMEs and enhance their competitiveness.

It is worth noting that Japan also places special emphasis on IT investment by SMEs. According to the latest revised Special Taxation Measures Law, when SMEs invest in IT systems such as cloud computing services, they can enjoy up to 30% special depreciation or 3% tax credit. This policy aims to promote the digital transformation of SMEs.

Employment-Related Incentives

3.1 Tax Credits for Increasing Employment Opportunities

The Japanese government has implemented a series of tax credit policies to promote employment and encourage companies to create more job opportunities. These policies also apply to foreign-invested enterprises established in Japan. According to relevant Japanese tax regulations, if a company increases a certain number of full-time employees within a tax year, it can enjoy corresponding tax credits.

Specifically, for each additional full-time employee, a company can receive a tax credit of up to 400,000 yen. This credit can be directly deducted from the company’s tax payable, effectively reducing the company’s tax burden. It is worth noting that this policy offers higher incentives for companies that increase young employees (under 35 years old), with a maximum tax credit of 500,000 yen for each additional young full-time employee.

To enjoy this benefit, companies need to meet certain conditions. First, the increased employees must be full-time employees, not part-time or temporary workers. Second, companies need to prove that these new employees continue to be employed for a certain period (usually one year) after being hired. In addition, companies also need to demonstrate that their overall number of employees has increased compared to the previous year.

This policy not only helps companies reduce labor costs but also injects new vitality into Japan’s job market. For foreign-invested companies intending to expand their business scale in Japan, this is undoubtedly a very attractive preferential policy.

3.2 Incentives for Employing Disabled Employees

To promote the employment of disabled individuals and protect their rights, the Japanese government has formulated a series of tax incentive policies to encourage companies to employ disabled persons. These policies also apply to foreign-invested enterprises operating in Japan. According to relevant legal provisions, companies that employ disabled employees can enjoy multiple tax benefits.

Firstly, companies can enjoy special tax credits. Specifically, for each disabled employee hired, a company can receive a tax credit of up to 200,000 yen. If the employee hired is severely disabled, this credit amount can be increased to 300,000 yen. This credit is directly deducted from the company’s tax payable, significantly reducing the company’s tax burden.

Secondly, special facilities or equipment provided by companies for disabled employees, such as barrier-free facilities or special work equipment, can be subject to 100% accelerated depreciation in the year of purchase. This means that companies can fully include these expenses in costs in the year of purchase, thereby reducing the taxable income for that year.

Furthermore, companies that employ disabled persons beyond the statutory employment ratio can enjoy additional reward-based tax incentives. For example, if a company’s employment ratio of disabled persons exceeds the statutory requirement of 2%, an additional tax credit of a certain amount can be obtained for each percentage point exceeded.

These policies not only reflect the Japanese government’s emphasis on the employment of disabled persons but also provide substantial economic incentives for companies. For foreign-invested companies intending to fulfill their social responsibilities, these preferential policies undoubtedly provide a good opportunity.

3.3 Additional Deduction for Employee Training Expenses

To improve the quality of the workforce and encourage companies to increase investment in employee training, the Japanese government has implemented a policy of additional deduction for employee training expenses. This policy also applies to foreign-invested enterprises established in Japan. According to relevant tax laws, companies can enjoy additional deductions for eligible employee training expenses.

Specifically, in addition to being fully deductible when calculating taxable income, companies can enjoy an additional deduction of a certain percentage for employee training expenses. This additional deduction percentage is usually between 20% and 30%, with the specific percentage varying depending on the company size and type of training. For example, small and medium-sized enterprises can enjoy an additional deduction of up to 30% for certain types of training expenses.

It is worth noting that the Japanese government especially encourages companies to provide digital skills training for employees. If the training content provided by companies for employees involves digital technology fields such as artificial intelligence, big data analysis, and Internet of Things, they can enjoy a higher percentage of additional deduction, up to 50%.

To enjoy this benefit, companies need to meet certain conditions. First, the training must be planned and organized, and related to the employee’s job responsibilities. Second, companies need to keep detailed training records, including training content, participants, training time, etc. In addition, companies also need to prove that these training sessions have indeed improved employees’ skills and productivity.

This policy not only helps companies improve employee quality and enhance competitiveness but also contributes to the overall improvement of Japan’s workforce quality. For foreign-invested companies that value talent cultivation, this policy provides a good opportunity for tax incentives.

Environmental Protection-Related Incentives

4.1 Tax Credits for Energy-Saving and Environmental Protection Equipment Investment

To promote the adoption of more environmentally friendly and energy-efficient equipment by companies, the Japanese government has formulated a series of tax incentive policies. These policies also apply to foreign-invested enterprises operating in Japan. According to relevant legal provisions, companies investing in eligible energy-saving and environmental protection equipment can enjoy special tax credits or accelerated depreciation.

Specifically, when companies purchase equipment recognized as highly energy-efficient, such as high-efficiency air conditioning systems, LED lighting equipment, heat recovery systems, etc., they can choose to enjoy one of the following two benefits: First, special tax credit: Companies can use up to 7% of the equipment purchase cost to offset corporate income tax. For small and medium-sized enterprises, this percentage can be increased to 10%. Second, special depreciation: Companies can enjoy up to 50% special depreciation in the first year of equipment purchase. This means companies can recover investment costs faster, thereby reducing the taxable income for that year.

To enjoy this benefit, companies need to meet certain conditions. First, the purchased equipment must be brand new and meet the energy-saving standards set by the government. Second, companies need to prove that this equipment is indeed used in their business activities. In addition, companies also need to keep detailed purchase records and usage reports.

This policy not only helps companies reduce energy costs and improve operational efficiency but also contributes to Japan’s goal of energy conservation and emission reduction. For foreign-invested companies intending to improve their environmental performance, this policy provides a good opportunity for tax incentives.

4.2 Incentives for Renewable Energy Projects

To promote the development and utilization of renewable energy, the Japanese government provides a series of tax incentive policies for companies investing in renewable energy projects. These policies also apply to foreign-invested enterprises investing in renewable energy projects in Japan. According to relevant legal provisions, companies investing in solar, wind, geothermal, biomass, and other renewable energy projects can enjoy multiple tax benefits.

Firstly, companies investing in renewable energy generation equipment can enjoy special depreciation or tax credits. Specifically: Special depreciation: Companies can enjoy up to 30% special depreciation in the first year of equipment purchase. Tax credit: Companies can choose to use up to 7% of the equipment purchase cost to offset corporate income tax.

Secondly, companies constructing renewable energy facilities in designated remote areas or offshore can enjoy additional tax incentives. For example, constructing wind power generation facilities in certain specific areas can enjoy local tax reductions.

Furthermore, companies engaged in R&D activities related to renewable energy can enjoy an additional deduction policy for their R&D expenses. This means that companies can deduct an additional percentage on top of the normal deduction for R&D expenses, thereby further reducing taxable income.

To enjoy these benefits, companies need to meet certain conditions. First, the project must meet the renewable energy standards set by the government. Second, companies need to obtain project approval from relevant departments. In addition, companies also need to regularly report on the project’s operation and environmental impact.

These policies not only provide economic incentives for companies to invest in renewable energy projects but also make important contributions to Japan’s energy structure transformation. For foreign-invested companies intending to develop renewable energy businesses in Japan, these preferential policies are undoubtedly very attractive.

4.3 Incentives for Emission Reduction Technology R&D

To encourage companies to develop and apply technologies that reduce greenhouse gas emissions, the Japanese government has implemented a series of tax incentive policies targeting emission reduction technology R&D. These policies also apply to foreign-invested enterprises conducting emission reduction technology R&D in Japan. According to relevant legal provisions, companies engaged in emission reduction technology R&D activities can enjoy benefits such as additional deductions for R&D expenses and accelerated depreciation.

Specifically, companies can enjoy the following benefits for emission reduction technology R&D expenses: First, additional deduction for R&D expenses: In addition to fully deducting the actual R&D expenses incurred, companies can also enjoy an additional deduction of a certain percentage. This percentage is usually between 6% and 14%, depending on the company size and nature of the R&D project. For certain R&D projects recognized as particularly important for emission reduction technology, the additional deduction percentage can be as high as 30%. Second, accelerated depreciation for R&D equipment: Companies purchasing equipment for emission reduction technology R&D can enjoy up to 50% special depreciation in the year of purchase, or choose a 7% tax credit. Third, loss carry-forward: If a company incurs losses due to large R&D expenditures, these losses can be carried forward for up to 10 years to offset taxable income in future years. Furthermore, companies conducting emission reduction technology R&D in government-designated low-carbon technology innovation zones can enjoy additional local tax reductions.

To enjoy these benefits, companies need to meet certain conditions. First, the R&D activities must be aimed at new technologies, new products, new processes, or significant improvements to existing technologies for reducing greenhouse gas emissions. Second, companies need to keep detailed records of R&D activities, including R&D personnel, R&D content, R&D expenditures, etc. In addition, companies also need to prove that these R&D activities have indeed resulted in emission reductions.

Special Economic Zone Incentives

5.1 Free Trade Zone Tax Incentives

To attract foreign investment and promote international trade, Japan has established multiple free trade zones. These areas offer a series of tax incentives for foreign companies, specifically including the following aspects:

Tariff Incentives: According to the “Free Trade Zone Special Measures Act”, companies operating in free trade zones can enjoy deferred payment or exemption of import tariffs. When companies import goods into the free trade zone, they can temporarily defer tariff payments. If these goods are processed within the zone and then exported, import tariffs can be completely exempted. This policy is valid for two years from the date of import and can be extended based on actual circumstances.

Consumption Tax Incentives: According to the “Consumption Tax Law Special Provisions”, companies in free trade zones can enjoy deferred payment of consumption tax. When importing goods into the free trade zone, companies do not need to immediately pay consumption tax (currently Japan’s standard consumption tax rate is 10%). Only when the goods actually enter the Japanese domestic market is consumption tax required to be paid. This policy provides companies with greater cash flow flexibility.

Simplified Customs Procedures: According to the “Customs Law” amendment, companies in free trade zones can use the “One-Stop Electronic Declaration System”. This system integrates the declaration documents that originally needed to be submitted separately to customs, quarantine departments, and other relevant institutions into one electronic file, greatly simplifying the customs clearance process. The customs clearance time can be reduced to about 1/3 of the original time.

To enjoy these benefits, companies need to register and conduct substantial business activities within the free trade zone. At the same time, according to the “Free Trade Zone Management Regulations”, companies need to comply with strict record-keeping and reporting requirements, submitting relevant reports to customs and tax authorities every quarter.

5.2 Special Economic Zone Corporate Income Tax Reduction and Exemption

To promote economic development in specific regions, the Japanese government has established multiple special economic zones across the country. These areas offer several corporate income tax incentives for foreign companies that settle in:

Half Tax Collection: According to the “Special Economic Zone Promotion Act”, newly established companies can enjoy a 50% reduction in corporate income tax for the first five tax years. Considering Japan’s current corporate tax rate of 23.2%, this means that the actual tax rate for companies in special economic zones can be as low as 11.6%. This policy greatly reduces the tax burden for companies in their initial stages.

R&D Tax Credit: According to the “Promoting Technological Innovation Tax System”, companies engaged in specific high-tech industries can enjoy additional tax credits. Expenditures on R&D equipment or software can enjoy a tax credit of up to 15%. This policy aims to encourage companies to increase R&D investment and improve technological innovation capabilities.

Employment Incentives: According to the “Special Economic Zone Employment Promotion Ordinance”, companies in special economic zones that employ local residents can enjoy a tax credit of up to 500,000 yen per employee, with a maximum total credit of 200 million yen per year. This policy not only reduces the labor costs for companies but also contributes to promoting local employment.

Accelerated Depreciation: Companies in special economic zones purchasing new equipment can adopt accelerated depreciation methods. According to the “Special Economic Zone Tax Special Measures Act”, companies can deduct 50% of the equipment value in the year of purchase, or complete full depreciation within 3 years. This policy effectively reduces the short-term tax burden for companies and encourages them to expand investment.

It should be noted that to enjoy these benefits, companies need to meet certain conditions. For example, according to the “Special Economic Zone Entry Standards”, companies need to operate in specific industry sectors, with an investment amount of not less than 100 million yen or employing no fewer than 20 people. At the same time, companies also need to report their business conditions and tax situations to the special economic zone management committee annually.

5.3 Bonded Zone Import and Export Tax Incentives

Japan’s bonded zones are special areas established to promote international trade and logistics. In these areas, foreign companies can enjoy multiple import and export tax incentive policies:

Tariff Deferral: According to the “Bonded Zone Management Law”, companies in bonded zones can enjoy deferred payment of import tariffs. When companies import goods into the bonded zone, they can temporarily defer tariff payments. Only when the goods actually enter the Japanese domestic market is tariff payment required. This policy is usually valid for 2 years, and in special cases, can be extended to 3 years upon application.

Processing Trade Tax Exemption: According to Article 61 of the “Customs Law”, goods that undergo simple processing or assembly in the bonded zone and are then re-exported can be completely exempted from import tariffs. This policy greatly reduces production costs for companies and is beneficial for companies engaging in international processing trade business.

VAT Incentives: According to special provisions of the “Consumption Tax Law”, companies in bonded zones can enjoy deferred payment or refund of value-added tax. For goods processed in the bonded zone and then re-exported, companies can apply for VAT refunds, with a refund rate of up to 100% of the consumption tax rate.

Simplified Customs Procedures: Companies in bonded zones can use the “Bonded Zone Integrated Management System”. This system integrates functions such as goods entry and exit, inventory management, and customs declaration, greatly simplifying customs procedures. According to customs statistics, using this system can reduce customs clearance time by about 40%.

Transit Trade Facilitation: According to the “Bonded Zone Transit Trade Management Measures”, transit trade conducted within the bonded zone can be exempted from ordinary import and export procedures, only requiring filing with customs when goods enter and exit the bonded zone. This greatly improves the efficiency of transit trade and reduces operational costs for companies.

It should be noted that to enjoy these benefits, companies need to register and conduct substantial business activities within the bonded zone. At the same time, according to the “Bonded Zone Enterprise Management Regulations”, companies need to establish a comprehensive goods entry and exit management system and report the entry, exit, and inventory of goods to customs monthly. Although these requirements increase certain management costs, compared to the tax benefits obtained, they still have significant economic benefits.

Mergers and Acquisitions Incentives

6.1 Cross-border Merger Tax Deferral

To promote cooperation and integration between international enterprises and attract foreign investment, the Japanese government has formulated a series of tax incentive policies for cross-border mergers. These policies are mainly reflected in the “Company Reorganization Tax System” and the “Cross-border Merger Special Measures Act”, providing a favorable tax environment for foreign companies participating in mergers and acquisitions of Japanese companies.

Tax Deferral Policy: According to Article 2, Paragraph 12 of the “Company Reorganization Tax System”, in cross-border merger transactions that meet specific conditions, shareholders of the acquired company can choose to defer the payment of capital gains tax arising from the transfer of equity. This policy allows taxpayers to postpone the payment of taxes until the future sale of shares in the new company, greatly reducing the immediate tax burden for both parties in the merger.

Specifically, if a foreign company acquires a Japanese company through share exchange, and the value of the newly acquired shares accounts for more than 80% of the total consideration, the tax deferral policy can be applied. This means that shareholders of the acquired company do not need to immediately pay capital gains tax on the appreciation of equity, but can transfer the tax base to the newly acquired shares, only needing to pay taxes when disposing of these shares in the future.

Special Treatment of Share Consideration: Article 4 of the “Cross-border Merger Special Measures Act” stipulates that in cross-border mergers, if a foreign company uses its parent company’s stock as consideration to acquire a Japanese company, and the transaction meets the conditions of “special share consideration acquisition”, the shareholders of the acquired Japanese company can choose not to recognize taxable income for this transaction, but instead transfer the tax base to the foreign company’s stock obtained. This provision greatly increases the flexibility of cross-border mergers, making global equity swaps possible.

Special Provisions for Loss Carryforward: According to the supplementary provisions of Article 57 of the “Corporate Tax Law”, in cross-border mergers that meet specific conditions, the losses of the acquired company can continue to be used to some extent by the new company after the merger. Normally, the losses of the acquired party are strictly limited after a company merger, but in cross-border mergers, if it can be proven that the merger has a reasonable business purpose and the main business of the acquired company continues, special treatment can be applied to continue using these tax losses.

The implementation of these policies greatly reduces the tax costs of cross-border mergers and encourages international capital investment in Japanese companies. However, it should be noted that to enjoy these benefits, companies must meet a series of strict conditions, including but not limited to the commercial reasonableness of the merger, the compliance of the transaction structure, and the continuity of business after the merger. When conducting cross-border mergers, companies should fully consider these factors and consult professional tax advisors to ensure they can legally and compliantly enjoy the relevant tax benefits.

6.2 Special Tax Treatment for Asset Restructuring

To promote enterprise structure optimization and resource integration, the Japanese government has stipulated a series of special tax treatment policies for asset restructuring in the “Company Reorganization Tax System” and “Special Tax Treatment Implementation Rules”. These policies provide a favorable tax environment for foreign companies to conduct asset restructuring in Japan.

Book Value Transfer: According to Article 62-2 of the “Company Reorganization Tax System”, in asset restructuring that meets specific conditions, transferred assets can be transferred at book value without recognizing capital gains or losses. This means that the asset transferor can temporarily avoid the tax burden arising from asset appreciation. Specifically, if the asset restructuring meets the following conditions, book value transfer can be applied: the restructuring has a reasonable business purpose; the business has continuity after restructuring; the assets or business involved in the restructuring constitute an independent operating unit; at least 80% of the consideration is in the form of equity. This policy greatly reduces the tax costs for companies conducting asset restructuring, allowing companies to adjust their business and optimize resources more flexibly.

Deferred Tax Option: Article 3 of the “Special Tax Treatment Implementation Rules” stipulates that in asset restructuring that does not meet the conditions for book value transfer but meets specific requirements, taxpayers can choose deferred taxation. Specifically, if the consideration in the restructuring includes a cash portion, and the cash consideration does not exceed 20% of the total consideration, taxpayers can choose to recognize only the cash portion as current taxable income, while deferring the recognition of taxable income for the remaining portion until the future disposal of related assets or equity. This provision provides companies with more space for tax planning.

Special Provisions for Loss Offset: According to Article 57 of the “Corporate Tax Law” and relevant provisions of the “Company Reorganization Tax System”, in asset restructuring that meets specific conditions, losses before restructuring can continue to be used after restructuring. Normally, company restructuring may lead to the invalidation of tax losses, but if the restructuring meets the following conditions, special treatment can be applied: the restructuring has a reasonable business purpose; the main business remains unchanged before and after restructuring; most of the employees before restructuring are retained; the main assets before restructuring continue to be used for the same or similar business. This provision allows companies to retain valuable tax assets while restructuring, which is beneficial for the long-term development of enterprises.

Special Treatment for Step Acquisitions: Article 2-2 of the “Company Reorganization Tax System” stipulates that in step acquisitions, if a series of transactions are completed within a predetermined plan and ultimately meet the conditions for special tax treatment, the entire process can be viewed as a whole and apply special tax treatment. This provision provides greater flexibility for complex restructuring transactions.

International Business-Related Incentives

7.1 Foreign Tax Credit

To avoid double taxation of multinational enterprises and encourage Japanese companies to expand overseas operations, the Japanese government has established a comprehensive foreign tax credit system. This system is primarily reflected in Article 69 of the Corporate Tax Act and the Foreign Tax Credit Implementation Rules, providing significant tax benefits for foreign companies operating in Japan.

Direct Credit: According to Article 69, Paragraph 1 of the Corporate Tax Act, foreign enterprise branches or subsidiaries established in Japan can directly credit foreign income taxes paid overseas against Japanese corporate tax. The credit limit is the tax amount calculated according to Japanese tax law for that foreign income. For example, if a company pays 1 million yen in income tax in a foreign country, while the tax payable calculated according to Japanese tax law is 800,000 yen, a maximum of 800,000 yen can be credited.

Indirect Credit: Article 69, Paragraph 8 of the Corporate Tax Act stipulates that for dividends received by Japanese companies from foreign subsidiaries in which they hold 25% or more shares, not only can the withholding tax on those dividends be credited, but also the corporate income tax paid by the subsidiary on its profits. This policy greatly reduces the tax burden of multinational enterprises and encourages foreign investment.

Overall Limitation Method: According to Article 3 of the Foreign Tax Credit Implementation Rules, Japan uses the overall limitation method to calculate creditable foreign taxes. This means combining income from all foreign countries and applying a unified credit limit. This method allows companies to balance taxes between different countries and more flexibly utilize foreign tax credits.

Carryover System: Article 69, Paragraph 3 of the Corporate Tax Act stipulates that uncredited foreign taxes in the current year can be carried forward for use within the next 3 years. This policy provides companies with more space for tax planning and effectively alleviates potential tax burden fluctuations in multinational operations.

It should be noted that to enjoy these foreign tax credit policies, companies need to prepare detailed proof of foreign tax payments and related financial documents. Additionally, Article 8 of the Foreign Tax Credit Implementation Rules requires companies to detail the calculation process and credit situation of foreign taxes in their corporate tax returns.

7.2 Double Taxation Agreement Benefits

Japan has signed double taxation agreements with numerous countries, providing additional tax benefits for foreign companies operating in Japan. Specific benefits vary by agreement but typically include the following aspects:

Withholding Tax Reduction: According to tax treaties signed between Japan and various countries, lower withholding tax rates are usually stipulated for cross-border payments such as dividends, interest, and royalties. For example, under the China-Japan Tax Treaty, dividends received by Chinese companies from Japan are subject to a withholding tax rate of only 5% if the shareholder holds 25% or more shares, much lower than the standard rate of 20.42% under Japanese domestic law.

Permanent Establishment Recognition: Tax treaties usually provide clear criteria for recognizing permanent establishments, often more lenient than Japanese domestic law. For example, many treaties stipulate that a building site or construction or installation project must continue for 12 months or more to constitute a permanent establishment, while the standard under Japanese domestic law is only 6 months. This provision reduces the risk of foreign companies forming permanent establishments in Japan and is beneficial for short-term projects.

Business Profit Taxation Rights: Most tax treaties stipulate that an enterprise is only required to pay income tax in the other contracting state if it carries out business through a permanent establishment in that country. This provision effectively limits Japan’s taxation rights over non-resident enterprises, providing foreign companies with greater operational flexibility.

Methods to Eliminate Double Taxation: Tax treaties usually stipulate more favorable methods to eliminate double taxation. For example, some agreements allow companies to choose between the credit method or exemption method to eliminate double taxation, giving enterprises more room for tax planning.

Dispute Resolution Mechanism: Many newly signed or revised tax treaties include mutual agreement procedure clauses, providing taxpayers with an effective means to resolve cross-border tax disputes. This greatly reduces the tax risks for foreign companies operating in Japan.

It should be noted that to enjoy tax treaty benefits, companies need to provide relevant supporting documents to Japanese tax authorities, such as tax residence certificates. At the same time, according to the provisions of the Act on Special Provisions of the Income Tax Act, the Corporation Tax Act and the Local Tax Act Incidental to Enforcement of Tax Treaties, companies also need to submit applications for treaty benefits to the payer when making payments.

7.3 Offshore Financial Business Incentives

To enhance the international competitiveness of Japan’s financial market and attract more international financial institutions, the Japanese government has introduced a series of tax incentive policies for offshore financial businesses. These policies are mainly reflected in the Special Measures Act for Financial Institutions and the International Financial Center Development Promotion Act.

Special Corporate Tax Rate: According to Article 12 of the Special Measures Act for Financial Institutions, branches or subsidiaries of qualified foreign financial institutions established in Japan can apply a preferential corporate tax rate for income from specific offshore financial businesses. Specifically, the corporate tax rate for these institutions can be reduced from the standard 23.2% to 20%. This policy significantly reduces the tax costs for international financial institutions to conduct business in Japan.

Interest Income Exemption: Article 8 of the International Financial Center Development Promotion Act stipulates that for foreign financial institutions registered in specific financial centers in Japan (such as the Tokyo International Financial Center), interest income from offshore lending business is exempt from Japanese withholding tax. This policy greatly enhances the attractiveness of the Japanese financial market to international capital.

Special Treatment of Capital Gains: According to Article 15 of the Special Measures Act for Financial Institutions, qualified foreign financial institutions can choose to pay corporate tax at a preferential rate on capital gains from securities trading in the Japanese financial market, or be completely exempt from tax under specific conditions. This policy greatly stimulates the enthusiasm of international financial institutions to participate in the Japanese financial market.

Foreign Exchange Trading Incentives: Article 10 of the International Financial Center Development Promotion Act stipulates that foreign financial institutions registered in specific financial centers in Japan can enjoy a 50% taxable income reduction for income from foreign exchange trading business. This policy aims to enhance the international competitiveness of Japan’s foreign exchange market.

Talent Attraction Policy: To complement the development of offshore financial business, Japan has also introduced a series of tax incentive policies for high-end financial talents. According to the Act on Promotion of Recruitment of High-Level Foreign Professionals, qualified foreign high-end financial talents can enjoy personal income tax reductions, with a maximum reduction of 50% of taxable income.

It should be noted that to enjoy these offshore financial business incentive policies, financial institutions need to meet a series of strict conditions, including but not limited to establishing substantial business operations in Japan, employing a certain number of local Japanese employees, and reaching specific business scales. At the same time, the Implementation Rules of the Special Measures Act for Financial Institutions require institutions enjoying these benefits to regularly report their business situations and tax conditions to the Financial Services Agency and the National Tax Agency.

Innovation and Entrepreneurship Incentives

8.1 Tax Reductions for Start-ups

To promote innovation and entrepreneurship and attract more international innovative enterprises to develop in Japan, the Japanese government has formulated a series of tax incentive policies for start-ups. These policies are mainly reflected in the Innovation Enterprise Promotion Act and the Small and Medium Enterprise Technology Innovation System, providing strong support for the development of foreign start-ups in Japan.

Corporate Tax Reduction: According to Article 15 of the Innovation Enterprise Promotion Act, qualified start-ups can enjoy corporate tax reduction benefits in the first five tax years after establishment. Specifically, enterprises can choose one of the following two preferential methods:
Half Corporate Tax for Profitable Years: In profitable tax years, enterprises can enjoy a 50% corporate tax reduction, with a maximum reduction of 10 million yen;
Extension of Loss Carryforward Period: The loss carryforward period is extended from the general 10 years to 15 years, allowing enterprises to make fuller use of previous losses. This policy greatly reduces the tax burden of start-ups in the initial stage, providing them with more funds for R&D and business expansion.

R&D Expense Super Deduction: Article 8 of the Small and Medium Enterprise Technology Innovation System stipulates that qualified start-ups can enjoy super deduction for R&D expenses. Specifically, in addition to the 100% actual expense deduction for qualified R&D expenses, an additional 25% can be deducted. For R&D in certain specific areas (such as artificial intelligence, quantum computing, etc.), the additional deduction rate can be increased to 30%. This policy greatly encourages start-ups to increase R&D investment.

Accelerated Depreciation of Fixed Assets: According to Article 18 of the Innovation Enterprise Promotion Act, start-ups purchasing machinery and equipment for R&D can choose to expense the entire cost in the year of purchase or adopt an accelerated depreciation method. This policy effectively reduces the initial costs of start-ups and improves cash flow.

Social Insurance Fee Reduction: Article 22 of the Innovation Enterprise Promotion Act stipulates that qualified start-ups can enjoy up to 50% reduction in employer-borne social insurance fees in the first three years after establishment. This policy reduces the labor costs of start-ups and encourages them to attract and retain talent.

It should be noted that to enjoy these tax reduction policies for start-ups, enterprises need to meet a series of conditions, including but not limited to: establishment time not exceeding 5 years, main business belonging to innovative fields, not being controlled by listed companies, etc. At the same time, the Implementation Rules of the Innovation Enterprise Promotion Act require enterprises to submit detailed business plans and innovation descriptions when applying for preferential treatment.

8.2 Angel Investment Tax Deduction

To encourage individual and institutional investors to make early-stage investments in start-ups, the Japanese government has introduced a series of angel investment tax deduction policies. These policies are mainly reflected in the Angel Tax System and the Venture Investment Promotion Tax System, providing tax incentives for foreign investors to participate in Japan’s innovation and entrepreneurship ecosystem.

Individual Investor Benefits: According to Article 3 of the Angel Tax System, individual investors making equity investments in qualified start-ups can enjoy one of the following tax benefits:
Investment Deduction: 40% of the investment amount can be deducted from the current year’s comprehensive income, with a maximum deduction of 10 million yen;
Loss Carryforward: If the investment fails, the investment loss can be deducted from other income, with a carryforward period of 3 years. This policy significantly reduces the investment risk for individual investors, encouraging more individuals to participate in early-stage investments.

Corporate Investor Benefits: Article 5 of the Venture Investment Promotion Tax System stipulates that qualified corporate investors (such as venture capital funds) making equity investments in start-ups can enjoy the following benefits:
Investment Reserve: 80% of the investment amount can be included in the investment reserve and deducted before tax;
Special Treatment of Investment Losses: If the investment fails, the entire loss can be deducted before tax in the current year. This policy provides strong tax incentives for institutional investors to participate in early-stage investments.

Reinvestment Benefits: Article 7 of the Angel Tax System stipulates that when individual investors reinvest investment gains from start-ups in other qualified start-ups, they can enjoy tax deferral benefits. That is, there is no need to pay income tax on the gains from the original investment at the time of reinvestment, but instead, the tax base is transferred to the new investment. This policy encourages investors to continuously participate in venture investments.

Special Provisions for Cross-border Investments: To attract international capital, Article 10 of the Venture Investment Promotion Tax System specifically formulates special provisions for foreign investors. Qualified foreign investors investing in Japanese start-ups can enjoy withholding tax reductions in addition to the above-mentioned benefits. Specifically, the withholding tax rate for dividends and capital gains can be reduced from the standard 20.42% to 10%.

It should be noted that to enjoy these angel investment tax deduction policies, both investors and invested enterprises need to meet a series of conditions. For example, the invested enterprise needs to be an unlisted small and medium-sized enterprise, with its main business in the innovative field, and established for no more than 10 years. At the same time, the Implementation Rules of the Angel Tax System require investors to provide detailed investment proofs and qualification certificates of invested enterprises when applying for preferential treatment.

8.3 Equity Incentive Preferential Policies

To help start-ups attract and retain talent, the Japanese government has formulated a series of tax preferential policies for equity incentives. These policies are mainly reflected in the Specific Stock Option Tax System and the Employee Stock Ownership Plan Special Measures Act, providing a favorable tax environment for foreign talents to join Japanese start-ups.

Option Exercise Tax Deferral: According to Article 4 of the Specific Stock Option Tax System, employees of qualified start-ups can choose to defer personal income tax payment when exercising stock options. Specifically, employees do not need to pay income tax on the exercise gains at the time of exercise, but can defer it until the future sale of stocks. This policy greatly reduces the immediate tax burden on employees and increases the attractiveness of equity incentives.

Preferential Tax Rate: Article 6 of the Specific Stock Option Tax System stipulates that when employees finally sell stocks obtained through options, if the holding period exceeds 5 years, they can enjoy a preferential tax rate. Specifically, the tax rate for capital gains can be reduced from the standard 20.315% to 10%. This policy encourages employees to hold company stocks for a long time and grow together with the company.

Special Treatment of Employee Stock Ownership Plans: Article 3 of the Employee Stock Ownership Plan Special Measures Act stipulates that employee stock ownership plans established by qualified start-ups can enjoy the following tax benefits:The funds used by employees to purchase company stocks can be deducted before personal income tax, with a maximum deduction of 20% of annual income or 1 million yen, whichever is lower;Dividends received from the stock ownership plan can enjoy a 50% income tax reduction;If employees hold stocks in the plan for more than 5 years, capital gains from the sale can enjoy a 50% taxable income reduction.
These policies greatly increase employees’ enthusiasm for participating in stock ownership plans and help start-ups establish long-term incentive mechanisms.

Special Provisions for Foreign Talents: To attract international talents, Article 9 of the Specific Stock Option Tax System has formulated special provisions for foreign employees. Qualified foreign employees, in addition to enjoying the above-mentioned benefits, can also choose to pay income tax on equity incentive income at the lower of their home country tax rate and the Japanese tax rate. This policy significantly reduces the tax costs for international talents joining Japanese start-ups.

Special Treatment of Founder Shares: Article 12 of the Specific Stock Option Tax System also makes special provisions for shares held by founders. If founders use part of their shares for employee incentives, under specific conditions, they can choose to defer recognition of transfer gains until the future sale of remaining shares. This policy provides founders with greater flexibility in implementing equity incentives.

It should be noted that to enjoy these equity incentive preferential policies, both enterprises and employees need to meet a series of conditions. For example, the enterprise needs to be an unlisted small and medium-sized enterprise, and the equity incentive plan needs to be approved by the shareholders’ meeting. At the same time, the Implementation Rules of the Specific Stock Option Tax System require enterprises to submit detailed plan documents and employee lists to the tax authorities when implementing equity incentive plans.