Japan’s corporate tax system is a complex and comprehensive framework designed to ensure fair tax payment by businesses while promoting economic growth. This document provides a detailed discussion on the structure of corporate tax rates in Japan, the method of calculating taxable income, and how corporate taxes are determined based on the size and revenue of a business.

Overview of Corporate Tax in Japan

Corporate tax in Japan is a direct tax levied on the profits of companies and other corporate entities. It is one of the main sources of revenue for the Japanese government and is managed and collected by the National Tax Agency (NTA).

1.1 Legal Basis of Corporate Tax

Japan’s corporate tax is primarily levied based on the Corporate Tax Act. This law was initially enacted in 1965 and has undergone numerous revisions to adapt to the changing economic environment and policy needs. Alongside the Corporate Tax Act, other related regulations, such as the Corporate Tax Enforcement Order and the Corporate Tax Enforcement Regulations, form the legal framework for corporate taxation in Japan.

1.2 Taxpayers

Corporate tax taxpayers in Japan include:

Companies registered in Japan

Permanent establishments of foreign companies in Japan

Other organizations considered as corporations, such as associations and foundations

It is noteworthy that Japan follows a global income taxation principle, meaning that Japanese companies must pay corporate tax on their global income, while foreign companies are only required to pay tax on income derived from Japan.

Structure of Corporate Tax Rates

The structure of corporate tax rates in Japan is relatively complex, varying based on business size, income amount, and specific conditions. Below, we will provide a detailed description of the corporate tax rates for various types of businesses.

2.1 Standard Tax Rate for Large Corporations

According to Article 66 of the Corporate Tax Act, the standard corporate tax rate for large corporations with capital exceeding 100 million yen is 23.2%. This rate has been in effect since April 1, 2018, as part of the Japanese government’s efforts to reduce corporate tax burdens and enhance international competitiveness.

2.2 Preferential Tax Rates for Small and Medium-Sized Enterprises (SMEs)

To support the development of SMEs, the Japanese government offers preferential tax rates for SMEs with capital not exceeding 100 million yen. Specifically:

For taxable income not exceeding 8 million yen per year, a preferential tax rate of 15% applies.

For income exceeding 8 million yen, the standard tax rate of 23.2% applies.

This preferential policy, stipulated in the Special Taxation Measures Law, aims to alleviate the tax burden on SMEs and promote their growth.

2.3 Lower Preferential Tax Rates for Specific SMEs

For SMEs that meet specific conditions, the Japanese government provides even lower preferential tax rates. According to Article 42-3-2 of the Special Taxation Measures Law, if an SME simultaneously meets the following conditions:

Capital does not exceed 100 million yen

Annual income does not exceed 8 million yen

The shareholding ratio of large corporations does not exceed 25%

Then, the portion of taxable income below 8 million yen can be subject to an even lower preferential tax rate of 19%.

2.4 Special Tax Rates for Cooperative Associations and Others

For certain types of corporate entities, such as cooperative associations and credit cooperatives, the Japanese government also provides special tax rates. According to Article 66, paragraph 3 of the Corporate Tax Act, the corporate tax rate for these entities is 19%.

Calculation of Taxable Income

Calculating taxable income for corporate tax purposes is a complex process that requires consideration of multiple factors. Below, we will provide a detailed explanation of the calculation steps and relevant regulations.

3.1 Recognition of Income

According to Article 22 of the Corporate Tax Act, a corporation’s income includes:

Consideration for the sale of goods or provision of services

Income from the transfer of assets

The value of assets acquired without compensation

Other income that increases the net assets of the corporation

Income is generally recognized on an accrual basis, meaning it is recognized when the ownership of goods is transferred or services are completed, rather than when cash is actually received.

3.2 Deduction of Expenses

Article 22 of the Corporate Tax Act also stipulates the expenses that can be deducted from income, mainly including:

Cost of goods sold

Selling expenses, general administrative expenses, etc.

Losses from the transfer of assets

Other losses that decrease the net assets of the corporation

Expense deductions must comply with the principles of “necessity” and “reasonableness,” meaning the expenses must be related to the business activities of the company and the amounts should be reasonable.

3.3 Depreciation and Amortization

Depreciation of fixed assets is a significant deduction when calculating taxable income. Japan employs both the straight-line method and the declining balance method for depreciation. According to Article 48 of the Corporate Tax Enforcement Order, different types of assets have different statutory useful lives and depreciation rates. For example:

Office computer equipment: statutory useful life of 4 years, declining balance method depreciation rate of 50%

Passenger cars: statutory useful life of 6 years, declining balance method depreciation rate of 33.3%

3.4 Reserves and Provisions

Japan’s corporate tax system allows companies to set aside reserves and provisions under certain conditions to adjust taxable income. Common reserves include:

Bad debt reserves: According to Article 52 of the Corporate Tax Act, companies can set aside bad debt reserves based on a certain percentage of accounts receivable.

Retirement benefit provisions: According to Article 54 of the Corporate Tax Act, companies can set aside provisions for employee retirement benefits.

3.5 Loss Carryforward

To balance profits and losses over different years, Japan’s corporate tax system allows companies to carry forward losses. According to Article 57 of the Corporate Tax Act, companies can carry forward losses for up to 10 years to offset future taxable income.

3.6 Basic Formula for Calculating Taxable Income

Based on the above, we can derive the following basic formula for calculating taxable income:

Taxable Income = Total Income – Deductible Expenses – Depreciation and Amortization – Reserves and Provisions ± Special Adjustments – Loss Carryforward

Calculation of Corporate Tax Amount

Once taxable income is determined, the specific corporate tax amount payable can be calculated. Below, we illustrate the calculation process through examples of companies of different sizes.

4.1 Calculation of Corporate Tax for Large Corporations

Suppose a large corporation with a capital of 500 million yen has a taxable income of 1 billion yen for the fiscal year 2023.

The calculation process is as follows:

Taxable Income × Tax Rate = Corporate Tax Payable

1,000,000,000 × 23.2% = 232,000,000 yen

4.2 Calculation of Corporate Tax for SMEs

Suppose an SME with a capital of 50 million yen has a taxable income of 100 million yen for the fiscal year 2023.

The calculation process is as follows:

Portion below 8 million yen: 8 million × 15% = 1.2 million yen

Portion above 8 million yen: (100 million – 8 million) × 23.2% = 21.44 million yen

Total Corporate Tax Payable: 1.2 million + 21.44 million = 22.64 million yen

4.3 Calculation of Corporate Tax for Specific SMEs

Suppose a company that qualifies as a specific SME with a capital of 30 million yen has a taxable income of 7 million yen for the fiscal year 2023.

The calculation process is as follows:

Taxable Income × Tax Rate = Corporate Tax Payable

7,000,000 × 19% = 1,330,000 yen

4.4 Comprehensive Calculation Considering Local Corporate Taxes

In addition to national corporate tax, companies must also pay local corporate taxes. Local corporate taxes include business tax, corporate inhabitant tax, and special local corporate tax. Using Tokyo as an example, we illustrate a comprehensive calculation.

Suppose a company with a capital of 200 million yen has a taxable income of 500 million yen for the fiscal year 2023.

National Corporate Tax Calculation:

Corporate Tax Payable = 500,000,000 × 23.2% = 116,000,000 yen

Local Corporate Tax Calculation:

Business Tax (standard rate): 500,000,000 × 1.0% = 5,000,000 yen

Corporate Inhabitant Tax (corporate tax portion, assumed rate of 12.9%): 116,000,000 × 12.9% = 14,964,000 yen

Special Local Corporate Tax (414.2% of business tax): 5,000,000 × 414.2% = 20,710,000 yen

Total Tax Burden:

116,000,000 + 5,000,000 + 14,964,000 + 20,710,000 = 156,674,000 yen

Actual Effective Tax Rate:

156,674,000 / 500,000,000 ≈ 31.3%

This example demonstrates the overall tax burden that Japanese companies face, including both national and local taxes, which results in a total tax rate much higher than the standalone corporate tax rate.

Special Situations and Preferential Policies

To encourage specific behaviors or support certain industries, the Japanese government has established various tax incentives. These policies may affect a company’s actual tax burden.

5.1 R&D Expense Super Deduction

To encourage companies to increase their investment in R&D, the Special Taxation Measures Law provides for an R&D expense super deduction policy. Under this policy, companies can deduct an additional percentage of R&D expenses beyond the normal deduction. The specific percentage depends on the size of the company and the growth in R&D expenses, with a maximum of up to 25% of R&D expenses.

5.2 Investment Promotion Tax System

To stimulate corporate investment, Japan has implemented an investment promotion tax system. According to Article 42-6 of the Special Taxation Measures Law, companies purchasing specific equipment can choose to enjoy special depreciation or tax credits. For example, investments in eligible IoT, robotics, cloud computing, and related equipment can benefit from 30% special depreciation or a 3% tax credit.

5.3 Disaster Recovery Support Tax System

To support the reconstruction of disaster-affected areas, the Japanese government provides tax incentives for companies investing in specific disaster areas. Under the Act on Special Zones for Reconstruction from the Great East Japan Earthquake, companies investing in designated reconstruction industry zones can enjoy special depreciation or tax credits.

5.4 Energy Conservation and Environmental Protection Investment Incentives

To promote environmental protection and energy conservation, the Japanese government offers tax incentives for corporate investments in energy conservation and environmental protection. For example, according to Article 42-5 of the Special Taxation Measures Law, companies purchasing eligible energy-saving equipment can enjoy special depreciation or tax credits.

Conclusion

Japan’s corporate tax system is a complex and comprehensive framework that involves multiple laws, regulations, and policy documents. This document has provided a detailed overview of the structure of corporate tax rates, the methods for calculating taxable income, and how corporate taxes are determined based on business size and revenue. It is evident that the Japanese government strives to balance tax collection and economic development needs through differentiated tax rates and various preferential policies.

When planning their tax strategy, companies need to comprehensively consider various factors, including but not limited to company size, income amount, investment plans, R&D expenditures, and more. The information provided herein is subject to change with policy adjustments. Companies should consult professional tax advisors in actual practice to ensure tax compliance while reasonably optimizing their tax burden.