Corporate Taxation System in Japan
National Corporate Income Tax Rate at a Glance
Corporate Income Tax Rate (%)
Capital Gains Tax Rate (%)
Branch Tax Rate (%)
Withholding Tax (%)
Dividends
Interest
Royalties from Patents, Know-how, etc.
Branch Remittance Tax
Net Operating Losses (Years)
Carryback
Carryforward
30 (a)
30 (a)
30 (a)
20 (b)
15/20
20
0
1 (c)
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(a)Local income taxes are also imposed as stated below. The resulting effective corporate
income tax rate for a corporation with capital of more than 100 million yen, is approximately
40%.
(b)Dividends paid on listed shares from April 1, 2003 through December 31, 2008 are
generally subject to a 10% withholding tax (including local tax) if certain requirements
are met. A 20% withholding tax rate will take effect on and after January 1, 2009. As a
temporary measure, a reduced 10% tax rate (including local tax) will apply to dividends
on listed shares up to 1 million JPY in 2009 and 2010.
(c) The loss carryback is temporarily suspended.
Local Income Tax Rate at a Glance
Local inhabitant tax
Income levy (%)
Per capita levy (thousand yen)
Enterprise tax (%) (f)
Added value levy
Capital levy
Income levy
5.19 to 6.21 (d)
70 to 3,800 (e)
0.48 (g)
0.2 (h)
7.2 to 10.08 (i) (j)
(d) Income levy is calculated as a percentage (from 17.3% to 20.7%) of national corporate
income tax due (the rate of which is generally 30%) of the corporation. The rate depends on the
corporation’s capital and the amount of national income tax due.
(e) Per capita levy is imposed by prefecture and city where the office of the corporation is
located. The levy depends on the corporation’s capital and capital surplus (for tax purposes)
and number of employees.
(f) Since April 1, 2004, Business Scale Taxation (Gaikei Hyojun Kazei) has been introduced,
under which a corporation with capital of more than 100 million yen is subject not only to the
traditional income levy but also to an added value levy and a capital levy.
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(g) The tax base for the added value levy is salaries (remunerations), net interest payable, net
rental fees payable and profit or loss of the taxable year. Some prefectures apply different rate
up to 0.504%.
(h) The tax basis for the capital levy is the total amount of capital and capital surplus (for tax
purposes) of the corporation. Some prefectures apply different rate up to 0.21%.
(i) Under Business Scale Taxation, the rate of income levy is 7.2% (up to 7.56% for some
prefectures). Corporations exempt from Business Scale Taxation are taxed at 9.6% (up to
10.08% for some prefectures).
(j)The current Enterprise tax rules will be amended and a new “Special local corporate tax”,
which is a national tax, will be applied to financial years starting on or after October 1, 2008.
The rate of Enterprise Tax of Income Levy for a corporation which is subject to Business Scale
Taxation will change from 7.2% to 2.9% and that for a corporation exempt from Business Scale
Taxation will change from 9.6% to 5.3%.
Corporations subject to Business Scale Taxation will be subject to the “Special local corporate
tax” at a tax rate of 148% on the Enterprise Tax of Income Levy. Corporations exempt from
Business Scale Taxation will be subject to the “Special local corporate tax” at a tax rate of 81%
on the Enterprise Tax of Income Levy. The government would redistribute these tax revenues
back to the prefectures as a “Special local corporate transfer tax”. The introduction of these new
taxes will not lead to an increase in the total tax burden of corporate taxpayers.
Outline of Japanese Corporate Tax System
 Taxable Income
Japanese domestic companies are subject to tax on their worldwide income, but nonresident
companies pay taxes only on Japanese-source income.

Capital Gain
Capital gains are not taxed separately. Such gains are treated as ordinary income to which
normal tax rates apply. Transferor corporations in qualified reorganizations may defer the
recognition of capital gains and losses arising in such transactions. Mergers, corporate
spinoffs and contributions in kind are considered qualified reorganizations if they satisfy
certain conditions.

Bonuses, Entertainment Expenses and Donations
Bonuses to directors are considered a distribution of income and are generally not
deductible by the corporation. The deductibility of entertainment expenses incurred by a
corporation is restricted according to the size (capitalization) of the corporation.
Deductions of donations, except for those to national or local governments or similar
organizations, are limited.

Transfer Pricing Rules
The transfer-pricing law stipulates that pricing between internationally affiliated entities
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should be determined at arm’s length. Entities are considered to be internationally affiliated
entities if there is a direct or indirect relationship by having either 50% or more ownership
or substantial control.

Tax Haven Rules
If a Japanese domestic company owns 5% or more of the issued shares of a tax-haven
subsidiary of which more than 50% is owned directly or indirectly by Japanese domestic
companies and Japanese resident individuals, the undistributed income of the subsidiary
must be included in the Japanese parent company’s taxable income in proportion to the
equity held. A foreign subsidiary is considered a tax-haven subsidiary if its head office is
located in a country that does not impose income tax or if the company is subject to tax at
an effective rate of 25% or less. If certain conditions are met, active business exemption
can apply.

Thin Capitalization
Thin-capitalization rules limit the deduction for interest expense for companies with
foreign related-party debt if the debt-to-equity ratio exceeds 3:1.

Foreign Tax Credit
A Japanese company may be entitled to claim a foreign tax credit against both Japanese
national corporate tax and local inhabitant tax.

R&D Tax Credit
A corporation may claim a credit of 8% to 10% of total research and development expenses
or 20% of the national corporate tax due, whichever is smaller. If the 8% to 10% creditable
expenses exceed the 20% tax due, the excess amount can be carryforward to the following
year. In addition to the current R&D tax credits, a new R&D tax credit is available with
respect to R&D expenses for financial years starting in the period from April 1, 2008 to
March 31, 2010, if certain conditions are met. The upper limit for the new R&D tax credit
is 10% of the corporate income tax due of the financial year.

The Consolidated Tax Return System (CTRS)
CTRS applies to a domestic parent corporation and its 100% domestic subsidiaries. A
consolidated group must elect the application of the CTRS, subject to the approval of the
National Tax Agency (NTA). If a consolidated group wants to terminate its CTRS election,
it must obtain the approval of the NTA.

Taxable Year
The tax year for a corporation is its fiscal year. A corporation must file a tax return within
two months of the end of its fiscal year, paying the tax at that time. In general, one month
extension is allowed by filing an application.
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Other Significant Tax
 Consumption Tax
Consumption tax is imposed on most of the domestic Japanese transactions (including
transfers of goods or services) and at importation of goods. In general, financial
transactions, capital transactions and certain specific transactions are tax exempt. The tax
rate is 5%. A corporation is generally allowed to credit consumption tax paid against its
consumption tax liability.
.
 Fixed Assets Tax
Lands, buildings and depreciable fixed assets are subject to fixed assets tax imposed by
municipal tax authorities. The tax base is fair market value of the assets and the general tax
rate is 1.4%. For lands and buildings, the fair market value is determined by the municipal
tax authorities, which are revaluated once in every three years. For depreciable fixed assets,
generally, the tax is imposed based on a report filed by the taxpayer, which includes
information on the acquisition cost and depreciation of the assets.
Treaty Withholding Tax Rates at a Glance
For treaty countries, the rates reflect the lower of the treaty rate and the rate under domestic tax
laws on outbound payments.
Dividends
%
Australia (a)
15
Austria
10/20
Bangladesh
10/15
Belgium
10/15
Brazil
12.5
Bulgaria
10/15
Canada
5/10/15
China
10
Czechoslovakia 10/15
Denmark
10/15
Egypt
15
Finland
10/15
France
0/5/10
Germany
10/15
Hungary
10
India
15
Indonesia
10/15
Ireland
10/15
Israel
5/15
Italy
10/15
Korea
5/15
Interest
%
Royalties
%
10
10
10
10
10
10
10
10
12.5 12.5/15/20
10
10
10
10
10
10
10
0/10
10
10
15/20
15
10
10
10
10
10
10
10
0/10
10
20
10
10
10
10
10
10
10
10
10
10
4
Luxembourg
5/15
10
Malaysia
5/15
10
Mexico
0/5/15
10/15
Netherlands
5/15
10
New Zealand
15
15/20
Norway
5/15
10
Pakistan (b)
15/20 0/15/20
Philippines (c) 10/20
10/15
Poland
10
10
Romania
10
10
Singapore
5/15
10
South Africa
5/15
10
Spain
10/15
10
Sri Lanka
20
15/20
Sweden
0/5/15
10
Switzerland
10/15
10
Thailand
15/20
10/20
Turkey
10/15
10/15
USSR
15
10
United Kingdom 0/5/10
10
United States 0/5/10
10
Vietnam
10
10
Zambia
0
10
Nontreaty countries 20
15/20
10
10
10
10
20
10
0
15/20
0/10
10/15
10
10
10
0/10
10
10
15
10
0/10
0
0
10
10
20
(a) Although Japan and Australia have singed a new tax treaty, it has not yet come into effect as
of March, 2008. If the tax treaty comes into effect in 2008, the following withholding tax
rates will be applied from January 1, 2009.
Dividends 0/5/10/15
Interest
10
Royalties 5
(b) Although Japan and Pakistan have signed a new tax treaty, it has not yet come into effect as
of March, 2008. If the tax treaty comes into effect in 2008, the following withholding tax
rates will be applied from January 1, 2009.
Dividends 5/7.5/10
Interest
10
Royalties 10
(c) Although Japan and the Philippines have signed a new tax treaty, it has not yet come into
effect as of March, 2008. If the tax treaty comes into effect in 2008, the following
withholding tax rates will be applied from January 1, 2009.
Dividends 10/15
5
Interest
Royalties
10
10
6