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Japan 2023 Tax Reform Proposals

On 16 December 2022, Japan’s ruling parties released the 2023 tax reform proposals aimed to increase investment in markets, industries and people in an integrated manner while properly implementing tax and other policies to redistribute wealth so that as many people as possible can enjoy the benefits of growth. The proposals relevant to the financial services industry include:

  1. Tax incentives for promoting open innovation expanded to certain venture capital acquisitions: The 2020 tax reforms introduced a tax incentive that allows companies to deduct from their taxable income 25% of share purchase amounts in start-ups (for partnerships and similar business arrangements). Companies that were eligible for the incentive were limited to large companies that purchase JPY100m or more (and small companies that purchase JPY10 or more) of start-up shares.

    Addition of eligible types of share acquisitions: The 2023 tax reform proposes to expand the eligible types of share acquisitions to include shares which are acquired from an entity/person other than the original issuer (qualified venture company) will be added to the scope of specified shares. In order for taxpayers to be eligible, they are required to acquire a majority voting rights in the qualified venture company. The upper limit of acquisition cost of the specified shares acquired is JPY200B; the minimum shareholding period will be five years; and, only domestic companies will be eligible as qualified venture companies for this purpose. Some of the conditions that trigger a reversal of the deduction and subsequent inclusion in taxable income will be reconsidered.       Reduction of upper limit for acquisition cost: With regard to the acquisition cost of specified shares obtained as part of direct capital investments in a qualified venture company, the upper limit will be reduced from JPY10B to JPY5B.

    Exclusions from eligible investments: In addition, the following criteria will be added to determine eligibility: investments made to qualified venture companies whose majority shares are already owned by the investor will be excluded from eligible investments, and, for incremental investments in qualified venture companies where the investor has already acquired minority voting rights using open innovation tax incentives, the incremental investment should bring the voting right ratio of the investor from below 50% to 50% or higher to be eligible.

    Other: A new system will be introduced to allow eligible acquiring companies to receive tax benefits continuously if some additional requirements (e.g., growth rate of venture company or scale of investment in venture company) are met within five years after the acquisition. It is expected that those proposed revisions will strongly accelerate the growth of venture companies in Japan.

  2. Global Minimum Taxation (Pillar Two): Under the 2023 tax reform, Japan will introduce the income inclusion rule (“IIR”), which is conceptually aligned with the IIR put forth by the OECD/G20 Inclusive Framework. The Japanese government also indicated that it is considering to include the UTPR and QDMTT in future tax reforms based on ongoing international discussions. The IIR will be applicable from a domestic company’s fiscal year beginning on or after April 1, 2024.

    Taxpayer: A domestic company that belongs to a “Specified Multinational Enterprise Group” (i.e., generally a group whose gross revenues are equivalent to EUR 750M or more in the last two of the four fiscal years immediately preceding the target fiscal year) is liable to pay national corporate income tax on the “Global Minimum Tax Amount” for each target fiscal year.

    Global Minimum Amount: The Global Minimum Amount will be calculated based on various factors outlined in the tax reform proposal and ultimately allocated to National Corporate Income tax and Local tax. De minimis exclusions and transitional safe harbour rules using certain information on the country-by-country.

    Other: Although the Japanese effective corporate income tax rate is generally approximately 30% - 35%, the following items could reduce the Japanese jurisdictional ETR: transactions that create tax deductions with no equal deduction from GloBE income; and, non-taxable/tax-deferred transactions (e.g., qualifying transfers between Japanese group companies under the group taxation regime).

For further information on these developments:

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