Japan Tax Regime

Japan taxes domestic corporations on worldwide income (including foreign branch income) through several layers — the national corporate tax, the national local corporate tax, the prefectural and municipal enterprise tax (with a special corporate business tax) and the inhabitants' tax — which together give an effective statutory rate of roughly 30%–35% depending on company size and location. A 95% exemption for qualifying foreign dividends, a group tax-relief system and an extensive treaty network sit within a system administered nationally by the National Tax Agency and locally by the prefectures and municipalities.

Individuals are taxed on a national progressive scale to 45%, plus a 2.1% reconstruction surtax and a flat 10% local inhabitants' tax, for a top combined rate near 56%, with financial income taxed separately at about 20%. A company is resident if its head office or main office is in Japan.

1.1 Sources of law and treaties

The Corporation Tax Act, the Income Tax Act, the Local Tax Act, the Consumption Tax Act and the annual Tax Reform Acts govern the system, administered by the National Tax Agency (NTA) and local governments. An extensive treaty network and the OECD multilateral instrument apply, and NTA circulars and rulings guide interpretation.

1.2 Recent developments

The most consequential recent and pending changes are:

A special corporate tax to strengthen defence capabilities, for fiscal years beginning on or after 1 April 2026, at 4% of the national corporate tax (after a JPY 5 million basic deduction).

Implementation of the OECD Pillar Two regime — an income inclusion rule for consolidated accounting years from 1 April 2024, and a qualified domestic minimum top-up tax and an undertaxed-profits rule for fiscal years from 1 April 2026 — for groups with revenue of at least EUR 750 million.

An increased SME preferential rate (17% rather than 15% on the first JPY 8 million) where company income exceeds JPY 1 billion, and size-based enterprise-tax changes capturing more large companies.

Wage-increase and domestic-investment tax credits as part of recent reform packages.

Headline statutory corporate income tax rate for a resident company. Where sub-national (state, provincial, cantonal or municipal) corporate taxes apply, the combined rate reported by the OECD is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Top marginal statutory personal income tax rate on employment income for a resident individual. Where sub-national (state, provincial, cantonal or municipal) income taxes are a standard part of the system, the combined top rate is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

2.1 Residence and scope

A domestic corporation (head office in Japan) is taxed on worldwide income, including foreign branch income; a foreign corporation is taxed only on Japan-source income, and one with a permanent establishment only on income attributable to that PE. There is no separate branch-profits tax. The corporate base is computed from the financial statements adjusted for tax under the Corporation Tax Act.

2.2 The layers of corporate tax and the effective rate

National corporate tax is 23.2% for companies with paid-in capital over JPY 100 million. A national local corporate tax adds 10.3% of the corporate tax; the prefectural/municipal enterprise tax (with the special corporate business tax) and the inhabitants' tax add further layers (the inhabitants' tax also has a per-capita component). Because enterprise tax is deductible, the combined effective statutory rate in Tokyo is about 31.5% for large companies (paid-in capital over JPY 100 million) and about 35.4% for smaller companies, before the new defence surtax.

2.3 The SME preferential rate

Companies with paid-in capital of JPY 100 million or less (other than subsidiaries of very large groups) pay a reduced national corporate tax of 15% on the first JPY 8 million of income (17% where income exceeds JPY 1 billion), against the statutory 19% small-company rate; the preferential rate does not apply to companies using the group tax-relief system. Size-based enterprise tax can nonetheless apply to capital-rich SMEs, so loss-making large companies may still owe enterprise tax.

2.4 The foreign-dividend exemption

To relieve double taxation of repatriated profits, 95% of dividends a Japanese company receives from a foreign company in which it has held at least 25% (or less under a treaty) for at least six months are excluded from taxable income — an effective participation exemption for foreign subsidiary dividends. Domestic inter-company dividends are also wholly or partly excluded depending on the size of the holding.

2.5 Income determination and losses

Taxable income follows the accounts adjusted for tax, with depreciation by the declining-balance or straight-line method at statutory rates, and specific limits on entertainment, directors' remuneration and certain provisions. Tax losses of large companies carry forward for ten years but can offset only 50% of taxable income in a year (SMEs may offset 100%); a one-year carryback is available mainly for SMEs.

2.6 Earnings stripping and thin capitalisation

Two rules limit related-party interest: the earnings-stripping rule caps the deduction of net interest expense at 20% of adjusted income (broadly tax-EBITDA), and the thin-capitalisation rule denies interest on related-party debt exceeding three times the related party's equity. The more restrictive of the two applies, protecting the Japanese tax base against excessive intra-group debt.

2.7 The group tax-relief system

Since fiscal 2022, the group tax-relief system (which replaced the former consolidated-taxation regime) allows wholly owned domestic groups to offset profits and losses among members while each company files its own return, simplifying compliance relative to full consolidation. Intra-group asset transfers within a 100% group are tax-deferred under separate group-taxation rules.

2.8 Controlled foreign companies

Japan's anti-tax-haven (CFC) rules attribute to a Japanese parent the income of a low-taxed foreign subsidiary — broadly where the foreign effective rate is below a trigger (around 20%, or 27% for ‘paper’ companies without substance) — unless the subsidiary meets economic-activity and other exemption tests. The rules are detailed and central to Japanese outbound structuring.

2.9 Transfer pricing

Cross-border related-party transactions must be priced at arm's length under rules aligned with the OECD Guidelines, with master-file, local-file and country-by-country documentation for larger groups and a specific approach to hard-to-value intangibles. The NTA audits transfer pricing actively, and advance pricing agreements (bilateral and unilateral) are widely used.

2.10 Incentives, the defence surtax and Pillar Two

Japan offers an R&D tax credit (a percentage of total and incremental research expenditure, within caps), wage-increase and domestic-investment credits, and special-zone incentives. From fiscal years beginning on or after 1 April 2026 a special corporate tax to strengthen defence capabilities applies at 4% of national corporate tax (after a JPY 5 million deduction). Under Pillar Two, the income inclusion rule applies for consolidated years from 1 April 2024, and the qualified domestic minimum top-up tax and undertaxed-profits rule from 1 April 2026, for groups with revenue of at least EUR 750 million.

3.1 Residence and rates

Individuals are classified as non-residents, non-permanent residents (resident for five years or less in the last ten, taxed on Japan-source and remitted foreign income) or permanent residents (taxed on worldwide income). National income tax is progressive from 5% to 45%, plus a 2.1% reconstruction surtax on the national tax and a flat 10% local inhabitants' tax, giving a top combined marginal rate of about 55.95%. Employment income is collected through withholding and year-end adjustment.

Indicative; a separate financial-income schedule applies. As-of June 2026.

3.2 Financial income

Interest, dividends and capital gains on listed securities are generally taxed separately at a flat 20.315% (15% national income tax, 0.315% reconstruction surtax and 5% local tax), rather than at the progressive rates, with withholding at source and an optional separate-declaration system. A tax-favoured small-investment account (NISA) shelters qualifying personal investment returns, encouraging household investment.

3.3 Inheritance, gift and the absence of a wealth tax

Japan levies no annual net wealth tax, but inheritance and gift taxes are among the heaviest in the world, with inheritance tax rising to a top rate of 55% above generous basic deductions, and a broad scope that can reach the worldwide assets of long-term residents and, in some cases, of heirs. Gift tax (also up to 55%) and special regimes for lifetime gifts and business succession apply, making succession planning a significant concern.

Dividends paid to non-residents are subject to 20.42% withholding (15.315% for listed shares), interest to 15.315% or 20.42%, and royalties to 20.42% (each including the reconstruction surtax), reduced or eliminated by Japan's extensive treaty network (often to 0%–10%, with nil rates for qualifying parent dividends and certain interest and royalties under modern treaties). Representative outcomes:

5.1 Anti-deferral, pricing and financing

The anti-tax-haven (CFC) rules (Section 2.8), transfer-pricing rules (Section 2.9) and the earnings-stripping and thin-capitalisation rules (Section 2.6) form the core of Japan's outbound and inbound framework, attributing low-taxed foreign income, requiring arm's-length pricing and capping related-party interest. Anti-hybrid considerations and the foreign-dividend rules limit deduction/non-inclusion outcomes on repatriated profits.

5.2 Anti-avoidance and disclosure

Japan relies on specific anti-avoidance provisions and a doctrine allowing the authorities to disregard unreasonable transactions of family and reorganised companies, rather than a single broad general anti-avoidance rule. It applies the OECD treaty-abuse and exchange-of-information standards, including the principal-purpose test in treaties, automatic exchange of financial-account information and country-by-country reporting.

5.3 Foreign tax relief

Double taxation is relieved by the 95% foreign-dividend exemption for qualifying subsidiary dividends and, otherwise, by a foreign tax credit limited to the Japanese tax on the foreign income (with indirect credit largely replaced by the dividend exemption). Treaties allocate taxing rights and provide a mutual-agreement procedure widely used alongside Japan's advance-pricing programme.

6.1 Consumption tax

Japan's consumption tax (a value-added tax) is charged at a standard rate of 10% (7.8% national plus 2.2% local), with a reduced 8% rate for food and beverages (excluding dining out) and newspapers. The qualified-invoice (‘invoice’) system governs input-tax credits, and registration, reverse-charge and cross-border digital-service rules apply. Consumption tax is a major and growing revenue source.

6.2 Property, registration and stamp taxes

A fixed-asset tax (around 1.4%) and a city-planning tax are levied annually on land, buildings and depreciable business assets, real-estate acquisition tax applies on property purchases, and registration and licence tax applies on registrations of real estate and companies. Stamp duty applies to specified documents, and a business-premises tax applies in large cities.

6.3 Social insurance and other

Social-insurance contributions (health, pension, employment and long-term-care insurance) are shared between employer and employee up to caps and are a significant cost of employment. Various national and local levies — including a forest-environment tax and motor-vehicle taxes — apply; Japan levies no annual net wealth tax.

7.1 Filing and payment

Tax is administered by the NTA under self-assessment. Companies file the national corporate-tax return and the local enterprise- and inhabitants'-tax returns within two months of the fiscal year-end (a one-month extension is generally available), with interim returns for the first half-year. Individuals file the national income-tax return between mid-February and 15 March, with most employees' tax settled by withholding and year-end adjustment; consumption-tax returns follow the business's filing cycle.

7.2 Blue-form filing, audit and limitation

Companies and individuals that keep proper books may file ‘blue’ returns, gaining loss-carryforward and other benefits. The general assessment period is five years (seven for substantial under-reporting and longer for fraud), and the NTA conducts field audits that are a regular feature of corporate tax life. Delinquency and under-payment additions and penalties apply, scaled to culpability and voluntary correction.

7.3 Disputes

A taxpayer first requests a reinvestigation by the tax office or files a request for review with the National Tax Tribunal, then may bring an action before the district court, high court and Supreme Court. The mutual-agreement procedure and arbitration under treaties address cross-border double taxation, supported by Japan's advance-pricing-agreement programme.

Indicative deadlines. As-of June 2026.

9.1 Entity choice and capitalisation

Foreign investors operate through a kabushiki kaisha (KK) or the simpler godo kaisha (GK), or through a branch taxed on income attributable to its Japanese permanent establishment. Paid-in capital is itself a planning variable: it drives the size-based enterprise tax, eligibility for the SME national rate and the per-capita inhabitants' tax, so the level of capitalisation is chosen with the tax thresholds in mind.

9.2 Holding and financing structures

Repatriation of foreign profits benefits from the 95% foreign-dividend exemption, while wholly owned domestic groups use the group tax-relief system to offset profits and losses. Financing must respect the more restrictive of the 20%-of-income earnings-stripping cap and the 3:1 thin-capitalisation rule, and related-party pricing is heavily audited, with bilateral advance pricing agreements widely used to manage exposure.

9.3 A worked illustration

A Tokyo company with paid-in capital over JPY 100 million and JPY 500 million of profit bears national corporate tax (23.2%), national local corporate tax, enterprise tax and inhabitants' tax for an effective statutory rate of about 31.5%; from fiscal years beginning on or after 1 April 2026 a 4% defence-capability surtax on the corporate-tax amount (after a JPY 5 million deduction) applies on top.

9.4 Compliance and the minimum tax

Returns are due within two months of the fiscal year-end (a one-month extension is generally available), blue-form filing unlocks loss carryforward and other benefits, and the National Tax Agency's field audits are a regular feature of corporate life. Large multinational groups must layer the Pillar Two income inclusion rule (and, from April 2026, the qualified domestic minimum top-up tax and the undertaxed-profits rule) over the ordinary multi-layer rates.