3.9 Other Principal Corporate Taxation Regarding International Transactions
Section 3: Taxes in Japan
This section discusses the aspects of Japan’s tax system that are most relevant to a foreign corporation or individual investing in Japan. Emphasis is placed on corporate tax structures, tax treaties, and personal taxes.
3.1 Overview of Japanese Corporate Tax System for Investment in Japan
3.2 Domestic-Sourced Income
3.3 Overview of Corporate Income Taxes (Corporate Tax, Corporate Inhabitant Tax, Enterprise Tax)
3.4 Overview of Withholding Income Tax
3.5 Tax Treaties
3.6 Overview of Consumption Tax
3.7 Overview of Personal Tax System
3.8 Other Principal Taxes
3.9 Other Principal Corporate Taxation Regarding International Transactions
3.9.1 Foreign Tax Credits and System of Exclusion of Dividends from Foreign Subsidiaries
In order to avoid double taxation of income internationally, a domestic corporation is allowed to credit foreign taxes imposed on a certain income up to the creditable limit. This foreign tax credit system provides; (1) credits for foreign taxes paid directly by a domestic corporation on income earned by it outside Japan ("direct tax credits"); (2) credits for amounts of tax that have been specially reduced or exempted in a country under the provisions of a tax convention with that country ("tax-sparing credits"); and (3) credits for foreign taxes corresponding to the income of a specified foreign subsidiary or similar entity that has been combined with the income of a domestic corporation under so-called anti-tax haven taxation system.
A Foreign Dividend Exclusion system has been introduced to avoid international double taxation. This allows domestic corporations to exclude from their taxable income a certain amount of dividend income from qualifying foreign subsidiaries (i.e., firms that meet shareholding requirements and other conditions).
3.9.2 Transfer Pricing Taxation
In order to prevent corporations from setting the prices for transactions with a parent company or other overseas affiliate at a different amount from ordinary (i.e. arm's-length) prices so as to transfer profits overseas, a transaction is treated as having occurred at the arm's length price and the amount of tax calculated accordingly if the income derived from the transaction differs from the arm's length price.
3.9.3 Anti-Tax Haven Taxation: CFC (Controlled Foreign Company) Rule
In order to prevent domestic corporations from evading taxes by retaining income through a foreign subsidiary established in a so-called tax haven, a domestic corporation is taxed by including in its taxable income an amount corresponding to its interest in the retained earnings of that foreign subsidiary.
3.9.4 Thin-Capitalization Taxation
If a corporation's borrowing from an overseas controlling shareholder exceeds three times its equity (or an alternative reasonable ratio), interest on borrowing corresponding to the excess cannot be deducted from taxable income.
3.9.5 Japanese Earnings Stripping Rules
Deductions for payments of interest, etc. by corporations to parent companies or other affiliates will be disallowed to the extent that such interest exceeds 50% of the adjusted taxable income. However, this shall not apply in the case that the amount of interest paid to affiliates does not exceed 10 million yen or if interest payments to affiliates are not more than 50% of the total amount of that corporation’s interest expenses.
Note that where interest payments are subject to both these rules and the rules on thin-capitalization taxation described in 3.9.4 above would apply, the rules under which the non-deductible amount would be greater shall apply.
