2025 Japan tax reform outline - Translation of Japan tax newsletter which was issued on 22 Jan 2025

Japan tax newsletter 26 February 2025

On 20 December 2024, Japan’s ruling party (a coalition comprised of the Liberal Democratic Party and Komeito) released the 2025 Tax Reform Outline (below “the Outline”). This newsletter provides an overview of the major amendments and revisions contained in the Outline.

The centerpiece of the 2025 tax reform is the strategic shift towards an economy energized by salary growth and robust investment, aptly labeled as “Realizing a Growth-Oriented Economy Driven by Wage Increases and Investment.”

This shift is designed to address the evolving economic and societal frameworks of present day. Amidst inflationary pressures, this year’s reform will recalibrate the tax obligations individuals face by refining key elements such as the basic exemption and employment income deductions. Moreover, this year’s reform aims to invigorate capital expenditures by ambitious small and medium-sized enterprises (“SMEs”), fostering a “virtuous cycle of growth” within regional economies. To this end, the SME investment incentive tax rules will be further revised.

Keeping pace with the economy’s global and digital transformation, this year’s reform will introduce new revisions for global minimum taxation (“GMT”), including the undertaxed profits rule (“UTPR”) and the qualified domestic minimum top-up tax (“QDMTT”), while also reassessing the consumption tax exemption rules for foreign tourists. In addition, the establishment of a “special corporation income tax for national defense” (tentative name) is proposed as a fiscal strategy to secure funds for a national defense build-up.

Please note that the contents of this newsletter may be partially revised, deleted or added in response to the outcome of discussion between the ruling and opposition parties and future Diet deliberations on the reform bill.

Contents

Corporate taxation

1. Revision of SME-related tax rules
2. Revision of lease-related tax rules
3. Clarification of calculation method for adjustment accounts in relation to assets transferred as result of a non-qualified merger
4. Distribution ratios for spin-offs of wholly-owned subsidiaries under the group relief system
5. Other

International taxation

1. Aligning with global minimum tax rules
2. Revision of Japanese Controlled Foreign Company (“JCFC”) rules

Individual income taxation and asset taxation

1. Recalibrating tax obligations amid inflationary trends
2. Other major revisions

Consumption Taxation

  Revisions to consumption tax exemption rules for foreign tourists

Tax rules and measures to secure funds for national defense build-up


Tax administration

1. Revision of the electronic book preservation act (e-retention) rules
2. Enhanced convenience of e-Tax