2025 Japan Tax Reforms Enacted – Taxation highlights for Inbound Businesses

Japan tax newsletter 18 April 2025

On 20 December 2024, Japan’s government (a coalition comprised of the Liberal Democratic Party and Komeito) released the 2025 Tax Reform Outline. These tax reforms were passed into legislation on 31 March 2025.

This newsletter provides an introduction to key tax reforms that are relevant for Inbound groups, i.e., overseas headquartered groups that operate (or invest) in Japan typically through Japanese subsidiaries and branches.

Please click here to access the overall 2025 Japan tax reform outline as released in the EY Japan tax newsletter published on 26 February 2025.

Please click here to access another EY 2025 tax reform newsletter that is focused on finance- and real estate-related tax issues.

After losing seats in the lower house of parliament in last year’s election, Japan's ruling parties were forced to negotiate with opposition parties on the details of the 2025 tax reforms.

The main point of contention was the tax-free income threshold for individuals, which has been JPY1.03 million. The Democratic Party for the People (DPP) objected to the proposed JPY 1.23 million threshold, advocating for a higher amount of JPY 1.78 million. In the end, the parties agreed to further discussions which resulted in additional reform bills, that are also now approved and have become law. The amount of the threshold will increase to JPY 1.6 million (including a basic deduction JPY 950,000 and an employment income deduction of JPY 650,000).

The new laws also include adjustments to corporate and tobacco taxes, aimed at funding increased defense spending. The “Special Defense Corporation Tax” is a 4% surtax effective from April 2026. The increase in defense spending is a response to what Japan perceives as growing threats in the region. Foreign Minister Takeshi Iwaya has said, “Japan now faces the most severe and complex security environment since the end of World War II.”

The Accounting Standards Board of Japan (ASBJ) recently issued new standards for leases. Lessees will need to adopt new recording practices, which include the on-balance sheet inclusion of leases. However, under the new laws, the current treatment of leases will be codified for tax purposes, meaning that the tax treatment will diverge from the accounting treatment. This shift in lease accounting is expected to have significant tax implications for corporations, as it will alter the timing and recognition of expenses and liabilities.

There are also changes to the corporate income tax treatment of corporate reorganizations, particularly spin-offs. 

In terms of international taxation, the now enacted 2025 tax reforms will further align Japan’s tax rules with the OECD’s Global Minimum Tax regime, comprising international measures intended to combat tax base erosion and ensure a minimum 15% tax on the profits of multinational entities. The new laws will introduce the undertaxed profits rule (UTPR) and the qualified domestic minimum top-up tax (also referred to as a QDMTT).

Furthermore, as well as increasing the tax allowance thresholds for individuals (as mentioned above) there will also be other salary deductions to support families with young adult dependents. The angel investor taxation system will also be modified to provide potential refunds for investments in startups.

In summary, the reforms reflect Japan's move toward global tax compliance and enhanced fiscal sustainability while providing support for certain individuals.

Contents

1. Corporate taxation

(1) Special Defense Tax
(2) Leasing

2. International taxation

3. Individual income taxation

(1) Basic Deduction and income thresholds
(2) Enhancements to NISA
(3) Revisions to iDeCo savings plan
(4) Extension of Reinvestment Period Under Angel Investor Tax Rules