2025 Japan tax reform measures related to global minimum tax come into effect - UTPR and QDMTT

2025 Japan tax reforms were passed into legislation on 31 March 2025, and are set to take effect on 1 April.

The Undertaxed Profits Rule (UTPR) and the Qualified Domestic Minimum Top-up Tax (QDMTT), two global minimum tax regulations, will apply to accounting periods starting on or after 1 April 2026.

UTPR

The UTPR serves as a tax mechanism that imposes additional taxes when the effective tax rate (ETR) in a jurisdiction, where a constituent entity of a multinational enterprise (MNE) group is based, is below the minimum tax rate of 15%. The UTPR top-up tax is applied to the constituent entity in jurisdictions that have implemented UTPR regulations, specifically when a residual top-up tax arises after the application of the Income Inclusion Rule (IIR).

The UTPR top-up tax for each jurisdiction is calculated by allocating the UTPR top-up tax based on factors that represent the group's operational substance (such as number of employees and the book value of its tangible assets). Once allocated, each jurisdiction has the discretion to determine its specific taxation methods in the jurisdiction within the framework of the model rules. For the UTPR top-up tax allocated to Japan, domestic corporations and foreign corporations with permanent establishments will be subject to each share of taxes based on its number of employees and the book value of its tangible assets.

Additionally, entities may be eligible for a five-year exemption to assist them during the initial stages of their international business activities, provided certain conditions are met, such as having six or fewer jurisdictions where their constituent entities are based.

QDMTT

The QDMTT serves as a tax mechanism that imposes additional taxes on local constituent entities within MNE groups to ensure their domestic ETR meets the minimum tax rate of 15%. This mechanism takes precedence over the application of other jurisdictions' IIR or UTPR.

If there is an international agreement in place that equates the DMTT to the QDMTT, the top-up tax related to local constituent entities will be deemed as zero from the perspective of other jurisdictions. In such cases, even if tax filings for IIR are required in other jurisdictions, calculations of the ETR and tax amounts required by the laws of those jurisdictions will not be necessary.

If the ETR in Japan (domestic ETR) does not meet the minimum tax rate of 15%, the QDMTT amount will be, in principle, calculated as follows:
QDMTT = (Net GloBE income of the domestic group - substance-based income exclusion) × (15% - domestic ETR)

The resulting QDMTT amount will be allocated to each constituent entity according to their ”attribution” ((GloBE income of the constituent entity × 15%) - adjusted covered taxes for the constituent entity).

Moreover, for the calculation of the QDMTT, certain current taxes/deferred taxes which are imposed in jurisdictions other than Japan (e.g., the local tax imposed on a foreign entity with a permanent establishment in Japan for the income attributable to that permanent establishment) will not be allocated to Japanese constituent entities (i.e., no “push-down” will occur).

Similar to the UTPR, an exemption for the initial stages of international business activities is available; however, if the IIR of another jurisdiction is imposed on a constituent entity located in Japan, the exemption for the QDMTT will not apply. This is because the QDMTT is considered to act as a shield against taxation by foreign IIR/UTPR regulations.

Furthermore, similar to the IIR, a transitional CbCR safe harbour has also been established. Specifically, for accounting years that begin on or before 31 December 2026 (limited to those that end on or before 30 June 2028), the QDMTT can be set to zero if any of the following tests are satisfied: 1) de minimis test, 2) simplified ETR test, or 3) routine profits test.

Please refer to page 10 of EY’s 2025 Japan tax reform outline for more details on these revisions.