Global Tax Alert | 7 January 2015

Japan releases 2015 tax reform outline

  • Share

On 30 December 2014, Japan's coalition leading parties released the 2015 Tax Reform Outline (Outline). The Outline includes both favorable proposals, such as a corporate tax rate reduction and unfavorable proposals, such as lowering an annual net operating loss (NOL) deduction limitation. A tax reform bill will be prepared based on this Outline. The bill will be submitted to the Diet and enacted by the end of March 2015. This Alert summarizes key provisions relevant to multinational corporate taxpayers.

Corporate tax rate reductions

  • The national corporate tax rate will be reduced to 23.9% from 25.5% for taxable years beginning on or after 1 April 2015.
  • The local enterprise tax rate applicable to income base will be reduced to 6% from 7.2% for taxable years beginning on or after 1 April 2015.
  • The combined national and local effective corporate tax rate will be reduced to 32.11% from the current 34.62%.1
  • A further rate cut is planned in a 2016 tax reform, which would make the combined effective tax rate 31.33%.
  • The Government is planning to lower the combined effective tax rate to below 30% over several years.

Amendment to NOL deduction and carryover period

  • A 65% limitation for an annual NOL deduction (compared to the current 80%) is proposed for taxable years between years beginning on or after 1 April 2015 and years beginning on or before 31 March 2017. A further reduction to 50% will apply to taxable years beginning on or after 1 April 2017.
  • The current 9-year carryover period is extended to 10 years for NOLs incurring for taxable years beginning on or after 1 April 2017.
  • Small and medium enterprises (SMEs)2 are eligible for a 100% NOL deduction and a 9-year/10-year NOL carryover period.
  • A special rule will apply to a newly established corporation and a corporation emerging from bankruptcy, which allows a 100% NOL deduction for a seven-year period.

Amendment to domestic dividend received deduction (DRD) rule

  • The proposed new DRD rates apply to domestic shareholders holding 33.33% or less interest in a Japanese distributing company as follows:3

Ownership percentage



At least 25% and 33.33% or less



More than 5% and less than 25%


5% or less


* The amount of interest expense allocable to the acquisition cost of stocks will be reduced from the amount of DRD.

  • For insurance companies, the applicable DRD rate for stocks owned 5% or less will be 40%.

Reduction in income tax base (local enterprise tax)

  • Local enterprise tax consists of three elements – capital, value added and income. While the total combined tax revenues are intended to remain unchanged, income base percentages over a total enterprise tax are expected to be reduced from the current 75% to 62.5% and 50% for 2015 and 2016, respectively.

Amendment to research and development (R&D) tax credit

  • The R&D tax credit limitation4 will be reduced from the current 30% to 25% of national corporate tax liability of a taxable year.
  • A new R&D tax credit limitation of up to 5% of national corporate tax liability will be introduced for special experiment and research expenses.
  • The carryover of unused creditable amount will be repealed.

International taxation

  • The proposal will change the effective tax rate from the 20% or less to less than 20% when determining a foreign tax haven subsidiary status.
  • A 95% participation exemption for dividends paid by a foreign subsidiary will no longer be available for dividends that are deductible in the country where the foreign subsidiary is located.

Consumption tax

  • The second phase of the consumption tax rate increase (from 8% to 10%) will be postponed for 18 months to 1 April 2017.
  • Provision of digital services (e.g., e-books, internet-delivery of music, advertisement, etc.) provided by a foreign person to Japanese customers will be subject to consumption tax from 1 October 2015. For business to consumer transactions, the foreign service provider will be required to register as a taxable entity and file consumption tax returns. For business to business transactions, a reverse-charge mechanism will be introduced, which requires a Japanese service recipient to declare taxable sales and related tax due on its consumption tax return.


1. Some local jurisdictions impose higher local inhabitant and enterprise tax rates than the standard rate. The current combined national and local effective tax rate applicable to a corporation located in Tokyo area with capital of more than JPY100 million is 35.64%, and this will be reduced to 33.1% based on the Outline.

2. An SME is generally defined as an entity with capital of JPY100 million or less. An entity that is wholly owned by a shareholder whose capital amount is JPY500 million or more is excluded from the SME regime.

3. Shareholders who hold more than 33.33% interest are eligible for a 100% DRD.

4. The change is only for the base credit portion. For additional information, see EY Tax Alerts, Japan releases 2012 tax reform outline, dated 15 December 2011 and Japan's tax reform outline announced, dated 4 October 2013.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Co., Tokyo
  • Emi Kono
    +81 3 3506 2182
  • Hiroyuki Nishida
    +81 3 3506 2026
Ernst & Young LLP, Japanese Desk, New York
  • Kojiro Oka
    +1 212 773 0228
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
  • Kaz Parsch
    +1 212 773 7201
  • Bee-Khun Yap
    +1 212 773 1816

EYG no. CM5089