JAPAN Law and Practice Contributed by: Junichi Ueda, Etsuko Hara, Nobuto Shirane, Takahiro Hayase, Yutaka Shimoo and Miki Goto, Anderson Mori & Tomotsune
5.3 Available Tax Credits/Incentives Corporations can credit the amount of income tax withheld at source from the amount of cor - porate income tax imposed. Income tax withheld at source is theoretically recognised as corpo - rate income tax that is collected in advance and therefore this amount can be deducted from the final tax amount. Domestic corporations are eligible to credit the amount corresponding to corporate income taxes paid in foreign countries from the amount of corporate income tax imposed in Japan – although the amount of this credit is subject to certain limitations. The purpose is to avoid the multiple imposition of tax in different coun - tries on the same income. Foreign corporations that have permanent establishments in Japan are also allowed to claim foreign tax credit with regard to income, which is attributable to their permanent establishments in Japan and taxable status in Japan. There are also various tax exemptions or tax reductions that encourage investments and R&D in Japan. By way of example, companies that file a blue form tax return are eligible to credit a certain percentage of R&D expenditure from the amount of corporate income tax. 5.4 Tax Consolidation There are two regulatory frameworks in Japan in respect of a group taxation scheme: the full controlling interest framework and the group cal - culation framework. The full controlling interest framework is man - datory and applies to intra-group transactions (including transactions involving transfers of assets, losses, dividends and interest) where all companies in the group are wholly owned (whether directly or indirectly) by the ultimate
parent of the group, regardless of whether the ultimate parent is a foreign or domestic com - pany or individual, provided that the parties to the relevant transaction are domestic compa - nies. Under this regulatory framework, taxation on intra-group profits from transfers of certain kinds of assets – such as fixed assets, securities, monetary claims and deferred assets (“qualify - ing assets”) – is deferred until those assets are transferred outside the group. Additionally, intra-group contributions, dona - tions and dividends are disregarded. If the full controlling interest framework is applied, certain tax incentives to which corporations with stated capital of JPY100 million or less are normally entitled would no longer be available to an SME that is fully controlled by a large corporation with a stated capital of JPY500 million or more. On the other hand, the group calculation frame - work – if approved by the Commissioner of the National Tax Agency (NTA) – is only applicable to groups in which all companies are wholly owned (whether directly or indirectly) by the ultimate parent of the group and where the companies of the group consist only of domestic companies. Under this framework, corporate income tax is calculated on a group-wide basis (ie, offsetting profit and loss among the group corporations), but is payable by each group corporation. For group corporations, unrealised profits and losses of qualifying assets will not be imputed to taxable income or losses, as long as certain requirements (which are consistent with those of tax-qualified reorganisation) are met (eg, where these subsidiaries are expected to remain direct - ly or indirectly wholly owned). The Certain Net Operating Loss (NOL) Limitation or Japanese Separate Return Limitation Year Rule is also applied to group corporations.
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