JAPAN Trends and Developments Contributed by: Yutaka Shimoo, Anderson Mōri & Tomotsune
• the CFC conducts its business primarily in the jurisdiction where its head office is located. In addition to the above, there are further detailed rules that apply depending on the type of business and the character of the CFC’s income. Recent case trends Because CFCs are governed by foreign law, disputes often arise where the Japanese tax authorities attempt to apply the CFC Rules to foreign entities whose legal form differs materially from a Japanese corporation. For example, the Tokyo District Court decision dated 12 September 2025 (the “TDC Decision”) considered whether a taxpayer should be treated as a quasi- shareholder of a foundation established under Liech - tenstein law. The court indicated that, in order to be treated as having shareholder status, beneficiaries must have made a contribution and, as a result of that contribution, obtained rights reflecting both: • personal economic interests (eg, the right to distri - butions or residual assets); and • elements of collective governance (eg, voting rights or rights to participate in management). On the other hand, the Tokyo High Court decision dated 14 April 2026 overturned the TDC decision. In practical terms, if the Supreme Court justified the tax disposition in this court case, it could support argu - ments that certain foreign non-equity entities may still be treated as being within the scope of the CFC Rules, and that a broad range of factors may be considered when assessing whether Japanese Residents have a controlling relationship. As another example, a tax tribunal decision dated 1 November 2024 addressed how to assess control over a US limited liability company (LLC) under the CFC Rules. The relevant legislation describes the con - trol relationship for foreign corporations by reference to either the “amount” of investment or the “number” of investment units. In the situation where a taxpayer in this case would receive a more favourable tax outcome if they were indirectly holding at least 25% of total investments in
the LLC, the taxpayer argued that they should be able to use the “number” of investment units for the control assessment by the wording of the relevant legislation, even if their share measured by investment amount was less than 25%. The tribunal stated that the “number” of investment units can be used only where each unit is structured as a uniformly subdivided fractional unit (ie, each unit is economically equivalent). The reasoning is gener - ally understood as reflecting the approach taken to Japanese membership-type entities where each unit tends to represent the same bundle of rights from both (i) the economic interest perspective, and (ii) the gov - ernance/participation perspective. In light of these cases, careful analysis of the legal and economic structure of the foreign entity is increasingly important when assessing the application of the CFC Rules. Trends in Cross-Border Digital Services Corporate income tax: introduction of the Global Anti-Base Erosion Rules (Pillar Two) in Japan As discussed in the OECD/G20 BEPS 2.0 project, increased digitalisation allows many foreign business operators to provide services to customers in Japan through online channels without a physical presence or a permanent establishment in Japan. Against this background, Japan introduced a global minimum tax regime through the 2023 and 2025 tax reforms. Japan’s rules are aligned with the Pillar Two framework and are designed to ensure an effective tax rate of at least 15% on the income of multinational enterprise (MNE) groups with consolidated annual rev - enue of at least EUR750 million. Japan’s global minimum tax regime consists primarily of three components: • the Income Inclusion Rule (IIR); • the Undertaxed Profits Rule (UTPR); and • the Qualified Domestic Minimum Top-up Tax (QDMTT). By contrast, Pillar One has not been implemented in Japan at this time.
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