Japan’s 2024 tax reform, passed by the parliament on 28 March 2024, includes the introduction of a new innovation box, as well as changes to the rules governing entertainment expenses and the tax credit for large enterprises that increase wages by a certain amount. The two latter measures are effective as from 1 April 2024 and the innovation box will apply for financial years starting on or after 1 April 2025.
The scope of IP subject to the innovation box includes patent rights and copyrights of AI-related programmes and the scope of qualifying taxable income will be licence income and capital gains arising from IP rights. Capital gains derived from the sale of IP to foreign entities and domestic related parties and license income received from related parties will be excluded from innovation box taxation.
The deductible amount will be computed as follows:
Deductible amount for corporate tax purposes = Taxable income amount resulting from specific IP rights transactions x (Qualified expenditure for IP development activities directly related to the specific IP rights transactions / Total expenditure for IP development activities directly related to the specific IP rights transactions) x 30%
The innovation box will apply for a seven-year period following the effective date, i.e., 1 April 2025 through 31 March 2032.
Under Japan’s rules governing the deductibility of entertainment expenses, small and medium-sized enterprises (i.e., SMEs, generally those with paid-in capital of JPY 100 million or less) can deduct entertainment costs up to JPY 8 million or 50% of meal expenses, whichever is higher; and large companies (i.e., generally those with paid-in capital that exceeds JPY 100 million) may not deduct entertainment costs at all. Regardless of the above, companies may deduct meal and beverage expenses up to a specific threshold, which has now been raised to JPY 10,000 per person.
To qualify for the deduction, the following information must be recorded in the company’s accounting records (i.e., general ledger, receipts or invoices, etc.) and retained to demonstrate that the expenses are for qualifying meals and beverages:
The pre-reform position is as follows:
Satoshi Tsuchiya
Chiemi Kato
BDO in Japan
Innovation box
The new innovation box provides benefits that should encourage companies to conduct their R&D activities in Japan and strengthen the competitive ability of Japan as a site location for such activities. The innovation box provides for a 30% deduction for qualifying income from domestic transfers or domestic or international licences of intellectual property (IP) rights, provided the company carries out the R&D activities in Japan.The scope of IP subject to the innovation box includes patent rights and copyrights of AI-related programmes and the scope of qualifying taxable income will be licence income and capital gains arising from IP rights. Capital gains derived from the sale of IP to foreign entities and domestic related parties and license income received from related parties will be excluded from innovation box taxation.
The deductible amount will be computed as follows:
Deductible amount for corporate tax purposes = Taxable income amount resulting from specific IP rights transactions x (Qualified expenditure for IP development activities directly related to the specific IP rights transactions / Total expenditure for IP development activities directly related to the specific IP rights transactions) x 30%
The innovation box will apply for a seven-year period following the effective date, i.e., 1 April 2025 through 31 March 2032.
Entertainment expenses
The maximum amount of certain food and beverage expenses that may be deducted in computing taxable income is increased from JPY 5,000 per person to JPY 10,000 per person.Under Japan’s rules governing the deductibility of entertainment expenses, small and medium-sized enterprises (i.e., SMEs, generally those with paid-in capital of JPY 100 million or less) can deduct entertainment costs up to JPY 8 million or 50% of meal expenses, whichever is higher; and large companies (i.e., generally those with paid-in capital that exceeds JPY 100 million) may not deduct entertainment costs at all. Regardless of the above, companies may deduct meal and beverage expenses up to a specific threshold, which has now been raised to JPY 10,000 per person.
To qualify for the deduction, the following information must be recorded in the company’s accounting records (i.e., general ledger, receipts or invoices, etc.) and retained to demonstrate that the expenses are for qualifying meals and beverages:
- Date the expense was incurred;
- Name of the customer, supplier or other party that relates to company’s business, and its relationship with the company;
- Amount of the expense, as well as the name and address of the venue; and
- Any other information needed to evidence that the expense is for meals and beverages.
Tax credit to encourage salary increases
The tax credit granted to companies that increase their wages expenditure from the previous fiscal year is expanded to incentivise them to raise employee wages and a new definition is provided for a medium-sized company.The pre-reform position is as follows:
- SMEs: Small companies that increase the amount of their annual wages for all domestic employees by 1.5% can basically enjoy the benefit of the tax credit. The tax credit is calculated as 15% to 40% of the increase in the amount of annual wages (depending on the extent to which the percentage increase in wages and certain employee training and educational expenses exceeds the relevant threshold), up to 20% of the amount of the corporate tax liability for the year.
- Other companies: In principle, companies that increase the amount of their annual wages for domestic employees who have worked for two consecutive years and meet certain requirements by more than 3% can also enjoy the benefit of the tax credit. The tax credit is calculated as 15% to 30% of the increase in the amount of annual wages (depending on the extent to which the percentage increase in wages and certain employee training and educational expenses exceeds the relevant threshold), up to 20% of the amount of the corporate tax liability for the year.
| Small corporation | Medium-sized corporation*(New definition) | Other | |
| Maximum tax credit as a percentage of the increase in wages | 45% | 35% | 35% |
| Cap | Up to 20% of the amount of the corporate tax for the year | ||
| New tax benefit | Five-year carryforward deduction | ||
| *A corporation with no more than 2,000 employees and that meets certain requirements. | |||
Satoshi Tsuchiya
Chiemi Kato
BDO in Japan