Japan’s 2026 tax reform proposals presented on 19 December 2025 and approved by the ruling coalition on 24 December include changes to the corporate income tax, international tax, personal income tax and consumption tax (i.e., Japanese VAT/GST). The corporate income tax and international tax proposals may affect multinational enterprises with operations in Japan:
The tax system to promote investment in specified productivity-enhancing equipment is a preferential tax measure to encourage companies to invest in equipment that improves productivity, thereby strengthening the competitiveness of Japan’s overall economy. Specifically, if a “blue return corporation” acquires specified productivity-enhancing equipment certified by the Minister of Economy, Trade and Industry between the effective date of the amended Industrial Competitiveness Enhancement Act and 31 March 2029 and puts it into business use, the company can choose to apply special depreciation (100% of the acquisition cost, immediate depreciation) or a tax credit (4% or 7% of the acquisition cost, with a deduction limit of 20% of the corporate tax amount).
A new “strategic technology” category will be established under the R&D tax system, which will provide for a tax credit of 40% for key industrial technology R&D expenses under the Industrial Technology Enhancement Act and a 50% credit for special key industrial technology R&D expenses. The tax credit amount would be capped at 10% of the corporate tax amount, and any excess credit would be able to be carried forward for three years. The upper limit of the R&D credit rate would be maintained for general category R&D, but the credit rate curve and the variable measures for the credit limit would be revised. In addition, a limit would be set on the amount eligible for the tax credit for outsourced overseas commissioned R&D.
Changes are proposed to the tax measures to encourage wage increases. Under the current rules, corporations are classified into three categories: small and medium-sized enterprises (SMEs), medium-sized enterprises and large enterprises, and the applicable requirements differ for each type of entity. The 2026 tax reform would make the following amendments to the rules:
The 2026 tax reform includes proposals to revise the global minimum taxation rules introduced in 2023. In respect of the calculation of the adjusted covered tax amount when deferred tax assets (DTA) or deferred tax liabilities (DTL) are recorded in the covered fiscal year before the transition fiscal year, the following DTA or DTL will be deemed not to exist:
The 2026 tax reform would make the following adjustments to the conditions for applying this special provision:
Kenichiro Kishi
BDO in Japan
- Establishment of a tax system to promote investment in specified productivity-enhancing equipment
- Expansion and revision of the research and development (R&D) tax regime
- Abolition and revision of the tax system to promote wage increases
- Revision of the tax system to promote domestic production in strategic fields
- Revision of the open innovation investment promotion tax system
- Revision of the carbon-neutral investment promotion tax system
- Revision of the partial spinoff tax system
- Establishment of a special provision regarding the retention of documents for intercompany transactions within a corporate group
- Changes to the global minimum taxation rules (for prior coverage, see the article in the February 2025 issue of Corporate Tax News)
- Revision of the controlled foreign company (CFC) rules
- Revision of special tax provisions for foreign partnership members.
Tax System to Promote Investment in Specified Productivity-Enhancing Equipment
The tax system to promote investment in specified productivity-enhancing equipment is a preferential tax measure to encourage companies to invest in equipment that improves productivity, thereby strengthening the competitiveness of Japan’s overall economy. Specifically, if a “blue return corporation” acquires specified productivity-enhancing equipment certified by the Minister of Economy, Trade and Industry between the effective date of the amended Industrial Competitiveness Enhancement Act and 31 March 2029 and puts it into business use, the company can choose to apply special depreciation (100% of the acquisition cost, immediate depreciation) or a tax credit (4% or 7% of the acquisition cost, with a deduction limit of 20% of the corporate tax amount).
R&D Tax Regime
A new “strategic technology” category will be established under the R&D tax system, which will provide for a tax credit of 40% for key industrial technology R&D expenses under the Industrial Technology Enhancement Act and a 50% credit for special key industrial technology R&D expenses. The tax credit amount would be capped at 10% of the corporate tax amount, and any excess credit would be able to be carried forward for three years. The upper limit of the R&D credit rate would be maintained for general category R&D, but the credit rate curve and the variable measures for the credit limit would be revised. In addition, a limit would be set on the amount eligible for the tax credit for outsourced overseas commissioned R&D.
Tax System to Promote Wage Increases
Changes are proposed to the tax measures to encourage wage increases. Under the current rules, corporations are classified into three categories: small and medium-sized enterprises (SMEs), medium-sized enterprises and large enterprises, and the applicable requirements differ for each type of entity. The 2026 tax reform would make the following amendments to the rules:
- Abolish the measures for large enterprises as from 31 March 2026;
- The requirements for medium-sized enterprises would be revised and then be abolished as from 31 March 2027; and
- The current system will be maintained for SMEs, but the additional measures for education and training expenses will be abolished for both medium-sized enterprises and SMEs.
Retention of Documents for Intercompany Transactions
The 2026 tax reform proposals include a document retention provision relating to transactions within corporate groups. When a domestic corporation enters into a “specified transaction” with a related party and the transaction‑related documents do not contain descriptions or records of the details of the assets or services provided in the transaction, the calculation details of the consideration to be paid by the domestic corporation or other necessary information required to determine the amount of such consideration, the domestic corporation will be required to obtain or prepare and preserve documents (including electronic records) that provide the missing information, with potential penalties for failure to comply (such as cancellation of “blue return” taxpayer status).
Changes to the Global Minimum Taxation Rules
The 2026 tax reform includes proposals to revise the global minimum taxation rules introduced in 2023. In respect of the calculation of the adjusted covered tax amount when deferred tax assets (DTA) or deferred tax liabilities (DTL) are recorded in the covered fiscal year before the transition fiscal year, the following DTA or DTL will be deemed not to exist:
- DTA arising from agreements related to tax credits, etc., concluded with the national or local government (limited to those concluded on or after 1 December 2021 for the purpose of increasing the amount of such DTA), or similar circumstances.
- DTA or DTL recorded due to the valuation of assets or liabilities at fair value under laws and regulations concerning taxes equivalent to corporate tax in countries or regions other than Japan (limited to those enacted/put in place during the period from 1 December 2021 to the day before the start of the transition fiscal year).
Special Tax Provisions for Foreign Partnership Members
Japan offers tax relief for foreign partners in investment partnerships, which help avoid permanent establishment (PE) taxation, typically for passive investors that hold an interest in the partnership of less than 25% and that are not involved in management.The 2026 tax reform would make the following adjustments to the conditions for applying this special provision:
- The requirement that the ownership ratio of partnership assets must be less than 25% will be revised so that, for partnerships that establish a certain committee comprised of limited partners, the ownership ratio of limited partners in the partnership may be raised to less than 50%.
- Regarding the requirement not to engage in the execution of partnership business operations, the scope of actions excluded from the approval of business execution will be revised to include approval of conflict-of-interest transactions (currently, approval of self-dealing by those who execute business operations).
- The requirement that the partnership member must not have any PE income other than income attributable to the PE related to the partnership business will be abolished.
Kenichiro Kishi
BDO in Japan