News Details
2025.12.29
FY2026 Japanese Tax Reform Outline – For Foreign Companies Entering Japan
1. Introduction
On December 19, 2025, the ruling parties of the Japanese government released the FY2026 Japanese Tax Reform Outline. The reform aims to strengthen Japan’s economic growth potential and enhance its international competitiveness, and it contains important implications for foreign companies considering entry into the Japanese market.
This newsletter summarizes the key tax reforms from the perspective of foreign companies and inbound businesses, focusing on corporate tax, consumption tax (Japanese VAT), individual income tax, and international taxation. Please note that the contents may be subject to change following deliberations in the Japanese Diet.
2. Key Tax Reforms
[Corporate Tax]
Tax incentives that can be utilized for capital investment and business expansion after establishing a Japanese subsidiary will be expanded. These measures are intended to reduce the burden of initial investment and mitigate cash flow impact for foreign companies entering Japan.
(1) Impact on Initial Investment and Capital Expenditure at Market Entry
A new investment promotion tax regime will be introduced for high value-added capital investments made in Japan, allowing either immediate depreciation or enhanced tax credits. For foreign companies making investments above a certain scale, this measure supports a smoother business launch in Japan by reducing initial investment burden and easing cash flow constraints.
(2) Impact on R&D, Growth Investment, and Strengthening Japan-Based Functions
R&D tax incentives will be expanded for strategic sectors such as AI, semiconductors, and biotechnology, and a new “Strategic Technology Category” tax credit will be introduced. For foreign companies considering R&D activities or strengthening headquarters functions in Japan, these reforms enhance the attractiveness of Japan as a development and innovation hub.
(3) Impact on Post-Establishment Operations and Governance
For companies that are not proactive in capital investment or wage increases, mechanisms will be strengthened to restrict the application of certain special tax measures. Even for foreign-owned Japanese subsidiaries, it will be increasingly important to design medium- to long-term operational strategies that align investment planning, human resource policies, and tax strategy.
[Consumption Tax (Japanese VAT)]
The consumption tax system will be revised in ways that affect transaction structures and business models at the time of entering the Japanese market, providing foreign companies with both challenges and planning considerations for pricing and operations.
(1)Impact on Cross-Border Transactions and Digital Business
For cross-border mail-order sales, sellers will be required to pay Japanese consumption tax even for goods priced at JPY 10,000 or less. In addition, for sales conducted via digital platforms, a new system will be introduced that shifts consumption tax liability to the platform operator. These changes will impact transaction design for foreign e-commerce, SaaS, and D2C businesses.
(2)Impact on Establishing a Japanese Presence, Real Estate, and Substance
Brokerage fees and similar services paid by non-residents in connection with the acquisition or sale of Japanese real estate will become subject to Japanese consumption tax. This revision may affect initial setup costs, office acquisition or leasing decisions, and cash flow planning for foreign companies establishing operations in Japan.
(3)Practical Compliance During the Operational Phase
Transitional measures under the Japanese Invoice System will be revised. After the end of the “20% special rule,” a temporary measure allowing payment of 30% of output tax will apply for a limited two-year period. In addition, the 80% special rule for purchases from tax-exempt suppliers will be gradually phased out and is scheduled to end in September 2031, increasing the importance of transaction management and consumption tax compliance after establishing a Japanese entity.
[Individual Income Tax]
Income tax rules affecting expatriate employees and directors in Japan will be revised, impacting human resource strategies for foreign companies.
(1)Increase in Basic Deductions
The basic personal deduction will increase from JPY 580,000 to JPY 620,000, and the minimum employment income deduction will increase from JPY 650,000 to JPY 690,000. At the same time, taxation for higher-income individuals will be strengthened, which may affect compensation design and tax burdens for expatriates and executives.
(2)Revision of Tax-Exempt Allowances (Employee Benefits)
In response to rising prices, the tax-exempt limits for meal allowances and commuting allowances (including private vehicle commuting) will be increased. This change allows foreign companies to provide employee benefits, including for expatriates, in a more tax-efficient manner and enhances flexibility in remuneration design.
[International Taxation]
International tax rules affecting group structures and cross-border transactions will be revised, with implications for tax strategy and risk management for foreign multinational enterprises.
(1) Global Minimum Tax (Pillar Two)
Based on the OECD BEPS Project, Japan will move forward with full implementation of the global minimum corporate tax rate of 15% under Pillar Two. Multinational groups must manage effective tax rates across all jurisdictions, including Japanese subsidiaries, dissolved foreign affiliates, and entities with limited substance.
(2) Alignment of International Transactions, Transfer Pricing, and Group Structures
From the perspective of transfer pricing rules and anti-tax avoidance measures, documentation and accountability for cross-border related-party transactions will be further emphasized. Groups will be required to review structures involving paper companies or formal SPCs and reassess transaction flows and organizational design, including Japanese entities.
(3) Cross-Border Services and Permanent Establishment (PE) Risk
With the expansion of cross-border services and digital transactions, addressing permanent establishment (PE) recognition and withholding tax risks will become increasingly important. For foreign companies before and after entering Japan, attention must be paid to the actual scope of activities conducted in Japan, as well as past business relationships involving dormant or liquidated subsidiaries, as these factors may affect tax assessments.
3. Conclusion
When considering entry into the Japanese market, it is essential to review corporate structuring, investment planning, and tax governance in light of ongoing tax reforms.
This article is intended to provide a general overview only and does not constitute professional advice. Decisions should not be made based solely on this information without obtaining advice from qualified professionals. If you have any questions, please feel free to contact us through the inquiry page below.
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References:
FY2026 Japanese Tax Reform Outline (Ruling Party Proposal)
https://storage2.jimin.jp/pdf/news/policy/212129_1.pdf
(Accessed: December 25, 2025)
https://storage2.jimin.jp/pdf/news/policy/212129_1.pdf
(Accessed: December 25, 2025)
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