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Japan Aims To Relax Corporate Tax Haven Rules

by Mary Swire,, Hong Kong

18 December 2009

Japan is expected to change its current tax haven rules to reduce the tax burden on Japanese companies arising from their overseas subsidiaries.

Japan's corporate income tax rate is among the highest in the developed world, at over 40% when local taxes are added. Under current rules aimed at combating tax avoidance through tax havens, any profit generated by a Japanese company's overseas investments must be repatriated and added to the company's domestic income, and then taxed at over 40%. For these purposes, a tax haven is deemed to be a country whose corporate income tax rate is less than 25%.

A Ministry of Economy, Trade and Industry (METI) overseas business survey showed that half of Japan's 17,000 or so overseas affiliates and subsidiaries are located in tax haven countries under the current system.

After court action relating to a Hong Kong subsidiary tax imposition and representations from Nippon Keidanren (the Japan Business Federation), the Japanese government, through its influential Tax Advisory Council, is considering a reduction of the applicable corporate income tax to just over 20% on income from jurisdictions deemed to be tax havens, according to a Nikkei report. Such changes could be introduced to be effective from tax year 2010 onwards.

There are already other criteria for exempting a Japanese subsidiary from the tax haven classification for tax purposes:

  • It should not be a holding company for loans and investments;
  • It should not be a "brass name-plate" operation;
  • It should exercise control and administration of day-to-day business affairs; and
  • Its business should be transacted primarily with non-affiliated companies.

There is, however, still concern that the rigid imposition of these anti-tax avoidance measures may stimulate the exodus of Japanese group headquarters to overseas locations, with consequent loss of revenue to the Japanese government. This is especially so because the tax rules as they currently stand apply to China, Korea, Vietnam and Russia – countries where Japanese companies are keen to expand their business.

A comprehensive report in our Intelligence Report series describing how to get an optimal blend of tax-efficiency and profits from global manufacturing operations through judicious use of offshore and onshore techniques, and showing how the corporate supply chain is full of opportunities to save tax while optimising efficiency, is available in the Lowtax Library at and a description of the report can be seen at

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