Japan's National Diet (parliament) approved the bill for the government's tax reform proposals for 2022 on 22 March 2022, which was enacted on 31 March and generally applies from 1 April 2022. One of the main measures amends the tax credit for wage/salary increases with effect from 1 April 2022 to 31 March 2024, providing for a credit equal to 15% to 40% of the wage/salary increase (difference) as compared to the previous year, depending on company size, subject to a cap equal to 20% of the corporate tax liability. As amended, the tax credit for wage/salary increases is provided as follows:

• For large companies:
  • a 15% credit if the total wage/salary of continuously employed persons has increased by at least 3%;
  • a 25% credit if the total wage/salary of continuously employed persons has increased by at least 4%; and
  • an additional 5% credit if education and training costs have increased by at least 20%, i.e., a 20% credit if wage/salary increased at least 3% and a 30% credit if wage/salary increased at least 4%;
• For SMEs, more favorable conditions and credit amounts are provided:
  • a 15% credit if the total wage/salary of continuously employed persons has increased by at least 1.5%;
  • a 30% credit if the total wage/salary of continuously employed persons has increased by at least 2.5%; and
  • an additional 10% credit if education and training costs have increased by at least 10%, i.e., a 25% credit if wage/salary increased at least 1.5% and a 40% credit if wage/salary increased at least 2.5%.

In addition to amending the tax credit for wage/salary increases, the restrictions on access to certain incentives are amended for large companies that do not meet wage/salary increase requirements. The restrictions generally apply for large companies with at least JPY 1 billion in capital and at least 1,000 full-time employees and, as amended, include that such large companies are not allowed to benefit from the credits for investment in R&D, digital transformation, carbon neutrality, and 5G technology unless:

• the total wage/salary of continuously employed persons has increased by at least 0.5% in the fiscal year beginning from 1 April 2022 to 31 March 2023, as compared to the prior year; and
• the total wage/salary of continuously employed persons has increased by at least 1.0% in the fiscal year beginning from 1 April 2023 to 31 March 2024, as compared to the prior year.

It is also required that domestic investment in depreciable assets is more than 30% of depreciation expense, which is unchanged.

Some other important measures of the reform include the following:

• The withholding tax requirement for dividends paid between domestic companies is amended with effect from 1 October 2023 to provide that withholding tax is not required if dividends are paid by a 100% group company or by a company in which the recipient directly holds greater than one-third of the paying company on the dividend record date;
• A restriction is introduced on the depreciation rules for low-value assets (fully deductible if below JPY 100,000 and deductible over 3 years if below JPY 200,000), providing that the rules do not apply for assets that are used for rental purposes, unless such rental activity is part of the company's primary business;
• Amendments are made to improve and address concerns with the tax basis rules for companies leaving a group under the new group relief system that replace the prior consolidated tax rules for tax years beginning on or after 1 April 2022;
• The open innovation tax incentive is extended for investments in innovative technology start-ups (venture companies), which provides a 25% tax deduction for such investments, with certain conditions to be relaxed, including that a qualifying start-up must be less than 15 years old (instead of 10 years) if it is loss-making and its R&D expenditures are at least 10% of gross revenue; and
• The earnings stripping rules (interest deductions limited to 20% of adjusted taxable income) are amended to expand the scope of the rules to include the following for non-resident companies:
  • Japanese source income of a non-resident company that is not attributable to the non-resident's permanent establishment in Japan; and
  • Japanese source income of a non-resident company without a permanent establishment in Japan.

Note, prior to the amendment, the earning stripping rules only applied for non-residents in relation to Japanese source income attributable to a permanent establishment in Japan.