General Rule

Typically, ordinary and necessary expenses, incurred in relation to the business, are tax-deductible. In some cases, expenses deducted for accounting purposes are not allowed for tax purposes and the appropriate adjustment must be made.

Allowable deductions include material costs, manufacturing expenses, trading expenses, administration expenses, interest payments, rental payments, and royalties paid. Management fees paid to a foreign affiliate may be deductible to the extent they are considered reasonable for the specific benefits derived by the Japanese company.

The domestic law allows other types of tax deductions and credits for normal business operations as follows:

Deductions may be taken against repairs, overseas investment losses, natural disasters, and employee severance indemnities;
Deductions are available for charitable donations up to an amount equal to one-fourth of the sum of 2.5% of taxable income and 0.25% of capital (including capital surplus) for tax purposes. Higher levels of deductibility are available in relation to donations to specified public interest-facilitating companies and certain organizations designated by the government. Donations to foreign related parties are not deductible;
In general, entertainment expenses are not deductible. However, for a certain period entertainment expenses are deductible as follows:
- for small and medium enterprises (SMEs) (see Sec. 8.1.1. for classification threshold), entertainment expenses of up to JPY 8 million per annum are deductible, alternatively, SMEs may opt to deduct 50% of entertainment expenses related to meals and beverages until 31 March 2022;
- large companies (other than SMEs) with share capital not exceeding JPY 10 billion can deduct 50% of entertainment expenses related to meals and beverages until 31 March 2022; and
- for large companies (other than SMEs) with share capital exceeding JPY 10 billion, entertainment expenses (including related to meals and beverages) are not deductible (until 31 March 2020, 50% of entertainment expenses related to meals were deductible); and
Subject to certain conditions, bonuses paid to directors may be deductible.

The following expense types are not deductible or have limited deductibility for tax purposes in Japan:

Interest expenses exceeding the amount calculated as per the interest deduction restriction rules are not deductible (see Sec. 13.2.);
Corporate tax and inhabitants’ tax are not deductible;
Fines and penalties are not deductible;
Fees paid by a Japanese subsidiary to a foreign affiliate are deductible, subject to the fulfillment of certain conditions; and
Start-up costs are considered as deferred assets and can be amortized on a voluntary basis.

Powerful Tax Solutions

Tax Rules Engine

Collaboration Tools

Latest Tax News