On 19 December 2025, Japan released its fiscal year 2026 tax reform outline, detailing a broad set of measures designed to stimulate capital investment, promote technological development, and refine individual and corporate taxation frameworks. While the proposals remain subject to adjustment during parliamentary deliberations, the outline provides clear signals regarding Japan’s policy direction for the coming year.

Corporate Taxation: Encouraging Investment and Strategic Innovation

The 2026 reform introduces targeted incentives to drive capital investment and R&D activities:

1. Capital Investment Incentives: Companies investing in production equipment, facilities, and software under the Industrial Competitiveness Enhancement Act will be eligible for either immediate depreciation or a tax credit equivalent to 7% of acquisition costs (4% for buildings). The total credit cannot exceed 20% of corporate income tax, with excess amounts carried forward for three years. This aims to accelerate high-value, large-scale investments across industries.

2. R&D Tax Credits for Strategic Technologies: Recognizing the critical role of advanced sectors, Japan has introduced separate tax credits for strategic technologies—including AI, robotics, semiconductors, quantum computing, bio-healthcare, fusion energy, and space. Standard R&D expenses in these areas qualify for a 40% tax credit, rising to 50% for collaborative projects with certified R&D institutions. The total credit is capped at 10% of corporate income tax, with unused portions carried forward. Credits for outsourced research abroad will face tighter restrictions.

3. Wage-Related Incentives: Tax incentives for large enterprises aimed at promoting wage growth will be phased out by 31 March 2026. Medium-sized enterprises retain modified incentives until March 2027, while small and medium-sized enterprises maintain the current framework with potential revisions aligned with expiration timelines. Incentives for education and training expenditures will be discontinued.

4. Other Measures: The reform refines rules for open innovation incentives, partial spin-offs, local facility strengthening, and expensing of small-scale depreciable assets (raising the threshold from JPY300,000 to JPY400,000). New documentation requirements for corporate group transactions are also introduced.

International Taxation: Refining CFC Rules and Global Compliance

Japan’s controlled foreign company (CFC) rules will see targeted revisions, including new provisions for dissolved foreign affiliates and adjustments to asset ratio requirements for shell entities. Global minimum taxation will be clarified in line with OECD guidance. For investment partnerships, the threshold for limited liability partner equity will rise from 25% to 50%.

Individual Taxation: Balancing Relief and Targeted Levies

1. Basic and Employment Income Deductions: The basic deduction will rise from JPY580,000 to JPY620,000, while the minimum guaranteed employment income deduction will increase from JPY650,000 to JPY690,000. Collectively, the starting threshold for income tax liabilities will reach JPY1.78 million, applied to income taxes from 2026 and local inhabitant taxes from 2027.

2. Expansion of NISA: The tax-advantaged investment framework will extend eligibility to individuals from birth. Annual contributions for children (ages 0–17) are capped at JPY600,000, with a total tax-free holding limit of JPY6 million.

3. Special Income Tax for National Defense: A tentative 1% additional income tax will be levied starting January 2027 to fund defense enhancements, accompanied by a corresponding reduction in the reconstruction tax. The revised taxation period will extend to 2047.

4. Housing Loan Tax Credit: The tax credit is extended until 2030, with longer reduction periods for second-hand homes (up to 13 years) and higher eligible loan limits (up to JPY35 million; JPY45 million for young families). Floor area exemptions will also apply to second-hand properties.

5. Crypto Asset Taxation: Pending legal revisions, capital gains from spot and derivative crypto trading, and ETFs, will be taxed at a flat rate of 20%, with a three-year carryforward for losses. The measure applies to crypto assets contributing to personal wealth accumulation.

6. Other Individual Measures: Expansion of taxation for high-net-worth individuals, adjustments to the hometown tax donation program, and new mechanisms for prefectural inhabitant tax interest allocation are included.

Asset Taxation: Aligning Valuation with Market Reality

Rental and fractionalized real estate will now be valued based on fair market value for inheritance and gifting purposes, particularly for properties acquired or built within five years prior to tax events. Tax breaks for educational fund gifts will expire in March 2026.

Consumption Tax: Cross-Border E-Commerce and Invoice System Adjustments

1. Cross-Border E-Commerce: New obligations require collection and remittance of consumption tax for mail-order sales below JPY10,000, with platform operators assuming tax responsibilities for mediated transactions.

2. Qualified Invoice System: Transitional measures for small-scale enterprises will extend for two years, with gradual reduction in deductible rates from 70% (October 2026) to 30% (October 2030).

3. Real Estate Services to Non-Residents: Consumption tax rules will explicitly include services related to domestic real estate provided to non-residents.

Tax Administration and Miscellaneous Measures

Procedures for national tax violation investigations will be digitized, in line with reforms to the Code of Criminal Procedure. Other measures include raising the international tourist tax, abolishing the environmental performance levy in automobile tax, and removing certain customs valuation rules for personal imports.

The 2026 Japanese tax reform underscores a strategic approach that balances corporate incentives for investment and innovation with adjustments to individual taxation and consumption rules. These reforms signal Japan’s continued emphasis on fostering high-value economic activity while updating tax structures to reflect evolving market and societal needs.