Tax Benefits for Foreign Companies in Japan

Published on October 31, 2025 and written by Cyril Jarnias

Japan, known for its powerful technological economy and cutting-edge innovation, continues to attract companies worldwide through strategic incentive measures. Among these incentives, significant tax benefits offer an attractive opportunity for foreign companies seeking to establish or expand their operations. With competitive tax rates and targeted tax support mechanisms, Japan positions itself as a favorable business environment, ready to support the economic prosperity of international investments. Let’s explore how these tax policies can transform Japan into a preferred destination for global investors.

Various Tax Incentives Offered by Japan

Tax Incentive Measures Offered by Japan to Foreign Companies

Japan implements various tax incentive measures to attract foreign companies and stimulate its national economy. Here is an explanation of their main content, eligibility conditions, and the effects of these policies.

Main Tax Incentive Measures

• Corporate Tax Rate Reduction
  The Japanese government sets an effective corporate tax rate for certified foreign companies that is lower than the usual level. For example, an exceptionally low corporate tax rate of 28.5% is applied during the first five years of establishment in Japan. These measures fall under the “Asian Base Promotion Policy.”
• Special Depreciation and Investment Deduction
  When creating research centers or new facilities within designated areas such as “Asian Headquarters Districts,” special depreciation or investment deduction for capital expenditures is granted under certain conditions. Additionally, exemptions from local taxes related to real estate acquisition or urban planning may be offered.
• Double Taxation Measures
  Regarding income from foreign company branches, Japan implements international double taxation measures (such as deductions for taxes paid abroad). These mechanisms aim to alleviate the burden on globally expanding companies.
• Subsidies and Cost Assistance for Research and Development Promotion
  For certain industries, subsidies for research and development activities and cost assistance systems (up to 70%) are established, promoting the introduction of new technologies and innovation activities.

Eligibility Conditions

1. Establish a physical base (headquarters, branch, subsidiary, etc.) or project-based facilities in Japan.
2. The business activity content must be recognized as contributing to strengthening international competitiveness and regional economic revitalization.
3. Compliance with application submission deadlines and related documentation requirements.

It is necessary to verify the guidelines from relevant ministries (such as the Ministry of Economy, Trade and Industry) for detailed conditions of each measure.

Examples of Recently Introduced Policies

In 2024, a proposal to reduce the effective statutory corporate tax rate (from 30% to 25.5%) was adopted with the aim of further improving competitiveness. Additionally, a simplified procedures program for small to medium-sized foreign-owned startups is being accelerated to implement flexible approach incentives.

Expected Impact

• Job creation within the national territory
• Increased influx of advanced technologies/talent
• Improved chances of success for regional revitalization projects

Ultimate goal = doubling the cumulative stock of direct investments (example: numerical target emphasized during the Koizumi administration).

How Japan’s Tax System Attracts International Investors

The Japanese government broadly introduces tax incentives to promote foreign investment and strengthen international competitiveness. The following explains their specific details and effects.

Tax Incentives

• Corporate Tax Rate Reduction: Japan is progressively reducing the effective corporate tax rate and offers special incentives to foreign companies. For example, under the Asian Location Promotion Act, the tax rate for certified foreign companies is reduced to as low as 28.5% during the first five years of operation in Japan. This regime aims to encourage the establishment of research and development centers and regional coordination centers in Japan.
• Double Taxation Prevention Agreements: In Japan, double taxation prevention measures are implemented through multilateral or bilateral tax treaties. This reduces the burden on multinational companies from being taxed on the same income both domestically and internationally. Additionally, a foreign subsidiary dividend exemption regime is also applicable, with 95% of dividends received by a Japanese company being non-taxable.
• Investment and Research & Development Support: Investments in specific areas such as environmental technologies and renewable energy benefit from significant support measures, such as an initial tax credit of up to 30% or a production-related credit.

Promoting Innovation and Reducing Operating Costs

Through these measures, companies benefit from the following advantages:

• Reduced Operating Costs: The reduction or exemption of corporate tax rates reduces direct economic burden.
• Environment Conducive to Innovation: Tax credits and subsidies for research and development expenses increase motivation to participate in new technology development activities.
• Global Expansion: Tax treaties improve connectivity with foreign markets.

As an example, a foreign pharmaceutical company that established an R&D center in Japan through the use of the Asian Location Promotion Act benefited from significant corporate income tax deductions and local government subsidies, allowing it to become profitable again a few years after establishing its research laboratory, while strengthening its export base not only in the Japanese market but also to neighboring Asian countries.

These policy reforms and incentive measures help reduce risk when entering the Japanese market and ensure stability in business prospects. However, to further enhance competitiveness, it is necessary to reach a level equivalent to other major advanced countries (example: Singapore 17%).

The Impact of Tax Benefits on Foreign Companies in Japan

The preferential tax measures granted to foreign companies in Japan serve as an important policy instrument to enhance the appeal of the domestic market and stimulate the economy. We discuss their impacts below, focusing on both positive and negative aspects.

Positive Aspects

1. Promotion of Foreign Direct Investment (FDI)
   Corporate tax rate reductions and preferential tax measures encourage foreign companies to enter the Japanese market. Especially in Japan, where corporate tax rates were high, this recent easing has reduced the competitiveness gap with major nations. As a result, many foreign companies have expanded their economic activities, such as capital investment and job creation.
2. Economic Revitalization in Specific Areas
   Tax incentives are effective in strategic industrial sectors. For example, in high-tech and biotechnology sectors, foreign companies show active willingness to enter the market. The expansion of investment in these priority areas also contributes to technological innovation and regional economic development.
3. Synergy Effect Through Local Partnerships
   Collaborations through the creation of joint ventures or mergers and acquisitions between foreign and Japanese companies tend to increase. This movement brings multilateral benefits, such as the exchange of technological know-how and the opening of new markets, developing high-value-added activities in Japan.
4. Concrete Example: Amazon Japan
   Amazon Japan not only created employment opportunities through active investments in its logistics facilities but also fostered efficiency improvements across sales and delivery services. The company benefited from preferential tax measures in certain regions, which contributed to its business expansion.

Negative Aspects

1. Increased Competition with Local SMEs
   Foreign companies often have strong brand power and solid financial foundations. Therefore, intensified competition with them risks pushing some local small and medium-sized enterprises out of the market. Additionally, the establishment of large foreign chains raises concerns about the impact on traditional industries.
2. Tax Evasion Issues
   Even if preferential tax measures are appropriate, acts of tax evasion targeting their loopholes (for example, using tax havens) may occur. This can threaten public revenue bases. This requires regulatory strengthening measures, such as anti-tax haven bills.
3. Long-term Tax Burden
   Considering only the decrease in corporate tax revenues, a drop in revenue occurs in the short term. Conversely, a higher return on investment (increased consumption and income taxation) is expected. However, given the time before these benefits materialize, it is necessary to reassess the sustainability and fairness of this system.
4. Compatibility with Global Minimum Tax
   Starting in 2024, Japan must also consider implementing the treaty on the 15% or higher corporate minimum tax. When it takes effect, special attention must be paid to readjustment, as limiting previous preferences is possible when dealing with difficult situations becomes necessary.