Revision of the Tax Credit System for Promoting Income Growth


Regarding the tax credit system for promoting income expansion aimed at small and medium-sized enterprises (SMEs), this tax reform eases the requirements for eligibility, and increases the tax credit rate.

Regarding the Relaxation of Requirements for Eligibility

Until now, the requirement for eligibility for the “tax credit system for promoting income growth” was that the total amount of salaries and bonuses paid to continuing employees (employees who had been paid for all months from the beginning of the previous fiscal year to the end of the applicable fiscal year, and who met certain requirements) must have increased by at least 1.5% over the previous fiscal year.

It was necessary to extract the amount paid to continuing employees from the total amount of employee salaries and bonuses in the income statement and cost of goods manufactured report. Moreover, since the requirements regarding continuing employees were also defined in detail, the extraction was inevitably complicated and difficult to understand.

The requirements for eligibility in the revised “tax credit system for promoting income growth” are as follows:

【Requirements for Eligibility】
(Employees' salaries and other allowances - Comparative employees' salaries and other allowances) / Comparative employees' salaries and other allowances ≧ 1.5%

*“Employees' salaries and other allowances” means the total amount of salaries and bonuses paid to employees, while “Comparative employees' salaries and other allowances" can be considered to be the total amount of salaries and bonuses paid to employees in the prior fiscal year.

The above eligibility requirement simply means that the total amount of salaries and bonuses paid to employees should have increased by at least 1.5% over the previous year. Basically, one can determine whether the requirement is met by just comparing the total amounts of employee salaries and bonuses on the income statement and cost of goods manufactured report with those of the previous year. There is no need to extract the amounts paid to continuing employees.

Under the previous system, the salary paid to each employee had to have increased in order to qualify. However, under the revised system, even if the salary paid to each employee has not increased, it may be possible to qualify as long as the total amount of salaries & bonuses is increased - for instance, by increasing the number of employees.

The Tax Deduction Rate is Added To

In addition to the basic deduction rate of 15%, a 15% tax credit is added if employees’ salaries and other allowances increased by 2.5% or more over the previous year, while a 10% tax credit is added if employee education and training expenses increased by 10% or more compared to the previous year. The maximum tax deduction rate can be as high as 40%.

【Requirement for Additional 15% Tax Deduction Rate】
(Employees' salaries and other allowances - Comparative employees' salaries and other allowances) / Comparative employees' salaries and other allowances ≧ 2.5%

【Requirement for Additional 10% Tax Deduction Rate】
(Employee education and training expenses - Comparative employee education and training expenses {prior period education & training expenses}) / Comparative employee education and training expenses ≧ 10%

Caution Needed Regarding Period of Applicability

The post-revision tax credit system for promoting income expansion described above will apply to fiscal years beginning on or after April 1, 2022. For fiscal years beginning in April 2021, the fiscal year for which the settlement of accounts will be in full swing, the pre-revision tax credit will be applied.

If a company wishes to apply for the tax credit for promoting income growth, it must determine whether it meets the eligibility requirements by extracting the amount paid to continuing employees.

Concerning Taxation of Fines Paid


In addition to fines and other administrative penalties imposed on corporations, some fines are imposed on corporate officers and employees. We will consider how these fines would be handled if a corporation ends up shouldering them.

Fines for Failing to Register

The term of office for directors of a corporation is fixed, and the number of years in their terms (up to ten years) is stated in the articles of incorporation of each company. When the term of office of a director expires, registration of his/her reappointment is required even if the same director continues to serve in that position. However, in cases where the term of office is set at ten years, a disadvantage is that the timing of the director's re-election is likely to be forgotten. There are probably many people who failed to register the re-election of a director at the appropriate time because they forgot to do so.

If the registration procedure for this important appointment is neglected, a court may send a fine notice to the home of the president/representative director. The key point is that the notice is sent to the representative director's home - not to the company. It is understandable that a recipient would be surprised if they were to suddenly receive such a document from a court.

Why is the penalty addressed to the individual president/representative director, even though it’s related to the registration at their company? The reason is that corporate law imposes non-penal (correctional) fines on individual representative directors - not on their companies - for their failure to register their reappointment.

If the same treatment is given as fines, etc. imposed on the company, then the expenses are simply treated as non-deductible expenses related to the company's misconduct, etc. However, if the company bears the cost of the fine imposed on the president/representative director, the question arises as to whether the amount borne by the company is considered to be salary for the executive.

Whether or Not a Fine Paid by a Company on a Director's Behalf Qualifies as Salary

If a company pays a fine imposed on an executive, and the payment is classified as part of the individual’s salary, there will be a tax withholding issue. So if a company does bear the cost of such a fine, would it be considered to be salary?

Basic Corporate Tax Instruction 9-5-8 states, "Where a corporation incurs a penalty, a minor fine, a non-penal (correctional) fine, or a traffic infraction imposed on its officer(s) or employee(s), if the fine, etc. is imposed for an act, etc. committed in connection with the performance of the employee's duties, it shall not be included in the corporation's deductible expenses. If the fine, etc. is imposed for any other reason, it shall be considered as salary to the officer(s) or employee(s).”

It can be said that the key to determining who bears the burden is not who the nominee of the fine, etc. is, but whether or not the punishment was imposed for an act done in connection with the conduct of business. In this case, we think it is normal to consider that a fine imposed for a director's failure to register closely relates to conducting the corporation's business.

If the reason for the punishment was that the company was unaware of the timing of the director's re-election, in accordance with the basic instruction above, it would be appropriate to exclude the resulting amount paid from deductible expenses and not consider it as salary to the president/representative director.

Of course, if a representative director paid a traffic fine or other fine unrelated to his/her work duties, and the company then paid that on the person’s behalf, the amount(s) paid would fall under the category of director salary.

Pitfalls Concerning Special Provisions for Vacant Houses


We have seen a pattern of people transferring vacant houses without being aware of the many possible pitfalls concerning such transactions. They don’t consult with tax advisors in advance, and end up later being unable to apply for the special provision.

Overview of Special Provisions for Transfers of Vacant Houses

In response to the increasing number of vacant houses that do not meet earthquake resistance standards and which have become a social problem as a result of inheritance, this system allows the use of special exceptions for transfers of residential property when a house that does not meet earthquake resistance standards is transferred after work is done on the building to ensure it meets the standards, or when a house is demolished and only the land it is on is transferred.

The special provision for the transfer of residential property is for the transfer of property used by the transferor for residential purposes. Therefore, the 30 million yen deduction was previously not available for the residence of an elderly person living alone, in which the heir did not reside. This special provision was established to address this problem.

Since the prerequisite is that an elderly person is living alone, there must be no one living with him or her. Also ineligible are cases when the residence is lent/rented to someone, whether the arrangement is paid or unpaid.

Pitfall #1)

This special provision is applicable only when the heirs obtain both the house and the site it is situated on in a set through inheritance. For example, if one of the heirs inherits only the house and then demolishes it, the other heirs who inherit only the site will not be able to use this special exception.

For example, suppose there are three siblings and there is talk of tearing down the house and selling it, so the estate is divided, with the oldest son inheriting the house and tearing it down, and the land being inherited by the three children with each inheriting one-third.

In this case, the tragedy would be that only the first son could use the special exception, while the second and third sons could not.

This is not limited to cases where the house is demolished, but also applies to cases where the house is left standing. Only heirs who acquire both a house and the site it sits on as a set through inheritance can use this special provision.

Pitfall #2)

 If the heir(s) originally owned either the house or the site, so that only either the site or the house was acquired through inheritance, the provision would not be applicable. Even if the structure of the property is the same after inheritance, the special provision for the transfer of vacant houses cannot be used unless the property was inherited as a set.

Pitfall #3)

If the house is demolished and only the land is transferred, attention should also be paid to the timing of the demolition of the house. The house must be torn down by the time of transfer. In some cases, a special clause, "The building will be demolished after the transfer of the land.” is included in the land purchase agreement. However, if the building is torn down or renovated post-transfer, the special provision is no longer applicable.

No matter if the transfer is for the purpose of not increasing the number of vacant houses, if it does not meet all the requirements, the special provision will not be applicable. The National Tax Tribunal has clarified that such preferential tax treatment was established from a policy perspective, and therefore it is not allowed to be interpreted in an expansive or analogous manner considering validity or individual circumstances.

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