The Basic Income Tax Exemption Increases from the 2025 Tax Year

Introduction

On December 20, 2024, the Liberal Democratic Party (LDP) and Kōmeitō party decided on a tax reform plan for the 2025 tax year, which provides a tentative direction concerning the issue of ‘the ¥1.03 million income ceiling’ that had become a hot topic during the recent lower house election. Let's examine relevant details regarding individual income tax.

The Basic Exemption to be Increased from the 2025 Tax Year

Regarding the basic exemption, it has been decided that the exemption amount for individuals with total income of 23.5 million yen or less will be increased by 100,000 yen. The table below shows the amounts of the basic exemptions after the revision.

Taxpayer’s Total Income	Amount of Basic Exemption
23.5 million yen or less	580,000 yen
More than 23.5 million yen, up to 24 million yen	480,000 yen
More than 24 million yen, up to 24.5 million yen	320,000 yen
More than 24.5 million yen, up to 25 million yen	160,000 yen

The exemptions are to be applied against income taxes for the year 2025 and thereafter. These will affect the withholding at source for wages, etc. and public pensions payable on or after January 1, 2026.

In other words, on a monthly salary basis for the 2025 tax year, it’ll be difficult to feel any benefit from the tax reduction - with the benefit of the reduction only being realized at the time of the year-end adjustment.

As for the employment income deduction, the minimum guaranteed amount for the deduction (currently 550,000 yen) will be increased to 650,000 yen. However, not all people will benefit from this increase, as it applies only to those with incomes below a certain income level. In practice, regarding tax withholding, this change also will be applied to salaries and wages payable on or after January 1, 2026.

Establishment of the “Special Deduction for Specified Relatives” (tentative name)

In the case where a taxpayer has a relative, etc. who is between 19 and 23 years of age, is living under the same roof, and who is not a dependent for whom the dependent deduction applies, the “special deduction for specified relatives” (a tentative name) will be newly established to deduct a certain amount from the resident taxpayer's gross income for the relevant year.

Total Income of Relative(s), etc.	Deduction
Over 580,000 yen, up to 850,000 yen	630,000 yen
Over 850,000 yen, up to 900,000 yen	610,000 yen
Over 900,000 yen, up to 950,000 yen	510,000 yen
Over 950,000 yen, up to 1,000,000 yen	410,000 yen
Over 1,000,000 yen, up to 1,050,000 yen	310,000 yen
Over 1,050,000 yen, up to 1,100,000 yen	210,000 yen
Over 1,100,000 yen, up to 1,150,000 yen	110,000 yen
Over 1,150,000 yen, up to 1,200,000 yen	60,000 yen
Over 1,200,000 yen, up to 1,230,000 yen	30,000 yen

Like the increase in the basic exemption, this increase will also apply to income tax years beginning in 2025, but the effect will not be felt on a monthly salary basis until January 2026 or later.

Until now, dependents between the ages of 19 and 23 with total income of 1,030,000 yen or less for the year entitled the taxpaying head of the household to　a deduction of 630,000 yen for each specified dependent relative. However, if the dependent’s total income exceeded 1,030,000 yen even slightly, the head of household could not receive any deduction at all. So this tax revision will help remedy this issue.

Summary

In future tax system revisions, the timing of the application and procedures may change depending on the contents of proposed revisions and ministerial ordinances, and it is clear that changes in basic exemptions and payroll deductions will affect employees' income tax amounts and year-end adjustment paperwork.

In addition, newly-established deduction systems, such as the above-mentioned ‘Special Deduction for Specified Relatives' (tentative name), can help reduce the tax burden on employees and their relatives if the requirements are properly understood. Please note that it may be necessary to confirm the income of relatives, etc. who share the same residence.

On the Handling of Contract Money Paid for Joining a Company

Introduction

Often, entry-level contractual payments (congratulatory gifts for joining a company) are offered by companies to attract the best talent, especially in highly-competitive industries, or for positions that are understaffed.

While this is a major attraction for applicants, and an important factor in the success of a company's recruitment efforts, there are a few points that a company should keep in mind, to manage tax risks and ensure legal compliance.

Treatment under Income Tax Law

Lump-sum contract initiation money paid prior to joining a company is paid when the new employee promises to join the company, and falls under the category of "contract money obtained temporarily by promising to provide services" as stipulated in Article 204, Paragraph 1, Item 7 of the Income Tax Law. Under Article 28, Paragraph 1 of the same law, such payments are not considered to be salary, etc.; as a result, they are not treated as salary.

Also, although such payments are received at one time, they do not fall under the category of temporary income, but rather are considered to be miscellaneous income under income tax law. Therefore, in some cases, the recipient of the contract initiation payment may be obligated to file an income tax return.

Also, a company providing a contract initiation payment must be aware that such payments are not considered salary, so that the firm doesn’t mistakenly include the payment in the withholding tax forms for employment income.

One exception to the tax liability of contract initiation payments is when certain conditions are met, such as relocation expenses. For example, if a payment is for the acquisition of a qualification necessary for the performance of work, or for moving expenses associated with relocation, the tax treatment differs; such payments may be exempt from taxation.

Treatment under the Consumption Tax Law

Under the Consumption Tax Law, the provision of services received from another person which is not for compensation such as salary as defined in the Law, falls under the category of taxable purchases if the provision of such services by such other person as a business would be a taxable transaction.

However, under the invoice system, if an invoice is not kept for taxable purchases made by a business, in principle, the tax credit for purchases cannot be applied.

In addition, since invoices can only be delivered by an invoice-issuing business, the payment of a sum for contract initiation to an individual who is not an invoice-issuing business does not meet the requirements for application of the purchase tax credit.

Before the start of the invoice system, if the total amount of consideration paid was less than 30,000 yen, or else the total amount of consideration paid was 30,000 yen or more but an invoice was not delivered, then if there was a compelling reason for doing so, the tax credit for purchases could be applied by merely preserving books in which certain information was noted.

Treatment after Start of the Invoice System and Transitional Measures

However, no such provision exists under the invoice system. Therefore, in principle, a contract initiation payment that is paid as a lump sum before an employee joins a company can be considered to be non-deductible for purchase tax credit purposes.

However, due to transitional measures, it may be possible to deduct a portion of such payments made before September 30, 2026.

Operating Leases Continue to be Accounted for as Leases

Introduction

Recently*, the Accounting Standards Board of Japan (ASBJ) issued a new lease accounting standard. The new lease accounting standard can be applied for fiscal years beginning on or after April 1, 2025, and will become mandatory for fiscal years starting on or after April 1, 2027. How will the new lease accounting standard affect taxation? Here, we will provide an overview of the new standard and its impact on practices; also, we will explain differences between the standard’s effects on listed companies, versus small and medium-sized enterprises.

Overview of the New Lease Accounting Standard

Under the new lease accounting standard, a lessee (renter) is required to recognize a right-of-use asset and a lease liability on the balance sheet for all leases. In addition, the lessee will recognize depreciation expense for the right-of-use asset, and as a general principle, allocate the interest component of the lease liability to each period using the interest method. This treatment would result in the recognition of an asset and a liability even for a conventional operating lease, which may change the composition of the balance sheet.

Example of accounting treatment:
(at time of lease)
Right-of-use assets XXX / Lease liabilities XXX
(at the time of lease payment)
Lease liabilities XXX / Cash deposits XXX
Interest expense XXX
Depreciation XXX / Accumulated depreciation XXX

Since the release of the new lease accounting standard, there has been much attention paid to the tax treatment of leases in light of the new standard. In particular, since operating leases will no longer be permitted to be accounted for as leases for accounting purposes, there has been interest in whether income tax treatment would be consistent with the accounting treatment.

The 2025 Fiscal Year Tax Reform Proposal

Under the FY2025 Tax Reform Proposal, lessees of operating leases will be considered to be dealing through rental transactions for corporate tax purposes, as is the case at present. Therefore, the lessee's corporate tax treatment will include the amount of rent as a deductible expense in each period. This policy may increase the differences between accounting treatment and tax treatment, and may require adjustments to tax returns in the future.

Treatment under Corporate Tax Law

Under the corporate tax law, there is a principle that taxable income is calculated in accordance with "Generally Accepted Accounting Principles” (GAAP). However, the deductible amount is limited to "the amount of the confirmed portion of the obligation”.

Therefore, even if depreciation expense related to a right-of-use asset and interest expense related to a lease liability are recognized as expenses under the new lease accounting standard, it is not considered permissible to treat them as deductible as they are. Thus, after the revision, adjustments to tax returns will be required.

Differences between Effects on Small and Medium-sized Companies, and Publicly-listed companies

Small and medium-sized enterprises are not subject to the new lease accounting standard, so they will continue to be allowed to account for operating leases as operating leases for both accounting and tax purposes.

On the other hand, listed companies and companies subject to audits by auditor firms are required to prepare for the application of the new standard. Specifically, it is essential to take measures as early as possible, such as modifying accounting systems and establishing internal guidelines for the recognition of right-of-use assets and lease liabilities.

The new lease accounting standard will significantly change the accounting treatment on the lessee side, but there are still limitations on the scope of deductible expenses under the Corporate Tax Law. The FY2025 Tax Reform Proposal also indicates that there is a strong possibility that differences will arise between accounting and taxation, so it is essential to make appropriate adjustments to tax returns.