Prohibition of Transfer Fees Being Borne by Sellers

Introduction

The Act against Delay in Payment of Subcontract Proceeds, etc. to Subcontractors (Subcontract Act) will undergo its first fundamental revision in approximately 20 years. Starting in January 2026, it will be renamed the “Act for Preventing Delay in Payment of Subcontract Proceeds, etc. to SME Subcontractors” (the “SME Subcontracting Transaction Fairness Act"). Regulations will be strengthened, including an expansion of the scope of applicable transactions. Both client (procuring) parties and subcontractors need to correctly understand the revised content.

Revised Law Expected to Cover About Half of Transactions

The new law, as before, defines applicable transactions based on "transaction content" and "capital stock criteria”; it also newly adds an "employee criteria."

Capital Stock Criteria: For example, in transactions involving manufacturing outsourcing of goods, if the procuring party's capital stock exceeds 300 million yen and the small or medium-sized subcontractor's capital stock is 300 million yen or less, a transaction between these parties falls under the Act's regulations.

Employee Criteria (New): For instance, in transactions such as manufacturing consignment, if the client company has over 300 regular employees while the small or medium-sized subcontractor has 300 or fewer regular employees, the transaction is also subject to the Act's regulations.

• The employee count threshold varies by industry (e.g., 300 for manufacturing, 100 for services).
• Regularly-employed employees include part-time and temporary workers.

Previously, approximately 35% of transactions in the manufacturing industry, and approximately 41% of transactions in the transportation and postal services industry were subject to the Subcontract Act. The amendment is expected to increase the number of transactions subject to regulation by approximately 4%~12%.

Deduction of Transfer Fees Without Agreement is Prohibited

Deducting bank transfer fees for payment from the subcontractor's payment without written agreement has been prohibited, as it constituted "reducing the amount of the subcontract payment." However, until now it was permitted if there was an agreement to that effect in writing.

However, under the SME Subcontracting Transaction Fairness Act, deducting transfer fees from payments is prohibited "regardless of whether there is an agreement." Therefore, even if there is a written agreement for a small or medium-sized contractor to bear transfer fees in transactions subject to the SME Subcontracting Transaction Fairness Act, it violates the Act.

Effective Date and Penalties

• Applies to orders placed for transactions on or after January 1, 2026
• Violations may result in recommendations from the Fair Trade Commission and possible public disclosure of business names, etc.
• Continuing contracts are also subject to the Act - for orders placed on or after January 1.

Invoice Compliance

Procuring companies who previously deducted transfer fees from payments to subcontractors based on mutual agreement must now amend their contract terms, to require the procuring firms themselves to bear the transfer fees for transactions subject to the Act.

The shift in who bears the transfer fees - from small and medium-sized subcontractors (sellers) to the procuring businesses (buyers) also necessitates attention to impacts on accounting procedures and invoice compliance. When the seller bore the transfer fees, invoice compliance was highly complex. With the buyer now bearing the fees, the buyer can record them as payment handling fees, while the seller no longer needs to process the fee amounts, thereby simplifying the process.

To claim purchase tax credits, the buyer generally requires an invoice for each individual transfer. However, as a flexible alternative, purchase tax credits are permitted by retaining the financial institution's "passbook" or "deposit/withdrawal statements" together with one invoice from that institution.

Regarding the Appropriate Operation of the "Company Housing System"

Introduction

The company housing system is a powerful mechanism within the employee benefits category that provides tax savings for both the company and its employees. However, caution is required, because the valuation standards for wages/salaries in kind differ significantly between income tax and social insurance.

Income Tax: 50% Rule for Rental Equivalent Amount

Under income tax law, when a company provides housing to an employee free of charge or at a low cost, the difference between what the employee pays and the local market rate is treated as taxable in-kind compensation. To avoid this taxation, the company must collect at least 50% of the "rental equivalent amount" as company housing usage fees from the employee, calculated using a prescribed method. This "rental equivalent amount" is calculated primarily based on the assessed value for fixed asset tax purposes - not on typical market rent or the market price. The specific calculation formula is complex, but it is essentially the sum of the following three components:

1. The building’s fixed asset tax base amount × 0.2%
2. 12 yen × (the building’s floor area ÷ 3.3 m²)
3. The land’s fixed asset tax base amount × 0.22%

The rental equivalent amount is often calculated significantly lower than normal market rent, making the threshold for meeting the ’50% rule’ relatively low. This allows employers to keep the rent collected from employees low, while the difference becomes tax-exempt, resulting in the benefit of increasing the employee's take-home pay.

Social Insurance: Addition to Standard Monthly Remuneration

It is important to note that the economic benefit from providing company housing must be included in the standard monthly remuneration amount used as the basis for calculating social insurance premiums. The valuation for social insurance purposes is entirely different from income tax, and is calculated based on the "value per tatami mat“* set by each prefecture.
*The standard size for a full tatami mat in Japan is approximately 90 cm by 180 cm (35.5 inches by 71 inches).

Value of salary in kind = Prefecture-specific value per tatami mat {in the company-provided housing} × Number of tatami mats for living space

As an example, in Tokyo starting April 2025, the amount calculated by multiplying ¥2,830 per tatami mat is added to the standard monthly remuneration as the monthly housing benefit amount. The value per tatami mat varies significantly by region. In metropolitan areas like Tokyo and Osaka, the value per tatami mat is set higher, so it often exceeds the rental equivalent amount for income tax purposes.

The difference between the amount calculated using this method and the actual amount collected from the employee must be added to the standard monthly remuneration as ‘compensation (salary) in kind’.

It is important to note that while setting company housing rent based upon income tax may help avoid tax liability, social insurance contributions may still apply. In such cases, both employee and company contributions are incurred, so be mindful to fully consider social insurance implications when setting company housing rent levels.

Practical Simplified Application and Its Risks

In practice, when precise calculation of the rental equivalent amount is difficult, some companies collect 50% of the rent paid to the landlord. However, this practice lacks a legal basis.

During tax audits or social insurance investigations, authorities may require recalculation using the proper method, potentially leading to additional tax assessments or retroactive collection of social insurance premiums (up to two years' worth). The impact is particularly significant for social insurance premiums, as the company's share is also incurred. It is important to establish appropriate company housing rules/policies, and operate in compliance with laws and regulations.

【Important Note】

• Calculation methods differ for company housing for executives (particularly luxurious housing requires caution)
• A simplified calculation method applies to residences with under 132㎡ of floor space

Ruling and Opposition Parties Agree to Abolish Provisional Gasoline Tax Rate

Introduction

It has now been formally agreed upon through working-level negotiations between ruling and opposition parties that the provisional gasoline tax rate, long considered a challenge in Japan's tax system, will be abolished within the year. This is significant good news for citizens struggling with high prices, especially for regional economies where automobile use is indispensable.

Overview of the Abolition Agreement and Impact on Prices

The ‘provisional’ (temporary) tax rate, which has been added to the gasoline tax, totals 25.1 yen per liter. Its abolition is expected to permanently reduce the retail price by approximately 27.6 yen/liter, comprising the provisional rate amount plus the associated consumption tax portion (about 2.5 yen).

• Gasoline: Provisional tax rate of ¥25.1/liter to be abolished on December 31
• Light oil: Temporary tax rate of ¥17.1/liter abolished on April 1 of the following year {2026} (price adjustments via subsidies to be implemented in advance)

To avoid confusion from sudden price fluctuations, transitional measures will be implemented until the abolition date, involving a phased increase in existing subsidies to suppress prices. This is expected to achieve a price level equivalent to the abolition of the provisional tax rate through subsidies alone, by early December.

Fuel costs for companies heavily reliant on vehicles, such as transportation, logistics, and construction firms, will permanently decrease. This offers the benefit of helping to suppress shipping costs and, ultimately, contributing to overall price stability. The abolition of the provisional tax rate on light oil, in particular, directly reduces truck transportation costs.

Concerns Regarding Funding Sources and Impact on Businesses

Lower gasoline prices will reduce annual household expenses for private vehicle users by several thousand~10,000 yen or more. In rural areas, where cars are essential for daily life, the economic benefits are expected to be greater than in urban centers. Additionally, reduced transportation costs will enhance corporate competitiveness and alleviate inflationary pressures. On the other hand, concerns exist regarding funding sources, due to the estimated annual tax revenue loss of approximately 1.5 trillion yen. The provisional tax rate has generated substantial annual revenue of about 1.5 trillion yen for national and local governments combined. This revenue has historically been allocated primarily as dedicated road funds for road maintenance and the upkeep of public transportation infrastructure.

The recent agreement outlined a policy to reach a conclusion by year-end regarding alternative funding sources to replace this revenue loss, focusing on measures such as "reviewing special tax measures for corporations" and "revising the tax burden on high-income earners." The review of special tax measures being considered as an alternative funding source could potentially result in a de facto tax increase for corporations.

• Reduction of the (Employee) Wage Increase Tax System
• Reduction of the R&D Tax Credit
• Revision of the Small & Medium-Sized Enterprise (SME) Investment Promotion Tax System

For companies outside the transportation industry, the increased burden from the reduction of these tax incentives may outweigh the savings from lower gasoline costs. It is essential to carefully assess the impact on your company ahead of the year-end tax reform outline.

Future Outlook and Ripple Effects on Tax Reform

This agreement between the ruling and opposition parties represents not just temporary subsidies, but a permanent revision of tax rates, marking a historic first step to end the long-standing "temporary" status.

However, the issue of securing funding sources remains unresolved. Discussions surrounding funding sources are likely to extend to a fundamental review of the tax system as a whole, particularly concerning preferential measures for corporations, and the taxation of high-income earners.