Regarding Small and Medium-sized Enterprises (SMEs) Remaining as Beneficiaries of the Wage Increase Promotion Tax System

Introduction

The wage increase promotion tax system, which allows companies to receive tax deductions (thereby reducing taxable income) for raising employee wages, will be revised based on company size.

Future Direction of the Wage Increase Promotion Tax System Shown in the FY2026 Tax Reform Outline

The fiscal year (FY) 2026 tax reform outline established clear distinctions for the wage increase promotion tax system based on company size. The system, previously applied uniformly, is being revised to reflect the differing realities between "companies that have already made significant wage increases" and "companies still struggling to even secure personnel." Specifically, the system for large enterprises will be phased out ahead of schedule, while support measures for small and medium-sized enterprises (SMEs) will be maintained. The underlying concept of this revision is to distinguish between companies that have completed the "phase of tax-based support for wage increases", and those that still require support.

Abolition for Large Companies

The wage increase promotion tax system for large corporations will be abolished on March 31, 2026 (Reiwa {令和} 8), a year ahead of the originally-planned expiration date of March 31, 2027 (Reiwa 9). This decision stems from the assessment that wage growth rates at large corporations are already at a high level, creating an environment where wage increases can proceed without tax incentives.　This policy sends a clear message: "Wage increases have surpassed the stage where they should depend on tax incentives." Large enterprises will no longer receive direct benefits through tax deduction, even if they raise wages.

For Mid-sized Companies, Requirements will be Tightened, and the Deductions Will be Abolished by the End of March 2027

For medium-sized companies (those with 2,000 or fewer employees that do not qualify as small and medium-sized enterprises {SMEs}), the system will continue until its application deadline at the end of March 2027, but the requirements will be tightened. Note that SMEs (i.e., companies/organizations with capital of 100 million yen or less, or individual proprietors with 1,000 or fewer employees) fall under a separate category.

• Mandatory Requirement: Wage increase rate raised to 4% or higher (currently 3%)
• Additional Requirements: A 5% or higher wage increase rate results in a 5% increase in the deduction rate; a 6% or higher wage increase rate results in a 15% increase in the deduction rate (currently, a 4% or higher wage increase rate results in a flat 15% increase in the deduction rate).

Current System to be Maintained for SMEs

Meanwhile, for SMEs, considering the fierce competition for talent and the business environment, the current requirements and deduction rates will be maintained for fiscal year 2026 (Reiwa 8). This is a reassuring point for SMEs within the revisions. However, there are important points to note.　Regardless of company size, the additional tax deduction rate for increased education/training expenses will be abolished across all categories. This change follows a point raised by the Board of Audit that tax deductions sometimes exceeded the actual increases in education/training expenses. Going forward, the focus for human resource investments will likely shift from only tax benefits to emphasizing actual cost-effectiveness.

Category	Direction of Revisions	Wage Increase Requirements	Remarks
Large Companies	Abolishment	-	To be ended at the end of March 2026
Medium-sized Companies	Stricter	Raised to 4% or higher	Raising the bar
Small and medium-sized enterprises	Maintained	Remain unchanged	Continuation of favorable conditions

Future Considerations

The wage increase promotion tax system has undergone a major shift, from a "system available to anyone" to a "system tailored to company size and actual circumstances." While SMEs in particular still have room to utilize it, it is essential to accurately grasp the system's deadlines and requirements.

Boosting Capital Investmentthrough the Capital Investment Promotion Tax System

Introduction

The 2026 tax reform outline clearly states a policy to strongly support corporate capital investment, aiming to strengthen Japan's economic growth potential. Particularly noteworthy is the bold Capital Investment Promotion Tax System (“Specific Productivity-Enhancing Equipment Investment Promotion Tax System”), which builds upon previous special measures. With a minimum investment threshold of ¥500 million for small and medium-sized enterprises (and ¥3.5 billion or more for large corporations, etc.), this system targets truly substantial capital investments. Understanding its details should prove valuable in future management decisions.

Background

The introduction of this bold tax system stems from chronic labor shortages, pressure from rising wages, and rising raw material & energy costs. Addressing these requires productivity improvements and labor-saving investments, making the reduction of "tax burdens that deter investment" a key objective. For SMEs, too, it is set up not merely as a survival measure, but as a tax system designed to encourage growth-oriented investment.

System Overview

This tax system will introduce a mechanism allowing immediate depreciation or tax deductions  for certain capital investments that enhance productivity and strengthen business competitiveness. Eligible investments are limited to the following equipment directly used in company operations. (Note: Office furniture and fixtures, buildings such as headquarters or dormitories, and welfare facilities, etc. are excluded).

Buildings, building fixtures, structures, machinery & equipment, tools & fixtures of a certain scale or larger, as well as software

Selecting immediate depreciation allows the full cost of the capital investment to be deducted as an expense in the year of acquisition, rather than expensing it over several years as is typically done. This significantly reduces the tax burden in the first year. On the other hand, choosing the tax deduction option directly reduces the corporate tax liability itself, offering greater benefits to companies generating profits. The tax deduction amount is calculated as 4% of the acquisition cost for buildings, building fixtures, and structures, and 7% of the acquisition cost for machinery, equipment, tools, fixtures, and software.

Amounts exceeding the deduction limit cannot generally be carried forward. However, this is possible for plans addressing unforeseeable, rapid changes in international economic conditions, provided they receive certification under the Industrial Competitiveness Enhancement Act.

Furthermore, carryover is permitted for up to three years only if confirmed by the Ministryof Economy, Trade and Industry. It is important to note that this carryover system is a limited measure applicable only under specific circumstances.

"What to Invest In" and "When to Invest" Matter

When utilizing this tax system, it is crucial to consider not only "what to purchase”, but also "when" and "in what form" to invest. The system is expected to have an application deadline, and eligibility may depend on the contract dates or acquisition dates.

Additionally, when combining this with subsidies or grants, attention is required regarding adjustments to acquisition costs and tax treatment. In some cases, the amount after deducting subsidies may be the applicable figure. Proceeding without prior consideration could result in failing to achieve the anticipated tax benefits.

The Era of Considering Capital Investment as a Tax Strategy

This bold capital investment promotion tax system is not merely a tax-saving measure. It is a system directly linked to addressing labor shortages, ensuring business sustainability, and conceiving future growth strategies. Precisely for this reason, capital investment must be considered not only as a management decision, but also based upon a tax perspective.

Rather than proceeding solely because "It's an update.” or "It's necessary.”, confirming the applicability and effectiveness of the tax system before execution can maximize the value of such investment.

Raising the ‘Annual Income Ceiling’ (Threshold) to ¥1.78 Million

Introduction

The 2026 tax reform outline proposes revising income tax deductions, and raising the ‘ceilings’ for non-taxable employment income (currently ¥1.03 million/¥1.6 million) to ¥1.78 million.

Why ¥1.78 Million?

The figure of ¥1.78 million was calculated by multiplying the ¥1.03 million non-taxable threshold from 1995 (year Heisei 7) by the ratio of the current minimum wage vs. the minimum wage level back in 1995 (a ratio of approximately 1.73 times).

Revision of the Basic Deduction

This revision will adjust the basic deduction for all taxpayers for whom it is applicable.” For individuals with total wage/salary income of 23.5 million yen or less, the basic deduction amount will increase from the current 580,000 yen to 620,000 yen.

More significantly, the special additional basic deduction will be expanded. The maximum additional amount will increase from the current ¥370,000 to ¥420,000, and the range of eligible salary income will be substantially broadened - from up to ¥2 million-equivalent to up to ¥6.65 million-equivalent. This will extend the practical tax reduction effect to middle-income earners who previously could not benefit from the special additional deduction.

The Increase in the Salary Income Deduction and the ¥1.78 Million Threshold

For salaried workers, part-time employees, and other wage earners, the minimum guaranteed amount for the salary income deduction will be revised. The minimum guaranteed amount will increase from the current ¥650,000 to ¥690,000. Combining the revisions to the basic deduction and the salary income deduction, the annual income thresholds at which income tax begins to be levied will be as follows:

• Basic deduction: ¥1,040,000 (Standard ¥620,000 + Special ¥420,000)
• Salary income deduction: ¥740,000 (Standard rule ¥690,000 + Special provision ¥50,000)

The total of these two sums is ¥1.78 million, which becomes the new "annual income threshold." Consequently, the previous ¥1.03 million/¥1.6 million benchmarks, which served as guidelines for adjusting employment, take on significantly different meanings.

Effective Dates and Practical Considerations

The effective dates for these amendments are:
Income tax: From the 2026 (Reiwa 8) tax year; and,
Resident tax: From the 2027 (Reiwa 9) fiscal year.
Related to the increase in the salary income deduction, revisions to the withholding tax tables and year-end adjustment calculation standards are also planned.

Furthermore, this revision is expected to introduce a mechanism where the deduction amount will be reviewed every two years, based upon movements in the Consumer Price Index. This approach aims to periodically re-align the tax system with economic conditions, meaning the "annual income threshold" will not be fixed going forward. Note that even though the income tax threshold is raised, separate thresholds for resident tax and social insurance remain. When considering work arrangements, it remains crucial to make comprehensive judgments that include not only taxes, but also social insurance.

Impact on High-Income Earners is Limited

For high-income earners with salary income exceeding ¥25 million, the basic deduction is already ¥0, so this revision will have no fundamental impact.

Furthermore, the special provision for increasing the basic deduction applies only to middle-income earners with salary income of 6.65 million yen or less. For those earning 6.65 million yen or less, the basic deduction becomes 1.04 million yen. However, if salary income exceeds 6.65 million yen, the basic deduction decreases to 670,000 yen, potentially reducing take-home pay.

Thus, it is important to note that this increase in the "annual income threshold" comes with a substantive earned income restriction.