On December 16, 1997, the ruling Liberal Democratic Party (LDP) made public its proposal for tax reform for the fiscal year 1998 which would allow approximately Y840 billion in tax cuts. The proposal includes, as its main features, drastic changes in corporate taxation including a 3% reduction in corporate income tax rates and substantial changes to a corporate tax base, easing of taxation of land and real estate to facilitate land transactions, and taxation of financial and securities transactions to promote a reform to the financial system. On December 17, 1997, the government's Tax System Research Council also submitted its recommendations for the 1998 tax reform which are similar in contents to the LDP proposal to Prime Minister Hashimoto. The government will draft and present bills for 1998 tax reform to the Diet session scheduled to be convened in the middle of January 1998 for enactment.

Major items of revisions mainly affecting corporations are described below.


Corporate income tax rates will be reduced as follows from the tax year beginning on or after April 1, 1998.

                              Current         Proposed

Ordinary Corporation            37.5%            34.5%
Reduced rate for
small and medium-sized
corporation                       28%              25%

Changes to corporate tax base:

Reserve method for accrued employee bonuses and for warranty repair expenses will be abolished.

The deductible provision for special repair reserves will be reduced to 3/4 of that under the current method.

The statutory fixed percentage method for bad debt reserves will be abolished. However, for the periods beginning from April 1, 1998 to March 31, 2003, a reserve method at a newly fixed percentage may be applied in lieu of a reserve method at a percentage of actual bad debt losses. The current reserve method will be preserved for small and medium sized corporations for 3 years. Special bad debt reserves will be absorbed in bad debt reserves.

The deductible provision for employee retirement allowance reserves will be reduced from 40% to 20% of the total amount required for payment at the end of tax year.


  • Only the straight-line method will be allowed for newly acquired buildings.
  • The useful lives for buildings will be shortened by approximately 10% to 20% with a maximum useful life of 50 years.
  • The acquisition cost of depreciable assets qualified for an expense deduction will be reduced from less than Y200,000 to less than Y100,000. However, for depreciable assets of which the acquisition cost is Y100,000 or more but less than Y200,000, election will be available by each tax year to aggregate costs of these assets acquired during the tax year and depreciate over three years.
  • Amortization of goodwill will be revised to be amortized equally over five years.
  • Depreciable assets leased to nonresidents or foreign corporations for business use outside Japan under a finance lease shall be depreciated with the straight-line method over the term of the lease. This method will apply to the assets leased under the lease contract concluded on or after October 1, 1998.
  • The adjusted basis of marketable securities will not be permitted as the cost compared with the market price under the lower of cost or market method.

Limitation on deduction for entertainment expenses for small and medium sized corporations will be reduced from 90% to 80%.

Suspension of net loss carryback will be extended for 2 years.

Corporate enterprise tax (currently 6% to 12%) will be reduced to 5.6% to 11% from the tax year beginning on or after April 1, 1998.

It is confirmed that a taxable base other than income (e.g. wages and rents paid) for assessment of corporate enterprise tax will be deliberated.


Starting April 1, 1998, both the securities transaction tax for sale of stock, convertible bonds and national bonds, and the exchange tax for futures and options transactions will be reduced by 50%. The securities transaction tax and the exchange tax will be abolished by the end of 1998 subject to the progress of reform to the financial system and market conditions.

Special tax measures will be established to facilitate the forming of bank holding companies.

Shareholders of the merged bank will be allowed to defer the recognition of capital gains on a transfer of the surviving bank's stock in exchange for the stock of the bank holding company and will be exempt from securities transaction tax.

The surviving bank will be exempt from tax on capital gains realized on transfer of its subsidiary's stock to the bank holding company.

Special purpose companies(SPC's), meeting certain requirements, will be allowed to deduct dividends paid to the extent of SPC's income.

Corporate-type securities investment funds, meeting certain requirements, will be allowed to deduct dividends paid to the extent of the income of the funds.


Starting January 1, 1998, the land value tax will be suspended and special landholding tax will be eased.

For the period from January 1, 1998 to December 31, 2000, the 5% surtax (for holding period of over 5 years) and 10% surtax (for holding period of over 2 years up to 5 years) assessed on capital gains on transfers of land by corporations will be suspended.

The 15% surtax assessed on capital gains on transfers of land held for 2 years or less will be abolished effective December 31, 1997.

For the period from January 1, 1998 to December 31, 2000, recognition of 80% of capital gains realized on transfer of land held for more than 10 years for replacement may be deferred. Currently, such deferral is limited to transfers in specified regions.

Special tax treatment for the timing of an expense deduction of interest paid on loans for land newly acquired and not fully used by corporations will be abolished.

Due to the substantial number of proposed changes, this letter only provides a brief descriptions of the major changes which will affect corporations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information please contact Michael View at Showa Ota Ernst & Young on Tel: 0081332884096 or Fax: 0081332882459.