— Key Points for Multinational Companies and International Taxation —
On December 26, 2025, the Japanese government approved the FY2026 Tax Reform Outline.
This reform advances measures to respond to rising prices and wage increases, while at the same time promoting capital investment and research & development, and strengthening fairness and transparency in tax administration, all with the objective of realizing a “strong Japanese economy”
For multinational companies in particular, a key feature of this reform is that while available tax incentives are being expanded, enhanced controls are also being introduced with respect to international taxation and related-party transactions. It should be noted that the reform emphasizes accountability for intragroup transactions more strongly than mere increases or decreases in tax burdens.
We have set out the key points considered particularly important from the perspective of foreign-invested companies and international taxation below.
1. Direction of Reforms Relating to International Tax and Intragroup Transactions
Introduction of Documentation Requirements for Related-Party Transactions
Under the FY2026 tax reform, as part of efforts to establish an environment for fair and smooth tax compliance, new documentation and record-keeping obligations will be introduced for transactions conducted between companies within the same corporate group.
Although this reform does not modify Japan’s transfer pricing rules themselves, it will apply primarily to the following types of transactions that are frequently undertaken by multinational companies:
– Payments of royalties to overseas parent companies or other related entities
– Management service fees and fees for management guidance
– Provision of services related to IT, research and development, and marketing
– Transactions involving the use of intangible assets (including intellectual property rights and software)
With respect to these transactions, the retention of contracts, detailed statements, and other documentation substantiating pricing methodologies and the content of services provided will now become more important than ever.
In addition, please note that deficiencies in documentation may result in consequences such as the revocation of “blue tax return” filing status.
For multinational companies, these requirements should not be addressed solely at the level of the Japanese subsidiary. Rather, coordination with the overseas headquarters (HQ) and a comprehensive review of intercompany contracts and documentation management will constitute important practical issues.
2. Revisions to the R&D Tax Credit Regime and Their Impact on International Collaborative Research
Strengthening of R&D Tax Incentives for Strategic Industrial Technologies
In the field of research and development, a new tax credit will be introduced for “strategic industrial technology research expenditures,” covering areas such as AI, semiconductors, biotechnology, quantum technology, and space-related fields.
From the perspective of multinational companies, particular attention is required in the following situations:
– Where a Japanese subsidiary conducts joint research with overseas group companies
– Where a Japanese subsidiary outsources research and development activities to overseas affiliates
For outsourced research conducted outside Japan, a mechanism will be introduced under which the amount eligible for tax credits is limited to a certain percentage. As a result, it will become increasingly important to appropriately organize and review the location of research activities, contractual arrangements, and the attribution of R&D results.
For multinational companies that maintain research and development functions in Japan, while there is potential to benefit from tax incentives, advance consideration and structuring will be indispensable for applying the applicable rules.
3. Investment Incentive Tax Measures Particularly Relevant to Multinational Companies
Establishment of the Productivity Enhancement Investment Incentive
As a measure to promote domestic investment, a new investment incentive will be introduced for corporations that carry out capital investment of a certain scale or larger, allowing them to choose between immediate expensing or through the application of tax credits.
This incentive may represent an effective option for multinational companies that operate production bases or research and development facilities aimed at the Japanese market. However, particular attention should be paid to the following points:
– Minimum investment amounts and scale requirements
– Requirements relating to increases in employment and domestic investment ratios
– Restrictions on concurrent application with other tax incentive measures
Accordingly, while there is scope for utilization by multinational companies considering additional investment in Japan, advance tax and business planning will be essential.
4. Strengthening of Tax Discipline for Large-Scale and Multinational Companies
With respect to research and development tax credits and investment-related tax measures, restrictions on the availability of tax credits will be strengthened for corporations above a certain scale if wage increase requirements or capital investment requirements are not satisfied.
In particular, for multinational companies:
– Eligibility will be assessed based on the financial figures and employment conditions of the Japanese subsidiary on a stand-alone basis; and
– There is an increased likelihood of misalignment between global group strategies and Japan-specific tax requirements.
Accordingly, it will be essential to align headquarters-driven strategies with the requirements of Japanese tax rules.
5. Revisions Affecting Human Resources, Compensation, and Expatriates
In the area of individual income taxation, revisions have been made to various deductions and non-taxable thresholds.
For multinational companies, it is important to review the impact from the following perspectives:
– Impact on highly compensated executives and expatriates
– Tax treatment of employee benefit programs (including meals and commuting allowances)
– Impact on gross-up compensation arrangements
Although the content of the rules themselves has been improved, continued attention to Japan-specific practical tax compliance remains necessary.
6. Summary — Practical Implications for Multinational Companies
The FY2026 tax reform has the following key characteristics for multinational companies:
– Expansion of available tax incentives in the investment and research and development fields
– Strengthening of management, documentation, and accountability requirements in the area of international taxation, rather than changes in tax rates
– Increasing importance of tax management and contract organization led by the Japanese subsidiary
For multinational companies, this reform underscores that tax responses should not be limited to after-the-fact compliance. Instead, it highlights the growing importance of advance tax planning and the establishment of appropriate management and governance frameworks. In connection with this reform, it is anticipated that a growing number of companies will reconsider their intragroup transactions, R&D structures, and investment plans from the perspective of Japanese tax regulations.
Going forward, we plan to provide further information with more details of the 2026 tax reform in Japan over several installments.
Disclaimer: All views expressed in this article are solely for informational purposes and should not be construed as legal advice. This information is for reference only and is bound to change in case of any amendments or changes to applicable laws. We do not assume any responsibility or liability for any errors or omissions in the content of this article, and do not make any warranties about the completeness, reliability and accuracy of the information expressed in this article.