Tax paid abroadcannot necessarily be deducted in full from Japanese tax.There are two hurdles.

1. Some taxes are ineligible foreign corporation for credit from the outset(the definition of creditable foreign corporation tax in the parenthesis in Article 69(1) of the Corporation Tax Act and Article 142-2 of its Order).

2. Even eligible taxesare subject to a cap on the amount creditable,the credit limit.

This article addresses the second hurdle.

Location of the provision

Article 69(1) of the Corporation Tax Act.

... Of the tax calculated on the fiscal year's income under Article 66(1) through (3), Corporation Tax Rates on Fiscal-Year Income, the amount corresponding to that fiscal year'sforeign income,（……meaning an amount prescribed by Cabinet Order,calculated as prescribed by Cabinet Order and referred to in this Article asDeduction limit“the credit limit,”is the ceilingfor crediting that foreign corporation tax,excluding the specified categories,The remaining amount is referred to in this Article as“creditable foreign corporation tax.”referred to as creditable foreign corporation tax, against corporation tax on the fiscal year's income.

“Foreign income” is also delegated to Cabinet Order.Article 141-2 of the Order defines it as the total income from foreign sources,with a negative total treated as zero.That is the rule.

The calculation

Article 142(1) of the Order for Enforcement of the Corporation Tax Act, titled “Calculation of the Credit Limit.”

... The domestic corporation's corporation tax for each fiscal yearthe corporation tax on income.is multiplied by that year'sratio of adjusted foreign income to income.The resulting amount is the limit.

Credit limit = corporation tax for the fiscal year × adjusted foreign income ÷ income

The result depends on the numerator and denominator. The provision defines both.

Foreign source income not subject to foreign corporation tax is removed from the numerator.Foreign income untaxed locally does not enlarge the limit. Article 142(4) defines “not subject to tax” in two categories.However, the parenthesis in item (i) excludes cases involving foreign corporation tax deemed paid, so income subject to tax sparing is not removed.

A 90% ceiling applies

The proviso to Article 142(3) of the OrderThere is a proviso:is often overlooked in practice.

However, where that amountexceeds ninety percent of the fiscal year's income,usethe amount equivalent to ninety percent.That is its role.

The numerator is capped at 90% of income.Even if almost all income is foreign,the current year'scredit limit cannot exceed 90% of corporation tax.

However, this does not mean 10% of Japanese corporation tax must always remain payable.If carried-forward credit capacity under Article 69(2) exists, a further credit against current corporation taxIn addition,is possible. Local corporation tax and inhabitant tax also have separate limits.

Income tax has a different structure

For individuals who are resident eligible residents, the credit limit is governed by Article 222 of the Income Tax Order.Two points differ from corporations.

... The year's income tax,“the amount of income tax”excluding incidental taxes, is multiplied byadjusted foreign income as a proportion of total income for the year.The resulting amount is the limit.

The proviso to paragraph (3) states:

However, if foreign incomeexceeds total income for that year,use that year'stotal income amount.That is its role.

Do not assume individuals also have a 90% ceiling or must exclude exempt income.The main text of Article 222(3) contains no wording deducting exempt foreign source income.

What if the limit is exceeded or unused?

• Excess foreign tax invokes the mechanism under Article 69(2),called the “carried-forward credit limit,”while unused capacity invokes paragraph (3).called “carried-forward creditable foreign corporation tax,”Both concernthere is capacity from fiscal years within the preceding three years,the eligible prior three-year period.
• Calculations follow Article 144 of the Order, unused capacity and excess foreign tax, and Article 145.
• Individuals have the same structure under Article 95(2) and (3), but the unit is the calendar year.“each year within the preceding three years”」

Filing requirements apply

Article 69(25) of the Corporation Tax Act.Attachment of schedules and retention of documents are required.

Paragraph (1) applies only wherethe final return, amended return, or request for correctionThe return or similar filing must have the prescribed schedule attached, and documents proving imposition of creditable foreign corporation tax and other documents prescribed by Ministry of Finance Order must be retained.are retained.In that case,unless the district director of the tax office finds special circumstances,the amount is limited to the amount stated as such in the schedule.

It is not fixed permanently at the amount stated in the original return.Amended returns and requests for correction are also covered. For omissions or understatements, check the schedules and retained documents and consider claiming or increasing the credit through a request for correction or similar procedure. Watch procedural requirements, including deadlines. Paragraph (26) governs carryforwards; paragraph (28) provides relief for failure to retain documents.

Points that require care in practice

• How is foreign income classified?Allocation of common expenses follows Articles 141-3(6) and 141-8(2) of the Order. Reallocation where exempt foreign source income exists is governed by Article 142(5).
• How does the local tax credit limit fit in?Article 143 defines it as the sum of prefectural and municipal inhabitant tax limits under the Local Tax Act Order.
• What if the 90% ceiling applies?That becomes a carryforward planning issue.
• What if the schedule amount is wrong?Paragraph (25) also covers amended returns and requests for correction. Check deadlines and document requirements and consider a request for correction or similar procedure.
• Why do individual and corporate calculations differ?They are governed by separate provisions. Be cautious of materials that mix them.

The credit limit is the maximum that may be credited, not necessarily the actual credit.Understanding how the limit is built allows analysis of foreign income classification and expense allocation. Companies with foreign subsidiaries or branches should consult us before year-end.

Legal basis

• Article 69(1), (2), (3), (25), (26), and (28) of the Corporation Tax Act (Foreign Tax Credits)
• Article 141-2 of the Order for Enforcement of the Corporation Tax Act (Foreign Income), and Articles 141-3(6) and 141-8(2) (Allocation of Common Expenses)
• Article 142(1) through (5) of the Order for Enforcement of the Corporation Tax Act (Calculation of the Credit Limit), and Article 142-2 (foreign tax credit Foreign Corporation Tax Ineligible for Foreign Tax Credits)
• Article 143 of the Order for Enforcement of the Corporation Tax Act (Local Tax Credit Limit), and Articles 144 and 145 (Carryforwards)
• Article 95(1), (2), and (3) of the Income Tax Act (Foreign Tax Credits)
• Article 222(1) through (3) of the Order for Enforcement of the Income Tax Act (Calculation of the Credit Limit)

This article does not address the text of the Local Tax Act Order. Individual calculations require confirmation of foreign income classifications.