A foreign subsidiary's income is included in taxable income in Japan.But that income has already been taxed locally.Without relief, there would be double taxation. Article 66-7 of the Special Measures Act addresses this.

Foreign corporation tax is deemed paid by the domestic corporation

Article 66-7(1) of the Act on Special Measures Concerning Taxation.

... Relating to that domestic corporation, foreign related companies imposed on the income of the foreign related company,foreign corporation tax... of the amount thereof, an amount calculated as prescribed by Cabinet Order ascorresponding to the foreign related company's taxable amount,subject to the following limit:if that amount exceeds the taxable amount, an amount equivalent to the taxable amount;or, for the foreign related company'spartially taxable amount,the corresponding amount calculated in the same way and subject to the same limit; or, for the foreign related company'spartially taxable amount for financial subsidiaries and similar entities,the corresponding amount calculated in the same way and subject to the same limit, shall, as prescribed by Cabinet Order,be deemed creditable foreign corporation tax paid by the domestic corporation,for purposes of Article 69 of that Act and Article 12 of the Local Corporation Tax Act.

The wording is “deemed.”Tax paid by the foreign subsidiary is treated as paid by the Japanese parent, so that foreign tax credit it falls within the foreign tax credit under Article 69 of the Corporation Tax Act.

There are exclusions from the entities covered by paragraph (1).Special purpose companies, investment corporations, trustee corporations for special purpose trusts, and trustee corporations for specified investment trusts, collectively called“special purpose companies and similar entities”in the statute, are outside paragraphs (1) and (2),and paragraph (3) provides a separate route.The explanation of paragraph (1) in this article does not apply to TMKs or investment corporations.

There are three separate caps.“If that amount exceeds the taxable amount, an amount equivalent to the taxable amount.”The taxable amount itself is the ceiling,not a comparison with the tax amount. The creditable amount cannot exceed the included income.

The rules correspond to three types of inclusion.

The deemed amount is included in gross income

Paragraph (2) of the same Article.

... Where, under the preceding paragraph,Article 69(1) through (3) or (18) of the Corporation Tax Actapplies, the amount deemed creditable foreign corporation tax under the preceding paragraph shall, in calculating the domestic corporation's income for the fiscal year prescribed by Cabinet Order,be included in gross income.。

This is a gross-up.If a foreign tax credit is claimed, the amount treated as creditable is added back to income. This follows the same approach as the general treatment under Article 69 of the Corporation Tax Act.

However, a condition applies:“Where Article 69(1) through (3) or (18) of the Corporation Tax Act applies.”The amount is included in gross income when the credit is actually claimed..

Another route: credit for Japanese income tax and similar taxes under paragraph (4)

The rules are not limited to foreign corporation tax.Paragraph (4) concerns taxes imposed on the foreign related companyin Japan.It provides for those cases.

... Of the total of the following amounts, referred to as“the amount of income tax and similar taxes,”the amount relating to the foreign related company of that domestic corporation,corresponding to the foreign related company's taxable amount,calculated as prescribed by Cabinet Order as corresponding to the relevant inclusion, referred to as“the amount equivalent to creditable income tax and similar taxes,”shall, for the domestic corporation's fiscal year prescribed by Cabinet Order, be deducted fromthe corporation tax on income.……It is credited against that tax.。

(i) The income tax imposed on the foreign related company,Income taxexcluding the amount of ancillary tax incidental taxes;corporate tax（corporation tax excluding corporation tax on the residual international minimum tax amount for each covered fiscal year and corporation tax on retirement pension funds and similar reserves;the amount thereof, excluding incidental taxes; andlocal corporation tax,（excluding the specified categories,in each case excluding incidental taxes

(ii) The income tax imposed on the foreign related company,The corporation tax-based component under Article 23(1)(iii) of the Local Tax Act,（……excluding that relating to corporation tax on retirement pension funds and similar reserves,andthe corporation tax-based component under Article 292(1)(iii) of that Act,with the same exclusion

The parenthetical exclusions differ by tax.From corporation tax,corporation tax on the residual international minimum tax amountandand corporation tax on retirement pension funds and similar reservesare excluded. From local corporation tax,local corporation tax on the base corporation tax amount under Article 6(1)(iii) of the Local Corporation Tax Actandand local corporation tax on the specified base corporation tax amount relating to the international minimum tax amount and similar amounts under Article 6(2)(ii)are excluded.These exclusions concern global minimum tax and retirement pension fund reserves; they do not exclude all local corporation tax.Note that the exclusions go beyond “incidental taxes.”

This adjusts for cases where the foreign related company is subject to Japanese withholding income tax or corporation tax,such as where it has Japan-source income.This route does not use a deeming rule; it directly credits the amount against corporation tax.

Paragraph (4) has documentation requirements

Paragraph (5) of the same Article.

The preceding paragraph applies only wherethe final return or similar filing, amended return, or request for correctionhas an attached document stating the income tax and similar taxes eligible for the credit, the credit claimed, and details of its calculation.Apply only if documents are attachedIn that case, the income tax and similar taxes forming the basis of the credit calculationare limited to the amount stated as such in that document.。

There are two constraints.A document must be attached, and the income tax and similar taxes forming the calculation basiscannot exceed the amount stated in it.However, amended returns and requests for correction are eligible as well as final returns and similar filings. If an amount was omitted, check the necessary schedules and consider applying for or increasing the credit through a request for correction or similar procedure. Pay attention to procedural requirements, including the deadline.

The order of credits is prescribed

Paragraph (7) of the same Article.

Where paragraph (4) applies, among credits against corporation tax under Part II, Chapter I, Section 2, Subsection 2 of the Corporation Tax Act and the credit under that paragraph, the latter credit shall be appliedafter the credit under Article 69-2 of that Act and before the credit under Article 70.That is the required order.

Check the Article titles.Article 69-2 of the Corporation Tax Act concerns“Credit for Foreign Tax Equivalent Amounts Adjusted at Distribution,”while Article 70 concerns“Credit for Corporation Tax Arising from Reassessment of Excessive Returns Based on Falsified Accounting.”Those are the Article titles.The foreign tax credit is in Article 69, and the income tax credit is in Article 68.Each is a separate provision.

Article 70-2 of the Corporation Tax Act, Order of Tax Credits, provides:

For credits against corporation tax under this subsection, first apply the credit underArticle 69-2,Credit for Foreign Tax Equivalent Amounts Adjusted at Distribution, thenthe preceding Article,meaning Article 70, and afterward apply the credits underArticle 68,Credit for Income Tax,and Article 69,Credit for Foreign Tax.

The overall order is therefore Article 69-2 → Article 66-7(4) of the Special Measures Act → Article 70 → Articles 68 and 69.

Points that require care in practice

• Can all tax paid locally be credited?The deemed tax amount is capped at each income inclusion amount, and the actual credit is also subject to the credit limits and other rules in Article 69 of the Corporation Tax Act.
• What happens to income when a credit is claimed?It is grossed up under paragraph (2).
• The foreign related company has had Japanese tax withheld.Use the paragraph (4) route.
• I forgot to submit the documents for paragraph (4).Paragraph (5) also covers amended returns and requests for correction. Check the deadline and attachments, then consider a request for correction or similar procedure.
• I understated the amount.Check the stated income tax and similar taxes forming the calculation basis, and consider an increase through a request for correction or similar procedure.
• What is the order of credits?Paragraph (7) places this credit after Article 69-2, concerning foreign tax equivalent amounts adjusted at distribution, and before Article 70, concerning reassessments of falsified accounting.
• What about TMKs and investment corporations?They are excluded from paragraph (1), and paragraph (3) provides separate rules.

CFC income inclusion does not end with taxation.Separate relief routes exist for taxes paid locally and taxes imposed in Japan. However, paragraph (4) has documentation requirements. If documents or entries were omitted, check whether a request for correction or similar procedure is available, including the filing deadline. Companies with foreign subsidiary income inclusions can consult us starting with a review of return attachments.

Legal basis

• Article 66-7(1), (2), (4), (5), (6), (7), and (8) of the Act on Special Measures Concerning Taxation (Special Tax Treatment of Income Relating to Domestic Corporations' Foreign Related Companies)
• Article 66-6(1), (8), and (10) of the Act on Special Measures Concerning Taxation (CFC Income Inclusion)
• Article 68 of the Corporation Tax Act (Credit for Income Tax), Article 69 (Credit for Foreign Tax), Article 69-2 (Credit for Foreign Tax Equivalent Amounts Adjusted at Distribution), Article 70 (Credit for Corporation Tax Arising from Reassessment of Excessive Returns Based on Falsified Accounting), and Article 70-2 (Order of Tax Credits)
• Article 12 of the Local Corporation Tax Act
• Articles 23(1)(iii) and 292(1)(iii) of the Local Tax Act (Corporation Tax-Based Component)

This article does not cover the special provisions for special purpose companies and similar entities in paragraph (3), detailed calculation methods prescribed by Cabinet Order, or adjustments under paragraph (9) onward. Individual calculations require review of foreign tax payment certificates and tax returns.