Income already taxed once under the CFC inclusion rules later returns to Japan as a dividend.Including it in gross income again would create double taxation.Article 66-8 of the Special Measures Act addresses this throughspecified taxable amountIt is.

three routes.

Article 66-8 has separate paragraphs depending on how the dividend is received.

Only paragraph (2) has a different effect.For dividends eligible for the foreign subsidiary dividend exemption, a 95% exclusion, the adjustment is not a separate gross income exclusion butremoval of the deduction for expenses equivalent to 5%.That is how the adjustment operates.

Paragraph (1) reads as follows.

Where a domestic corporation receives from a foreign corporation (excluding one qualifying as a foreign subsidiary under Article 23-2(1) of the Corporation Tax Act...) an amount listed in Article 23(1)(i) of that Act (... referred to asof dividends of surplus and similar distributions,such a distribution), the portion of that dividend of surplus or similar distribution relating to that foreign corporationup to the specified taxable amountshall, in calculating the domestic corporation's income for each fiscal year, be excluded from gross income.be excluded from gross income.。

The modified wording under paragraph (2) is as follows.

In that paragraph, the words “the amount of dividends of surplus and similar distributions less ... relating to those distributions”the amount calculated as prescribed by Cabinet Order as equivalent to expenses,are read asof dividends of surplus and similar distributions," is used.

are modified to remove the subtraction.

What is the specified taxable amount? Paragraph (4)

It is the sum of two items.

(i) Of the taxable amount, partially taxable amount, or partially taxable amount for financial subsidiaries and similar entities relating to the foreign corporation that is included in the domestic corporation's gross income inthe fiscal year containing the date of receiptof the dividend of surplus or similar distribution from that foreign corporation, an amount calculated with regard tothe number of directly held shares and similar interestsand ...the circumstances of the de facto control relationship,as prescribed by Cabinet Order

(ii) ……Fiscal years beginning within ten years before the start of the fiscal year containing the receipt date:of the amounts included in gross income in those fiscal years, referred to as“fiscal years within the preceding ten years,”the calculated amount, less, where applicable,dividends of surplus and similar distributions received from that foreign corporation during those fiscal yearslimited to portions to which the preceding three paragraphs applied,an amount equivalent to those distributions, leaving the remaining balance。……「Previously taxed amountThis is the defined term.

Item (i) is the current-year amount; item (ii) is the preceding ten years' amount, called the previously taxed amount.

The parenthesis in item (ii) is central to recordkeeping.Amounts already used are deducted from the balance.The previously taxed amount is a balance that decreases each time it is used.Without maintaining a ledger, you cannot determine the figure for the next dividend.

The wording is “the number of directly held shares and similar interests.”It does not mean indirect holdings. Paragraph (10), discussed below, deals separately with indirect amounts.

Succession through corporate reorganization: paragraph (5)

Where a domestic corporationA qualified merger, qualified split, qualified contribution in kind, or qualified distribution in kind... through which a domestic corporationreceives all or part of the directly held shares or similar interests in a foreign corporation,results in the amounts specified for each category of qualified reorganization being, as prescribed by Cabinet Order,deemed the domestic corporation's previously taxed amounts for fiscal years within the preceding ten years.。

Previously taxed amounts carry over in a qualified reorganization.For a qualified merger or distribution of all residual assets under item (i), these are the merged corporation's or other relevant corporation's previously taxed amounts for fiscal years within ten years before the merger or similar event. For qualified splits and similar reorganizations under item (ii), only the portion corresponding to the transferred shares or interests carries over.

The lower-tier subsidiary route: indirect specified taxable amounts under paragraph (10)

These rules apply where a subsidiary sits between the parent and another foreign corporation.Paragraphs (8) and (9) set out the effects; paragraph (10) defines the amount.

The term used in the preceding three paragraphs,“indirect specified taxable amount,”means, of the following amounts,the lesser amount.is what the term means.

(i) ……Within the two years before the start of the dividend fiscal year,from the start of the earliest fiscal year beginning in that period through the end of the dividend fiscal year,dividends of surplus and similar distributions received by the foreign corporation from another foreign corporation,... the portion corresponding to the domestic corporation'sthe number of directly held shares and similar interestsholdings in that foreign corporation ... referred to as“indirect dividends and similar distributions”This is the defined term.

(ii) The total of the following amounts: (a) amounts for the other foreign corporation included in the dividend fiscal year; (b) ...

The wording is “the lesser amount.”The limit is the lower of dividends flowing from the lower-tier subsidiary to the subsidiary, item (i), and the amounts included for the lower-tier subsidiary, item (ii).

The periods also differ.For specified taxable amounts, the period isten years,whereas for indirect specified taxable amounts it is shorter.2 yearsIt is.Two different time periods appear within the same system.

The effects of paragraphs (8) and (9) mirror those in paragraphs (1) through (3). Paragraph (8) modifies Article 23-2(1) of the Corporation Tax Act to remove the 5% deduction; paragraph (9) provides gross income exclusion for deductible dividends under paragraph (2) of that Article.Each has a parenthetical exclusion for amounts covered by paragraph (2) or paragraph (3), preventing overlap with specified taxable amounts.

Points that require care in practice

• We received the dividend in the year the income was included.That is the current-year amount under paragraph (4)(i).
• We distributed this year an amount included several years ago.That is the previously taxed amount under paragraph (4)(ii), within ten years.
• How are previously taxed amounts managed?Track the remaining balance by fiscal year after deducting amounts used.
• How does this relate to the 95% exclusion?Paragraph (2) adjusts the result by removing the 5% expense deduction.
• What about dividends passed up from a lower-tier subsidiary?These involve indirect specified taxable amounts under paragraphs (8) through (10).The period is two years.
• We acquired subsidiary shares through a merger.Under paragraph (5), previously taxed amounts can also carry over.

This system cannot be used without records.Previously taxed amounts require ten years of balance tracking, while the indirect route has a two-year window. Companies planning to receive foreign subsidiary dividends should consult us starting with organizing records of past income inclusions.

Legal basis

• Article 66-8 of the Act on Special Measures Concerning Taxation (Special Tax Treatment of Income Relating to a Domestic Corporation's foreign related companies), paragraphs (1) through (5) and (8) through (10)
• Article 66-6(1), (8), and (10) of the Act on Special Measures Concerning Taxation (CFC Income Inclusion), and paragraph (2)(v) (De Facto Control Relationship)
• Articles 23(1)(i) and 23-2(1) and (2) of the Corporation Tax Act (Foreign Subsidiary Dividend Exemption)

This article does not cover detailed calculation methods prescribed by Cabinet Order, adjustments under paragraphs (6) and (7), or paragraph (11) onward. Individual calculations require review of records of past income inclusions.