A company raises funds through a third-party allotment, increasing its share capital from ¥10 million to ¥200 million or ¥300 million. If it then reduces its share capital to ¥100 million, does it fall outside Japan’s size-based enterprise tax (gaikei hyojun kazei)?

Even after the FY2024 tax reform, some companies can still fall outside the regime. However, it is no longer safe to assume that share capital of ¥100 million or less is sufficient. The answer depends on the amount including capital surplus, the company’s tax status in the preceding business year, its wholly owned group relationships, and the business years in which the capital increase and reduction take effect.

This article assumes an ordinary stock company conducting business normally subject to income-based enterprise taxation. Businesses subject to revenue-based taxation, such as certain electricity and gas businesses, special categories of corporations, and corporate reorganizations require separate consideration.

1. What is size-based enterprise tax? Enterprise taxation beyond profits

Size-based enterprise tax is part of the corporate enterprise tax imposed by Japan’s prefectures. For a typical company within its scope, tax is levied not only on income but also on value added and capital as measures of business activity.

The underlying benefit principle is that even companies without profits benefit from roads, government services and other public infrastructure. Reducing reliance on income taxation and stabilizing local tax revenues were also objectives. For a loss-making startup, the possibility of a tax liability before it becomes profitable matters for cash flow. The Aichi Prefecture overview and the Government Tax Commission’s report explain the system and the reasoning behind its introduction.

2. The history: increasing the size-based share, then expanding coverage

2004: introducing a one-quarter size-based share for large corporations

In the 2003 Diet deliberations, the proposal was described as making one-quarter of corporate enterprise taxation size-based for corporations with share capital exceeding ¥100 million. Application began with business years starting on or after April 1, 2004. This did not mean taxing 25% of every company’s profits: it described the policy balance between the income-based and size-based elements. See the House of Representatives plenary proceedings of February 18, 2003 and the Ibaraki Prefecture explanation.

2015 and 2016: lower tax rates on profits, a larger size-based component

Reforms to lower the effective corporate tax rate were accompanied by measures to broaden the tax base. The size-based share increased from two-eighths at introduction to three-eighths in FY2015 and five-eighths in FY2016.

Standard rates for business years beginning on or after April 1 of each year. Prefectural surcharge rates and other applicable provisions require separate checking. Sources: Ministry of Internal Affairs and Communications, FY2016 Tax Reform and Related Matters (Local Taxes); Nara Prefecture tax rate table.

During this phase, the share-capital threshold determining which corporations were covered was largely maintained. The FY2024 reform goes further, revisiting the scope of the regime to address corporations with a substantial overall capital base despite a small stated share-capital amount.

3. Why did capital reductions to ¥100 million become an issue?

The traditional entry test was generally whether share capital exceeded ¥100 million at the end of the business year. Exactly ¥100 million does not exceed that threshold. Reducing share capital to ¥100 million or less could therefore take a company outside the regime at the year-end assessment for the year in which the reduction became effective, rather than only from the following year.

A key mechanism is a reduction that transfers share capital to other capital surplus without returning money to shareholders. The company’s cash and net assets may remain unchanged, while only the share-capital figure used to determine coverage declines.

Government materials on the FY2024 reform identify a decline in covered corporations to approximately two-thirds of the number at introduction, partly due to reductions of share capital to ¥100 million or less. They also highlight companies leaving the regime through mere transfers between capital accounts. See the FY2024 tax reform explanation published by the Ministry of Finance (pp. 874–875).

However, capital reductions themselves have not become unlawful. They serve various purposes, including addressing losses and reorganizing capital accounts. The reform does not prohibit all reductions; it adds categories of corporations that remain subject to size-based enterprise tax after a reduction. The background is explained in the FY2024 tax reform commentary on amendments to the Local Tax Act and related legislation.

Three capital concepts that should not be confused

Determining whether a company is covered and calculating the tax once it is covered are separate exercises. Since FY2015, the capital component has also had a minimum tax base where the adjusted amount of capital, etc., falls below share capital plus capital reserve. See the Shiga Prefecture explanation.

4. From 2025 and 2026, there are three routes into the regime

An ordinary stock company must check whether it meets any of these tests. Tests 2 and 3 have transitional measures and exceptions. The statutory basis is found in Article 72-2 of the Local Tax Act, Article 8-3-3 of its Supplementary Provisions and related provisions. The Tokyo Metropolitan Government Bureau of Taxation’s reform guidance is useful for practical checks.

The additional test from 2025: the amount must exceed ¥1 billion

The capital-reduction test requires prior-year coverage, year-end share capital of ¥100 million or less, and year-end paid-in capital exceeding ¥1 billion. Being covered in the preceding year does not mean a company remains covered indefinitely. Exactly ¥1 billion and more than ¥1 billion also produce different results.

For the first applicable business year, a transitional rule looks back at coverage from the business year preceding the one containing the promulgation date of March 30, 2024. Companies whose share capital had already fallen to ¥100 million or less by March 29, 2024, may be excluded under specified conditions. It is therefore inaccurate to say simply that a reduction before the 2025 effective date would have sufficed. See Osaka Prefecture’s explanation of the transitional rules.

The additional test from 2026: the ¥200 million threshold for wholly owned group companies

This test can apply even without a history of capital reductions. It covers companies with a qualifying wholly owned relationship with a corporation whose paid-in capital exceeds ¥5 billion, among others, where the company’s year-end paid-in capital exceeds ¥200 million despite share capital of ¥100 million or less.

The “specified corporation” at the parent level includes certain corporations with paid-in capital exceeding ¥5 billion, as well as mutual companies and foreign mutual companies. There are exclusions for tax-exempt and other corporations. Both direct and indirect ownership, including ownership within the same wholly owned group, must be examined. The parent-level test generally uses the parent corporation’s circumstances at the end of its latest business year ending on or before the subsidiary’s year-end. A large corporation or VC becoming a minority shareholder does not, by itself, trigger this test.

There are also rules adding back certain distributions of capital surplus and repayments of contributions made on or after March 30, 2024, and exceptions for specified approved M&A transactions. Companies newly brought within scope by this test may qualify for a two-year measure partially relieving the increase over the tax burden under the previous method. The analysis must therefore address ownership relationships and exceptions, rather than stopping at whether there is a parent with ¥5 billion in paid-in capital. See the Tokyo Metropolitan Government Bureau of Taxation’s guidance on wholly owned subsidiaries and other qualifying companies.

5. From ¥10 million to a third-party allotment, then a reduction to ¥100 million

Example 1: share capital reaches ¥300 million, then falls to ¥100 million with ¥200 million in capital surplus

Assume a company starts with ¥10 million in share capital and no capital surplus. It receives ¥290 million through a third-party allotment and records all of it as share capital. It subsequently reduces share capital without returning funds to shareholders, transferring ¥200 million to other capital surplus.

Paid-in capital after the reduction does not exceed ¥1 billion. Assuming the company is not a qualifying wholly owned group company of a specified large corporation, it meets none of the three tests for the year in which the reduction validly takes effect by year-end: share capital exceeding ¥100 million; prior-year coverage plus paid-in capital exceeding ¥1 billion; or the wholly owned group test. On these assumptions, the company can fall outside the regime.

Similarly, a reduction from ¥200 million to ¥100 million in share capital, with no other capital surplus and total paid-in capital of ¥200 million, does not meet the ¥1 billion test. The group-company test also requires an amount exceeding ¥200 million, not exactly ¥200 million. However, any applicable distribution add-backs require a separate calculation.

Example 2: share capital is ¥300 million, but capital surplus is ¥1.2 billion

The result changes for a company that has accumulated capital surplus through earlier fundraising. If a company with ¥300 million in share capital and ¥1.2 billion in capital surplus reduces share capital to ¥100 million through a simple transfer, capital surplus becomes ¥1.4 billion and total paid-in capital remains ¥1.5 billion.

If it was covered in the preceding business year, it meets the additional capital-reduction test. Knowing only that the latest fundraising increased share capital to ¥300 million is insufficient: capital surplus already present before the fundraising must also be included.

Example 3: the same ¥300 million total, but within a wholly owned large-corporation group

Even with the same ¥100 million share capital and ¥200 million capital surplus as Example 1, the company may be covered under the group-company test for business years beginning on or after April 1, 2026, if the conditions are met—for example, direct or indirect 100% ownership by a specified corporation with paid-in capital exceeding ¥5 billion. An amount of ¥1 billion or less does not end the analysis.

The effective date of the reduction determines which business year is affected

The following compares the same company under two timelines. It has a March year-end, was outside the regime through the preceding year, has no other capital surplus, and has no qualifying wholly owned relationship with a specified large corporation. Share capital after the increase is ¥300 million; after the reduction it has ¥100 million in share capital and ¥200 million in capital surplus.

The system does not automatically apply for the whole year merely because share capital exceeded ¥100 million briefly during that year. The Tokyo Metropolitan Government’s Q&A addresses a company previously outside the regime that increases and then reduces its capital within the same business year. Coverage is generally assessed based on year-end circumstances, but this does not dispense with checking prior-year coverage or the new group-company test. See Tokyo Metropolitan Government Bureau of Taxation Q&A, Section 15: Review of Corporations Subject to Size-Based Enterprise Tax.

6. Funds raised and share capital are different: plan before the fundraising

Not all funds received through a third-party allotment must be recorded as share capital. Under Article 445 of the Companies Act, up to one-half of the amount paid in may instead be recorded as capital reserve.

For example, if a company with ¥10 million in share capital receives ¥200 million and allocates half to share capital and half to capital reserve, its share capital becomes ¥110 million and its capital reserve ¥100 million. Allocating half to capital reserve does not necessarily keep share capital within ¥100 million: the existing ¥10 million must be added. Moreover, capital reserve is included in paid-in capital for the new coverage tests.

Illustrating the burden even without profits

Consider a 12-month business year in which the value-added tax base, after the employment stabilization deduction and other adjustments, is ¥100 million and the capital tax base is ¥300 million. A simple calculation using standard rates gives:

This is an illustrative calculation using assumed tax bases. It excludes the income component, special corporate enterprise tax, corporate inhabitant tax and other taxes, and does not reflect surcharge rates, allocation rules, special provisions or tax credits. The ¥2.7 million is not automatically the tax saving from a capital reduction.

Leaving the regime also changes the applicable income-component rate category and potentially other aspects of taxation. The effect differs between profitable and loss-making companies, so any benefit of a reduction should be evaluated against the overall tax burden. If a deficit is offset, paid-in capital itself may change; this should be calculated separately from a simple transfer from share capital to capital surplus.

A reduction involves Companies Act resolutions and creditor-protection procedures, generally including an objection period of at least one month. Passing a resolution is not enough: the effective date and completion of the procedures must be checked against the financial year-end. Tax and capital policy should be planned together, including investor consent requirements, lender covenants, and effects on future fundraising or IPO preparations. See Articles 447 and 449 of the Companies Act.

7. Frequently asked questions

8. Look at the whole company before deciding its share-capital amount

The history of size-based enterprise tax is one of introducing taxation less dependent on profits, increasing its weight, and extending coverage to large corporations whose scale is not fully reflected in share capital alone.

A third-party allotment requires consideration of the amount raised, its allocation between share capital and capital reserve, the financial year-end, the effective date of any reduction, accumulated capital surplus, and the shareholder structure. Neither “reduce to ¥100 million and you are outside” nor “the reform means you can never leave” is universally correct.

For more on fundraising, see What Is an Equity Story? For tax advice on capital increases and reductions, please see our Japanese tax consultation service.

Article date: October 22, 2026. Rules and public sources checked: October 31, 2026. This article focuses on the expansion introduced by the FY2024 tax reform and the rules applicable as of October 22, 2026. The examples are hypothetical calculations based on the stated conditions, not actual company cases.