Even if profits are left in an overseas subsidiary, they may still be taxed in Japan. This is due to the tax haven countermeasure tax system, now commonly referred to as the "Controlled Foreign Company (CFC) tax system." Since its introduction in 1978, the approach to determining its scope has shifted from designated countries and regions, to the tax burden of individual companies, and finally to the actual conditions of their business and income.

Knowing this history makes it clear why one cannot draw a conclusion based solely on explanations like "we haven't set up a company in a well-known tax haven" or "the local corporate tax rate is 20% or higher." Bearing primarily in mind the case where a Japanese corporation has overseas subsidiaries, this paper looks back at major revisions based on official materials confirmed by September 20, 2026.

major amendments that changed the framework of the system

The left column of the table shows the fiscal year of revision. What is the history from fiscal 1978 to 2015?Government Tax Commission document (page 5)and the 2017 amendment and its application timingNational Tax Agency tax return confirmation formis supported.

Introduction in 1978: Addressing the retention of profits abroad

The Japanese system was established in fiscal 1978 (Showa 53). Initially, it used a method whereby the Minister of Finance designated lightly taxed countries and regions. To address the retention of income in foreign subsidiaries with a light tax burden and the deferral of taxation on the Japanese side, a mechanism was established to aggregate a certain amount of income to the Japanese shareholder side. The structure is not one where Japanese corporate tax is directly levied on the overseas subsidiary itself.

The "deferral" referred to here does not simply mean having deposits in an overseas bank. The background of the system is a situation where income is attributed to an overseas subsidiary, which is a separate legal entity, and taxation does not apply until it is remitted back to Japan through dividends or other means.Documents of the Government Tax Commission (page 5)summarizes its starting point and subsequent changes in positioning in a chronology.

1992: From the national list to tax burdens by company

In the 1992 (Heisei 4) tax reform, the designation system for low-tax countries was abolished, and the system shifted to determining applicability based on whether the tax burden ratio of the foreign subsidiary is 25% or less. This standard is generally called the "trigger tax rate." Because tax burdens vary depending on the tax incentives received and the nature of the income, even for companies in the same country, it was no longer a system that categorized targets solely by country name.

However, this does not mean that all income is immediately aggregated if it falls below the threshold. Under the system prior to the fundamental revision in fiscal year 2017, the "exclusion criteria"—which verified business details, the substance of offices, local management and control, and business partners or locations—were important. A low tax burden and the conclusion of entity-based aggregate taxation must be distinguished.Old system diagram of the same document (page 6)this two-step judgment is also shown.

2009 and 2010: The Transformation of Dividend Taxation and the Focus on Types of Income

In fiscal 2009 (Heisei 21), a system was introduced that excludes 95% of dividends received from certain foreign subsidiaries from gross income in principle. Because the framework premised on taxation at the time of dividend payment to Japan was changed, the CFC tax system can no longer be understood simply as a response to the deferral of taxation. Its role in addressing tax avoidance at the stage when income is generated in foreign subsidiaries has become clearer. Adjustments have also been made in the calculation of taxable inclusion income, such as not deducting dividends paid by subsidiaries.National Tax Agency 70-Year History: International TaxationHowever, this explains the background of this amendment.

Fiscal 2010 (Heisei 22) was a year in which both tax easing and the refinement of taxation progressed simultaneously. The trigger tax rate was lowered from 25% or less to 20% or less, and the exclusion criteria were reviewed for certain substantive business holding companies and logistics management companies. Meanwhile, a mechanism was introduced to aggregate passive income—such as certain dividends, interest, and royalties—even for companies that meet the exclusion criteria. The major turning point was that it was no longer possible to say, "Because it is an operating company, all of its income is excluded from the scope."

These areFY 2010 Tax Reform Outlineand is indicated for application by the foreign subsidiary for business years beginning on or after April 1, 2010,Institutional History of the National Tax AgencyHowever, you can check the details of the amendment. The current concept of passive income aggregation has been built up since this period.

2015: From "20% or less" to "less than 20%"

In the fiscal 2015 (Heisei 27) revision, the target for the trigger tax rate changed from 20% or less to less than 20%. Although the number 20 is the same, the treatment of exactly 20% is different. If you simply write that this revision lowered the rate to 20%, you will lose sight of the difference from the fiscal 2010 revision.Amendment Chronology of the Government Tax Commission (page 5), also distinguishes between the two changes.

Note that we are not comparing the statutory tax rates themselves in the local jurisdiction. For example, even if the statutory tax rate is 20%, tax incentives do not necessarily mean that the effective tax burden ratio under the system will be 20%. While a list of country-by-country tax rates can serve as an entry point for consideration, it cannot replace the documentation used to determine CFC tax rules.

Fundamental revision in fiscal 2017—Emphasizing the actual conditions of business and income starting in 2018

published in 2015OECD BEPS Action 3 Final Reportprovided recommendations for system design, such as the definition of CFCs, target income, income calculation, and the elimination of double taxation. It does not establish a single, globally common CFC tax rate, but rather allows room for design according to each country's tax system.

Taking this international debate into account, Japan carried out a fundamental revision in fiscal year 2017 (Heisei 29). The application of the major new systems starts from the business years of foreign-related companies beginning on or after April 1, 2018. The year of the revision and the fiscal year from which it applies to the foreign subsidiary do not coincide.the National Tax Agency's tax return confirmation checklist at that timeAlso, its application category is clearly indicated.

Under this amendment, the entry point for restricting traditional "specified foreign subsidiaries and the like" based on tax burden has been revised, and categories have been established according to the actual conditions of the companies and the nature of their income. Since the tax burden ratio threshold that exempts the application of the system remains, the "abolition of the trigger tax rate" does not mean that the tax burden judgment itself has been eliminated.Explanation of the 2017 tax reform by the National Tax Agencyis organizing the review of the partial consolidation with the target company.

• specified foreign subsidiary company: Paper companies, de facto cash boxes, and companies located in countries or regions designated by the Minister of Finance as having significantly inadequate cooperation in the exchange of information. Entity-based aggregated taxation was considered, and the exemption threshold at the time of the initial amendment was an effective tax burden ratio of 30% or more.
• applicable foreign affiliated company: A company other than the above that does not meet any of the economic activity criteria. The structure is designed to consider entity-level aggregated taxation, and if the tax burden ratio is 20% or more, it is exempt from application.
• partially targeted foreign affiliated companyA company that meets all economic activity criteria. We will consider partial inclusion for certain passive income. This is also structured so that the exemption applies if it is generally 20% or more.

The determination of a paper company is not decided simply by the impression of having few employees. Whether the company possesses fixed facilities necessary for its main business, or whether it manages, controls, and operates its business by itself in the country of location, is verified in accordance with statutory requirements. A cash box is also classified based on a certain ratio of income and assets, rather than being called that simply because of a large bank balance. In addition, the designation regarding information exchange during this period is different from the designation system for low-tax countries that was abolished in 1992.Documents from the National Tax Agency at that timeAnd you can check the three categories and determination factors.

The economic activity criteria consist of the business criterion, substance criterion, management and control criterion, and either the resident country criterion or non-related party criterion depending on the type of business. While it retains aspects of the traditional exemption criteria, the taxable income subject to partial aggregation has also been reviewed. This involves adjustments on how to exclude income derived from substantive business activities, rather than being a system that invariably aggregates interest and dividends without exception.

Since 2018: Practical Adjustments and Recent Amendments

Adjustments continued even after the fundamental revision. In fiscal 2018, a special exemption was established to exempt capital gains on the transfer of shares associated with the liquidation of specified foreign-related companies, etc., conducted after an acquisition under certain requirements, and in fiscal 2019, a revision was made to exclude certain holding companies, etc., from paper companies.National Tax Agency Q&A (as of June 20, 2019)It deals with these, but that explanation cannot be applied retroactively to the 1978 system.

The 2025 tax reform changes which Japanese fiscal year the income is included in; it is not an amendment that uniformly extends the tax filing deadline by two months for all foreign subsidiary financial statements. For fiscal years of foreign-related companies ending between December 1, 2024, and January 31, 2025, there is a transitional measure that allows the choice of a new inclusion timing under certain conditions. It is necessary to review and compare the fiscal year-ends of both the Japanese and foreign entities.

Do not confuse 27% and 20% with the 15% global minimum tax.

The 27% and 20% used in the current CFC tax rules areOverview of the Ministry of Finance systemAs mentioned in, this is the tax burden ratio threshold for exempting the application of combined taxation. It does not mean that Japan will additionally impose a 27% or 20% tax.

The tax burden ratio is calculated by adjusting income and foreign corporation tax in accordance with CFC tax regulations. It does not always match the local statutory tax rate or the effective tax rate calculated by dividing accounting tax expenses by pre-tax income.Ministry of Finance Amendment Commentary (pages 694-695)Now, the tax treatment related to the global minimum tax has also been organized, and it is indicated that the Qualified Domestic Minimum Top-up Tax (QDMTT) of a foreign country is to be excluded from the calculation of the effective tax rate.

Meanwhile, the global minimum tax is a separate system that, as a rule, targets multinational enterprise groups with total annual revenues of 750 million euros or more, ensuring a minimum tax rate of 15% on a certain level of income in each country. The CFC tax regime does not have a uniform exclusion threshold based on this same revenue scale. Even with the Income Inclusion Rule (IIR) taking effect in Japan for targeted fiscal years beginning on or after April 1, 2024, and the Undertaxed Profits Rule (UTPR) and Qualified Domestic Minimum Top-up Tax (QDMTT) taking effect for targeted fiscal years beginning on or after April 1, 2026, the CFC tax regime will not be replaced.Ministry of Finance: "On the Legislation of the Global Minimum Tax"explains the two systems separately.

What remains unchanged throughout history is that the tax treatment in Japan is not determined solely by the format of establishing a separate overseas corporation. When considering overseas expansion or restructuring, it is necessary to organize the shareholding relationships, who decides what locally, and the types of income the company earns, and then cross-reference them with the regulations applicable for that fiscal year.