foreign tax credit must,The matter is not settled in the current year.Both unused capacity and uncredited foreign tax may be carried forward for three years. This article concerns corporations under Article 69(2) and (3) of the Corporation Tax Act. Individuals have corresponding provisions measured by“each year within the preceding three years”under Article 95(2) and (3) of the Income Tax Act.
Two carryforward mechanisms
| Provision | When triggered | What is brought forward | |
|---|---|---|---|
| ① | Article 69Paragraph (2) | Foreign taxexceeds the total of three limits,for corporation tax, local corporation tax, and local inhabitant tax, Deduction limit combined. | From prior years,unused capacity(the carried-forward credit limit) |
| ② | Article 69Paragraph (3) | Foreign taxThe corporation tax credit limit:foreign tax falls below it. | From prior years,Previously uncredited tax(the carried-forward creditable foreign corporation foreign tax amount) |
The entry tests differ.Route (1) uses the total of three limits; route (2) uses the corporation tax limit alone. Treating both simply as “the limit” leads to errors.
(1) When foreign tax exceeds the three combined limits: paragraph (2)
Where creditable foreign corporation tax payable by a domestic corporation for a fiscal year exceeds that year'stotal of the credit limit, local corporation tax credit limit under Article 12(1) of the Local Corporation Tax Act, and the amount prescribed by Cabinet Order as the local tax credit limit,andthere is capacity from fiscal years within the preceding three years,meaning fiscal years beginning within three years before the start of the current fiscal year, carried forward as prescribed by Cabinet Order,called the “carried-forward credit limit,”the excess is credited against corporation tax on the current year's income, up to that carried-forward limit, as prescribed by Cabinet Order.
Exceeding the corporation tax limit alone does not trigger paragraph (2) if the amount still fits within local corporation tax and inhabitant tax capacity.Article 143 of the Order defines the prescribed local tax credit limit as the sum of the prefectural and municipal inhabitant tax limits under the Local Tax Act Order.
(2) When foreign tax falls below the corporation tax limit: paragraph (3)
Where creditable foreign corporation tax payable by a domestic corporation for a fiscal year isless thanthe limit, and there is a portion ofthere is capacity from fiscal years within the preceding three years,creditable foreign corporation tax payable in prior eligible fiscal years that is carried forward to the current year as prescribed by Cabinet Order,called “carried-forward creditable foreign corporation tax,”then, as prescribed by Cabinet Order,up to the credit limit less creditable foreign corporation tax payable for the current year,that carried-forward tax is credited against corporation tax on the current year's income.
Only the remaining capacity can be used.
The absence of local tax amounts from the entry test does not mean paragraph (3) is unrelated to local tax.The Cabinet Order defines the carried-forward amount, and local taxes enter there, as discussed next.
Built around three Cabinet Order terms
The actual calculation rests on three definitions in Article 144 of the Order.
| Terminology | Provision | Definition |
|---|---|---|
| Unused national tax credit capacity | Article 144 of the Orderparagraph (5), | Where creditable foreign corporation tax is below the corporation tax credit limit,corporation tax credit limit − creditable foreign corporation tax |
| Unused local tax credit capacity | Article 144 of the Orderand paragraph (6), | If foreign tax does not exceed the combined corporation tax and local corporation tax limits, this is the full local inhabitant tax credit limit. If it exceeds those limits but the excess is below the local inhabitant tax limit, it is that limit less the excess. |
| Excess over the credit limits | Article 144 of the OrderParagraph (7) | Where creditable foreign corporation tax exceedsthe total corporation tax, local corporation tax, and local tax credit limits,the excess amount |
Route (1)'s carried-forward credit limit is built from unused capacity; route (2)'s carried-forward creditable tax is built from excess over the limits.The definition of excess in paragraph (7) includes all three limits.Local tax therefore also enters route (2)through the Cabinet Order.
The order of use is prescribed
Article 144(1) of the Order.
... Unused national or local tax credit capacity is appliedfrom the oldest fiscal year first and, within the same fiscal year, national tax capacity before local tax capacity,against excess foreign tax.
Article 145(1) likewise provides that excess foreign tax is appliedfrom the oldest fiscal year firstagainst unused national tax credit capacity.Oldest year first; within one year, national tax capacity first.There is no discretion over the order.
A year choosing a deduction eliminates earlier unused capacity
Article 144(2) of the Order.This is a frequent source of mistakes.
Where a domestic corporation deducts creditable foreign corporation tax payable in any of the preceding three fiscal yearsin calculating income for the year in which it became payable,then that corporation's unused capacity forthe relevant fiscal year and all earlier fiscal years,for both national and local taxes, isexcludedwhen applying the preceding paragraph.
It is not just that year. The wording is “the relevant fiscal year and all earlier fiscal years.”Choosing the deduction method even once makes all earlier accumulated unused capacity unavailable. Article 145(2) applies this rule to route (2) as well.
Filing requirements
Article 69(26) of the Corporation Tax Act.
Paragraphs (2) and (3) apply only if, from the oldest fiscal year relating to the carried-forward limit or carried-forward creditable tax,for every subsequent fiscal year,the returns and similar filings have attached documents stating that year's credit limit and creditable foreign corporation tax payable, and the return for the year claiming the carryforward has the required attachments, andrequired documents are retained.。
The wording is “every fiscal year from the oldest fiscal year onward.”Attachments are required not only in the year the carryforward arises but inevery yearthrough the current year. Missing a year breaks continuity. Paragraph (28) provides relief for failure to retain documents.
Where a merger or split occurs
Article 69(9) of the Corporation Tax Act provides, for qualified mergers, splits, and contributions in kind, that the predecessor's credit limits and creditable foreign corporation tax are deemed those of the successor,it is deemedwith calculations governed by Article 146 of the Order.The result is governed by provisions, not left unspecified.
Points that require care in practice
- How are local corporation tax and inhabitant tax limits calculated?Follow Article 143 of the Order to the Local Tax Act Order.
- We want to switch between a credit and a deduction.First check the reach of Article 144(2), covering the relevant fiscal year and earlier years.
- An attachment was missing for one year.Apply paragraph (26)'s continuity requirement and paragraph (28)'s relief provision as relevant.
- high-rate burden portion Can that amount be carried forward?No, if it is excluded from creditable foreign corporation tax.
- What about individuals?Article 95(2) and (3) of the Income Tax Act uses calendar years, “each year within the preceding three years.”
“We have unused capacity this year; can we recover tax that exceeded the limit last year?”Article 69(3) answers that question. Conversely, if this year's foreign tax is too large to credit fully, paragraph (2) applies. Planning takes place within a three-year window. Overseas expansion may initially leave capacity unused, then later produce shortages. Review it at each year-end.
Legal basis
- Article 69(1), (2), (3), (9), (26), and (28) of the Corporation Tax Act (Foreign Tax Credits)
- Article 143 of the Order for Enforcement of the Corporation Tax Act (Local Tax Credit Limit), Article 144(1), (2), and (5) through (7) (Carried-Forward Credit Limit), Article 145 (Carried-Forward Creditable Foreign Corporation Tax), and Article 146 (Carried-Forward Credit Limits and Related Amounts Following Qualified Mergers and Similar Reorganizations)
- Article 12(1) of the Local Corporation Tax Act (Foreign Tax Credits), cited in Article 69(2) of the Corporation Tax Act
- Article 95(2) and (3) of the Income Tax Act
This article does not cover the Local Tax Act Order or Ministry of Finance Orders. Individual determinations require confirmation of unused credit capacity and excess foreign tax for each year.
This article is a general commentary based on laws and regulations as of August 31, 2026. Please obtain advice on your individual circumstances before taking action.
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