“We have made losses since incorporation, so tax due diligence should have little to examine.” This assumption can be dangerous when preparing for fundraising or M&A. Accounting losses differ from tax losses, and withholding and consumption tax can matter even without taxable corporate income. Tax due diligence examines how historical treatment affects post-investment cash, use of losses, and transaction terms.

This practical guide for startups is based on public materials checked as of October 31, 2026. Tax due diligence is a review within an agreed scope and based on supplied records; it does not guarantee an absence of tax defects or future acceptance by tax authorities.

1. A loss-making company still has taxes to examine

The net loss in the income statement is not the tax loss balance available for use in a return. For example, some payments to directors are accounting expenses but subject to conditions for tax deduction. Reconcile resolutions, notifications, and actual payments against the categories in the NTA’s guidance on directors’ remuneration. Company payment of a founder’s personal expenses may also require analysis as an economic benefit provided to a director.

A payer’s withholding obligations on wages and specified fees are independent of whether the company makes a loss. Do not assume a payment is outside withholding merely because it is booked as outsourcing: check whether the recipient is an individual or company and what the payment buys. Use the NTA guidance on fees and remuneration to identify relevant payments; this does not mean every outsourcing fee requires withholding.

For consumption tax, examine taxable or exempt status, invoice registration, and classification of sales and purchases. As the NTA’s explanation of domestic taxpayers indicates, a corporate income tax loss does not eliminate consumption tax obligations. Also examine local taxes such as the per-capita levy separately. Restricting the review to the corporation tax return misses these obligations.

2. New investors and M&A buyers read the same records differently

In a share issuance, investment cash enters the company, and an important question is whether it remains available for growth. Later tax payments or remediation costs reduce the cash available for planned recruitment and development. Investors examine significant unresolved matters, internal controls, and the ability to improve before another round or IPO. Even a minority investment can require extensive review if the tax issue is material relative to the investment.

In an acquisition of existing shares, control changes while historical tax risks remain in the company. The buyer considers price and indemnities as well as post-acquisition reorganizations, use of losses, and group transactions. A business transfer involves different assets and assumed obligations, so its review scope differs from a share purchase. Our general M&A due diligence article covers the broader process; this article focuses on connecting a startup’s tax records with transaction decisions.

3. Link each issue to evidence and transaction consequences

Submitting large volumes of documents is not enough. Explain differences between returns and ledgers, inconsistencies between contracts and invoices, and items whose treatment changed historically. This reduces repeated follow-up questions. The table below illustrates a review design; not every company needs every area investigated to the same depth.

A payment abroad is neither automatically subject to withholding nor automatically outside Japanese taxation. Identify the category of Japanese-source income and the non-resident tax treatment. Where it is a royalty or another relevant payment, reconcile the tax treaty filing procedures as well. A software agreement, for example, requires different inquiries depending on whether the company merely uses software or also obtains reproduction or sublicensing rights.

For stock options, a cover page stating “tax-qualified” is insufficient. Separate requirements at contracting from those governing actual exercise and administration. Use the NTA’s stock option tax guidance as a starting point and check the law applicable when the options were granted and the effective dates of amendments. Do not apply today’s relaxed requirements indiscriminately to past grants.

4. A loss balance multiplied by a tax rate is not cash

For carried-forward losses, verify the year of origin, expiry, continuity of returns, record retention, and deduction limits. Under the NTA’s loss carryforward guidance, losses arising in financial years beginning on or after April 1, 2018 generally have a ten-year carryforward period, but conditions govern their use. Ownership changes and post-acquisition reorganizations require separate consideration of restrictions. Neither “every shareholder change eliminates all losses” nor “the company remains the same, so every loss remains usable” is correct.

If the business plan delays profitability, losses may expire unused. Separate verification of the loss balance from valuation based on expected future profits, and connect the two through the financial model. Check the availability of records for the loss-generating years, not merely the return schedules. The NTA guidance on record retention periods includes treatment for years with tax losses.

5. Turn findings into amounts, deadlines, and responsibilities

The report should distinguish verified facts, missing records, tax assessments, and assumptions behind estimated amounts. Missing evidence does not mean an expense will certainly be disallowed. Conversely, an unquantifiable item must not be treated as zero: specify the additional information needed and which decisions remain unresolved.

For suspected withholding shortfalls, identify the payments and periods, then separately consider principal tax and ancillary charges, corrective and payment procedures, and settlement with recipients. In negotiations, translate the findings into possible pre-closing remediation, indemnities, price adjustments, or cash-plan changes. A finding does not automatically produce an equal price reduction; the transaction structure and agreement between the parties matter.

To begin preparation, gather complete tax returns and filing receipts, ledgers, major contracts, and capitalization history. Add brief explanations for known issues. Request further records according to materiality afterwards; this sequence is easier for a small finance team to manage. Capital changes also connect to the issues in our article on size-based business tax and capital reductions.

To organize tax records and issues before fundraising or M&A, see our Japanese tax consultation service.