What was decided, when, and by whom

The Outline of the FY2007 Tax Reform was published by the Ministry of Finance on December 19, 2006. It lists the government's intended tax changes for the following year and is not itself legislation at this stage. Its items form the basis of bills debated in the Diet.

The outline begins by proposing fundamental depreciation reform to strengthen Japan's economic growth foundations, alongside measures for SMEs, international taxation, reorganizations, trusts, financial and securities taxation, housing and land, and tax administration. Depreciation is the central pillar, changing the familiar business question of how equipment purchase costs are expensed. For the previous year, see our article on the FY2006 Tax Reform Outline, and the following year is our article on the FY2008 Tax Reform Outline, and for the most recent developments, our article on the FY2026 Tax Reform Outline summarizing in

The source used for this article was text extracted by optical character recognition from an image-based PDF. Because recognition errors remain, amounts, rates, and dates are included only where the same figures could be verified in multiple separate places. Unverified figures are omitted.

Main pillars of the outline

Fundamental Depreciation Reform

Abolishing Depreciation Limits and Residual Values

For depreciable assets acquired on or after April 1, 2007, depreciation limits and residual values are abolished, allowing depreciation to JPY1, the memorandum value, by the end of useful life. Previously, a fixed portion of acquisition cost could not be expensed and remained on the books.

Declining-balance depreciation is also revised. Its rate is a specified multiple of the straight-line rate, with a switch to straight-line when the calculated depreciation falls below a prescribed amount. That amount assumes equal depreciation of the remaining carrying value over the remaining useful life. For practical ease, predetermined ratios by useful life allow it to be calculated by multiplying acquisition cost by the relevant ratio.

Treatment of Existing Assets

Assets acquired before April 1, 2007 are also addressed. From the fiscal year following completion of depreciation to the old limit, the remaining amount may be depreciated equally over a prescribed period down to JPY1. Useful lives for some manufacturing equipment are also shortened.

Changes to Lease Transactions

The outline calls finance leases other than those transferring ownership free of charge to the lessee at the end of the term, and certain similar cases, non-ownership-transfer finance leases. These are treated as sales for tax purposes despite their legal lease form.

Lessees depreciate lease assets straight-line over the lease term with zero residual value. Payments recorded as rental expenses are treated as depreciation. Lessors may recognize the interest component of total lease payments less cost using the interest method and recognize the remainder evenly over the lease term.

These amendments apply to contracts signed on or after April 1, 2008. Assets under earlier contracts may also be depreciated straight-line over the lease term from fiscal years ending on or after that date.

SMEs and Succession to Company Shares

Specified family companies with capital or contributions at or below a prescribed amount are excluded from retained earnings taxation. The base income threshold exempting special closely held companies from officer remuneration disallowance is also raised, narrowing its scope.

A special rule allows settlement-at-inheritance taxation for gifts of unlisted shares where specified requirements are met, including the recipient holding substantial shares and voting rights and managing the company as representative. Valuation methods for certain classes of shares, including nonvoting shares, are also clarified for inheritance tax and related purposes.

The angel investment tax incentive is also extended by two years.

Housing Loan Credits and Accessibility Renovations

A special alternative housing loan income tax credit is introduced for homes acquired and occupied in 2007 or 2008. Credit periods, loan limits, applicable years, and rates are prescribed, but the source table could not be read reliably, so specific figures are omitted here.

A second measure introduces accessibility renovation incentives. Qualifying residents renovating their homes with specified accessibility work and occupying them between April 1, 2007 and December 31, 2008 may credit a percentage of year-end renovation loan balances against income tax. Eligible work includes widening corridors, reducing stair gradients, improving toilets, removing indoor level differences, and installing sliding doors. Eligible residents include people above a specified age, certified care or support recipients, people with disabilities, and those living with such relatives.

Disposal provisions are also revised. Special long-term capital gains treatment for replacing or exchanging certain residential property is extended by three years after removing the upper floor-area limit for replacement homes. Similar relief for residential property acquired by inheritance or related means is abolished.

Restructuring Trust Taxation

The outline comprehensively reorganizes trust taxation, with extensive provisions and an appendix. This responds to Trust Act reform and new trust categories.

Beneficiary-certificate-issuing trusts meeting certain requirements become specified trusts, with income or corporation tax imposed on beneficiaries when trust income is distributed. Other such trusts are taxed at trustee level on trust income separately from the trustee's own property. Trusts without beneficiaries are also subject to corporation tax at trustee level, with deemed disposal or donation taxation for the settlor upon establishment.

For successive-beneficiary trusts, beneficiaries are deemed to acquire beneficial interests from the settlor at establishment, and later beneficiaries from the immediately preceding beneficiaries, triggering inheritance or related tax. Trusts used to transfer property therefore trigger taxation at the transfer point. Real estate income losses of individual beneficiaries are also deemed not to arise.

Electronic Filing and Tax Administration

A special income tax credit is introduced for individuals obtaining electronic certificates and electronically filing 2007 or 2008 returns by the deadline with an electronic signature and certificate, subject to conditions. It may be claimed for only one of the two years.

Procedures are also simplified. Certain third-party documents may be replaced by transmitting their contents when filing electronically, although the tax office may request originals for verification during a prescribed period. Other measures include electronic submission of withholding documents, omission of client electronic signatures where tax accountants act on their behalf, and payment through collection agents designated by the NTA Commissioner.

To determine if it relates to you

• Businesses holding machinery and equipment should see depreciation reform. Assets acquired from April 1, 2007 and earlier assets receive different treatment.
• If equipment is leased and payments recorded as monthly expenses, see lease transactions. Treatment changes for contracts signed from April 1, 2008.
• Family-company owners retaining profits or concerned about officer remuneration disallowance should see SME taxation.
• Those considering transferring company shares to successors should review the special settlement-at-inheritance rules for unlisted shares.
• Those acquiring and occupying homes in 2007 or 2008 should see the special housing loan income tax credit.
• Those planning accessibility work, such as removing level differences or installing sliding doors, should see accessibility renovation incentives.
• Those considering trusts for asset management or succession should see trust taxation. Some arrangements trigger tax upon establishment.

Source

• Ministry of Finance: Outline of the FY2007 Tax Reform (December 19, 2006)
• The original source of this article is a PDF saved as an image, and the text was read using optical character recognition. Numbers and proper nouns are included only where matches could be confirmed in multiple places.