What was decided, when, and by whom

The FY2021 Outline of Tax Reform is the government outline approved by Cabinet on December 21, 2020. Its preamble states the objectives directly.

To transform the economy after COVID-19 and create a virtuous cycle, incentives will promote corporate digital transformation and carbon-neutral investment, alongside a special increase in loss carryforward deduction limits for investing companies. Measures will also encourage SME restructuring through consolidation of management resources. To support households and private demand, property revaluation measures and extensions of housing loan relief will be introduced. Specific reforms follow.

These items form the year's framework. For how to read the outline, see Key points of the FY2026 tax system revision outline Please also take a look.

Main pillars of the outline

The text has eight chapters. Their names and decisions are as follows.

The accompanying estimate of revenue changes from FY2021 domestic tax reform totals a full-year JPY 56 billion reduction. For adjacent years, see FY2020 Outline of Tax Reform and FY2022 Outline of Tax Reform Please see

Extending the 13-Year Housing Loan Credit and Covering Smaller Homes

Personal income taxation begins with housing loan credits. The special three-year extension is available with revised contract-date boundaries.

Individuals making specially qualifying housing acquisitions and occupying the home from January 1, 2021 through December 31, 2022 may use the housing loan income tax credit and its special three-year extension.

Specially qualifying acquisitions are housing transactions taxed at 10% consumption tax with contracts concluded during prescribed periods: October 1, 2020–September 30, 2021 for new construction, and December 1, 2020–November 30, 2021 for existing-home purchases and similar transactions.

The other expansion concerns floor area. Homes of at least 40 but under 50 square meters may qualify, except in years during the 13-year credit period when total income exceeds JPY 10 million.

Asset taxation also changes the exemption for housing funds gifted by lineal ascendants. For contracts from April 1 through December 31, 2021, the exemption limit rises to JPY 15 million for new construction and similar transactions taxed at 10%.

Special Depreciation or Tax Credits for Digital and Decarbonization Investment

Corporate taxation centers on two investment incentives, both conditional on amendment of the Industrial Competitiveness Enhancement Act and investment under an approved plan. Their combined credits are capped at 20% of current-year corporation tax.

Digital Transformation Investment Incentive

This covers blue-return corporations with approved business adaptation plans installing or expanding software and similar assets under those plans from the amendment's effective date through March 31, 2023.

Qualifying business adaptation equipment acquired and used in domestic business may receive either 30% special depreciation or a 3% tax credit, increased to 5% where data is linked with businesses outside the group.

Business adaptation equipment includes machinery, furniture, and fixtures used alongside the software. Eligible investment is capped at JPY 30 billion.

Carbon-Neutral Investment Incentive

Corporations with approved medium- and long-term environmental adaptation plans qualify for specified productivity-enhancing equipment or equipment producing demand-development products under those plans, used domestically from the amendment's effective date through March 31, 2024.

The choice is 50% special depreciation or a 5% tax credit, rising to 10% for assets making a substantial contribution to greenhouse gas reductions.

Eligible investment is capped at JPY 50 billion. Special depreciation also applies to corporate inhabitant and enterprise taxes.

Higher Loss Carryforward Deduction Limits for Investing Companies

Blue-return tax loss carryforwards are capped at 50% of income before the deduction. The outline introduces a special expansion for corporations obtaining business adaptation plan approval within one year of the amendment's effective date and implementing that adaptation.

Qualifying losses may be deducted up to income before loss carryforwards, with the portion above 50% limited to the remaining cumulative investment amount.

Qualifying losses are blue-return losses arising in fiscal years containing a date from April 1, 2020 through April 1, 2021. Remaining cumulative investment is plan investment less amounts already deducted above the 50% limit under this special rule.

Allowing Reserves When SMEs Acquire Other Companies' Shares

Subject to amendment of the SME Management Enhancement Act, eligible blue-return SMEs must obtain plan approval from the amendment's effective date through March 31, 2024. The measure applies to shares purchased under the plan and held at year-end, excluding acquisitions costing more than JPY 1 billion.

A reserve for SME restructuring investment losses of up to 70% of share acquisition cost, established against price declines, may be deducted in the fiscal year of provision.

The reserve is not permanent. It is reversed when shares are no longer held and in other cases, or evenly over five years beginning with the fiscal year containing the date five years after the day following the year-end in which it was established, with reversals included in taxable income.

Ending Seal Requirements and Expanding Electronic Record Retention

The tax administration chapter begins with seals.

Tax documents previously requiring the submitter's seal will generally no longer require one, except for the following documents, with necessary related measures.

Exceptions are collateral and payment-in-kind documents requiring registered seals and seal certificates, and estate division agreement documents attached for inheritance and gift tax relief. This applies to submissions on or after April 1, 2021.

Prior approval for electronic and scanned record retention is abolished. Requirements are also relaxed as follows.

• National tax books and documents consistently created electronically may be retained subject to keeping system summaries and similar documents, prompt screen or other output, and compliance with download requests.
• The deadline for timestamping scanned records changes from three days to the data-entry period, and recipients' signatures are no longer required.
• Electronic transaction search requirements are fully waived where the person required to retain records has sales of JPY 10 million or less in the assessment period and complies with download requests.

There is also a stricter measure: underreporting based on concealed or falsified electronic records adds an amount equal to 10% of principal tax to heavy additional tax.

Holding Land Property Tax Steady and Revising Short-Service Retirement Benefits

For FY2021 Only, Keep the Taxable Base at the FY2020 Level

FY2021 is a property tax revaluation year. The outline continues burden adjustment mechanisms through FY2023 and adds a one-year FY2021 measure.

For residential and similar land—commercial land with burden levels below 60% and other land below 100%—and agricultural land below 100%, the FY2021 taxable base is set equal to the FY2020 base.

Even if appraised value rises, the FY2021 taxable base remains at the FY2020 level.

Restricting Half-Inclusion Treatment for Retirement Benefits After Five Years or Less

The measure covers payments corresponding to service of five years or less with the payer, excluding specified officer retirement benefits. The outline calls these short-term retirement benefits. It applies to income tax from 2022 onward.

To determine if it relates to you

• Those about to sign a housing purchase contract should review personal income taxation. The 13-year credit depends on both contract and occupancy dates.
• Those considering homes of at least 40 but under 50 square meters should review personal income taxation; an income condition applies.
• Corporations planning software or equipment investment should review corporate taxation. Investment incentives require approved plans.
• Corporations with losses in fiscal years beginning on or after April 1, 2020 should review corporate taxation. The approval application period is one year from the effective date.
• SMEs considering share acquisitions should review corporate taxation. Reserves must later be reversed.
• Those burdened by paper record retention should review tax administration. Requirements are relaxed, but heavy additional tax increases.
• Landowners should review asset taxation. The freeze applies only to FY2021.

Source

• FY2021 Outline of Tax Reform, Cabinet Decision of December 21, 2020