What was decided, when, and by whom

The ruling parties' FY2026 Tax Reform Outline was adopted on December 19, 2025. Its cover names the Liberal Democratic Party and Japan Innovation Party as the adopting parties, a change from the Liberal Democratic Party and Komeito combination in previous years.

The outline has three parts: I. Basic Approach to FY2026 Tax Reform, II. Specific Details of FY2026 Tax Reform, and III. Matters for Further Consideration, spanning more than 150 pages. As usual, Part I gives direction, Part II individual measures, and Part III future issues.

There Are Two Tax Reform Outlines

There are, precisely, two year-end documents referred to as the Tax Reform Outline. One is adopted by the ruling parties; the FY2026 version was adopted on December 19, 2025. The other is the government's Cabinet-approved Outline of Tax Reform, approved on December 26, 2025. News reports announcing agreement on the outline usually refer to the former.

These should not be confused. The ruling parties' outline is their policy decision and does not necessarily become law unchanged. The Cabinet-approved outline represents the government's decision and is developed into bills. Beyond that are bills submitted to the Diet and enacted laws. The certainty of something being decided varies greatly by stage. This article uses the ruling parties' outline for policy direction and the Cabinet-approved outline for individual measures.

Seven Pillars of the Outline

Part I sets out the following seven pillars. Their order itself indicates the outline's priorities.

Rising prices lead the list, while motor vehicle taxes and gasoline tax each form separate pillars. The outline looks different from years dominated by detailed lists of individual tax cuts.

The Largest Headline: A JPY 1.78 Million Tax-Free Income Threshold

The main personal income tax measure concerns the so-called annual income barrier. The outline first sets the minimum taxable income threshold at JPY 1.68 million after increases in the basic and other deductions, then adds another JPY 100,000 to reach JPY 1.78 million. On the origin of that figure, the outline states:The minimum taxable income threshold will be raised in advance to JPY 1.78 million, reflecting the intent of the December 11 agreement last year among the Liberal Democratic Party, Komeito, and Democratic Party for the People.as its explanation.

The key is not simply the amount, but which deductions change to produce JPY 1.78 million. The basic deduction, employment income deduction, and income requirements for dependents are separate provisions. When they change together, year-end adjustment forms, withholding amounts, and eligibility to claim a spouse or child as a dependent all change. Those adjusting part-time working hours may find their take-home pay thresholds have shifted during the year.

Capital Investment: Immediate Expensing or a 7% Tax Credit

The largest business measure is a new tax incentive for investment in specified productivity-enhancing equipment and other assets. For equipment confirmed by the Minister of Economy, Trade and Industry, businesses may choose immediate expensing or a tax credit.

The acquisition cost thresholds for eligible assets are as follows.

The tax credit is 7% of acquisition cost, or 4% for buildings and similar assets, capped at 20% of current-year corporation tax. Immediate expensing deducts the cost in that year but leaves no depreciation in later years. A tax credit directly reduces tax while retaining depreciation, but is capped. The better choice depends on expected current-year earnings and future cash flow. Decide before purchasing the equipment.

The inclusion of buildings is easily overlooked. It creates scope to expense assets immediately that otherwise have long depreciation periods.

The special rule for small depreciable assets of small and medium-sized enterprises also changes. The per-item acquisition cost limit rises from the current below JPY 300,000 tobelow JPY 400,000, and the application period is extended by three years. The JPY 100,000 difference matters when replacing computers or business equipment.

The R&D tax system gains a new regime for priority industrial technology research expenses. The credit rate is 40% of qualifying expenses, or 50% for specially prioritized industrial technology research expenses, capped at 10% of current-year corporation tax.

Crypto Assets: From Miscellaneous Income to Separate Taxation at 20%

Crypto assets are among the year's largest proposed changes to personal taxation. Previously, gains from selling crypto assets were miscellaneous income subject to aggregate taxation, combined with employment and business income at progressive rates. Higher-income individuals faced higher rates and sometimes substantial burdens including inhabitant tax.

The outline provides for this to beTaxed separately from other income at 20%: 15% income tax and 5% individual inhabitant tax.This moves treatment closer to gains on listed shares.

Not All Crypto Assets Qualify

Separate taxation applies to specified crypto assets. The outline restricts these toCrypto assets and similar assets recorded in the register of financial instruments business operators.Treatment therefore differs according to whether the asset is handled by a registered operator. First establish which category your holdings fall into.

Treatment becomes stricter for assets remaining under aggregate taxation. The outline provides that gains receive no special capital gains deduction, assets held over five years do not receive the one-half capital gains inclusion treatment, and losses cannot be offset against other income subject to aggregate taxation. This creates a clear distinction between assets qualifying for separate taxation and those outside it.

Losses Will Be Carryable Forward for Three Years

Previously, unused crypto asset losses expired at year-end. The outline allows amounts remaining after deduction against specified crypto asset transfer income and similar income for the year of disposal to be carried forward, subject to conditions, to each of the following three years. For assets with volatile prices, this three-year carryforward can materially affect the actual burden.

In addition,Miscellaneous income and similar income from crypto asset derivative transactions, limited to specified crypto assets,will be added to the special taxation regime for futures transactions. Treatment of spot and margin transactions moves toward alignment.

In Return, Transactions Will Be Reported

While the tax rate falls, transaction reporting becomes stricter. The outline requires crypto asset business operators toSubmit to the district director of the tax office, by January 31 of the following year, a report stating the name, address, individual number, and other details of residents and others who traded specified crypto assets during the year.This introduces a reporting structure similar to securities firms' annual transaction reports for specified accounts.

When Does It Start?

The start date is January 1 of the year after the year in which the amendment to the Financial Instruments and Exchange Act takes effect. Separate taxation applies to specified crypto asset disposals and similar transactions from that date. Reporting obligations apply to transactions from January 1 of the following year. Because these are calendar-year boundaries, the timing of sales across year-end matters.

The personal income tax section on financial and securities taxation also covers NISA, bonds of closely held and specified corporations, employee housing savings, listed shares held in specified accounts, special life insurance premium deductions, and angel investment incentives.

International Taxation: Minimum Tax and CFC Rules

Two international tax regimes are amended.

One is Global Minimum Tax For corporation tax on the international minimum tax amount for each covered fiscal year, adjustments for deferred tax assets and liabilities are revised. Specifically, deferred tax assets associated with tax credits and similar arrangements concluded on or after December 1, 2021, and certain deferred tax assets and liabilities under foreign law are excluded from the calculation. This refines calculation details rather than the regime's fundamental structure.

The other is the controlled foreign company regime, commonly called the tax haven countermeasure rules. The changes cover the following.

• A new special rule for dissolved foreign related companies allows companies in liquidation to remain within the previous framework for up to three years.
• The asset ratio requirement for the paper company exception is simplified.
• The calculation of the foreign corporate tax rate is clarified.
• The same revisions apply to the regime for resident individuals.

These apply to fiscal years of foreign related companies beginning on or after April 1, 2026. The first applicable year may differ by a year depending on a subsidiary's year-end, so companies with overseas subsidiaries should begin by checking their fiscal periods.

Impact on Funds: Revising the Special Tax Treatment for Foreign Partners

Although placed under other international tax matters, the revision to special treatment for foreign partners has significant practical implications. Entry conditions change when Japanese funds bring in overseas investors.

This special treatment exempts foreign investors investing in Japan through investment limited partnerships and similar arrangements from Japanese filing, subject to conditions. The type of partnership used as the fund vehicle affects the parties' taxation, making this inseparable from vehicle selection.

Three points change.

Raising the interest limit from below 25% to below 50% expands the amount a single overseas investor can contribute, subject to the fund having the required committee. Investors may also approve conflict-of-interest transactions without being regarded as executing the partnership's business. This is practically significant for investors wishing to participate in governance.

Abolition of the permanent establishment requirement also matters. Previously, another Japanese presence could disqualify an investor from the special treatment. Overseas institutional investors with Japanese branches will find it easier to participate in Japanese funds.

Additionally, Civil Code partnership and Silent partnership Treatment when using these vehicles is governed by separate provisions. Eligibility for this special rule must be considered when choosing the fund vehicle. Aircraft Leasing and other structures using partnerships to invest in assets require the same analysis.

Other Changes Affecting Households and Businesses

The seventh pillar referred to rationalizing special tax measures. Specific details appear in the asset taxation and consumption taxation chapters. Three measures directly affecting taxpayers follow.

The first is thatthe exemption for lump-sum gifts of education funds will end. The outline ends, without extension, the period for establishing trusts and similar arrangements under education fund management agreements, currently ending March 31, 2026. Funds contributed by that date continue to qualify. Those considering lump-sum education gifts to grandchildren must plan on the deadline remaining unchanged.

The second isan increase in the international tourist tax. It rises from JPY 1,000 to JPY 3,000 for departures on or after July 1, 2026. This adds up for frequent overseas travelers.

The third isconsumption tax on overseas online purchases. Goods shipped from overseas valued at JPY 10,000 or less excluding tax, previously untaxed, become taxable. A deemed-sale mechanism also applies to platform operators with sales exceeding JPY 5 billion. Application begins April 1, 2028, somewhat further ahead.

Businesses are also affected by invoice transitional measures. The deductible proportion for purchases without qualified invoices falls in stages to 70% from October 2026, 50% from October 2028, and 30% from October 2030. Businesses buying frequently from tax-exempt suppliers need to consider reviewing transaction terms around these dates.

For inheritance and business succession, the submission deadline for individual business succession plans is extended by two years and six months, and the special succession plan deadline for tax deferral on unlisted shares and similar interests by one year and six months. This responds to concerns about insufficient preparation time.

Motor Vehicles, Defense, and Gasoline Tax

The environmental performance components of motor vehicle tax and light motor vehicle tax are to be abolished on March 31, 2026. New charges for electric vehicles and similar vehicles are also under consideration. The direction shifts from tax on purchase toward burdens during ownership and use.

To fund stronger defense capabilities, a new provisional Special Defense Income Tax surcharge of 1% of income tax is proposed. At the same time, the Special Income Tax for Reconstruction rate falls by 1 percentage point. This changes the funding designation while leaving the combined immediate burden on taxpayers unchanged.

Tax revenue secured by rationalizing special measures and ensuring fairness is to provide stable funding for abolishing temporary gasoline and similar tax rates and making education free. Which incentives are reduced must be checked in Part II's specific measures and subsequent bills.

To determine if it relates to you

Three matters should be checked immediately after the outline is published.

• Is the item of interest mentioned only in Part I, Basic Approach, or also in Part II, Specific Details? Items appearing only in Part I may be deferred to later years.
• When does it apply? Application to income tax from 2026 onward differs greatly in timing from application to fiscal years beginning on or after April 1, 2026.
• What has been added to Part III, Matters for Further Consideration? Items listed there often move into the main text of the next year's outline.

Ultimately, applicability to you, your family, or your company is determined by enacted statutory provisions and National Tax Agency guidance. At the outline stage, only a direction has been indicated.

What Happened Subsequently?

The bill partially amending the Income Tax Act and other laws following this outline was submitted to the Diet on February 20, 2026, and enacted and promulgated on March 31, 2026. Except where otherwise provided, it took effect on April 1, 2026. Bills including amendments to the Customs Tariff Act and other laws were also enacted that day.

Source

• FY2026 Tax Reform Outline (Liberal Democratic Party and Japan Innovation Party, adopted December 19, 2025) / Liberal Democratic Party: Decisions and Action Toward a Strong Economy—FY2026 Ruling Parties' Tax Reform Outline Adopted
• Ministry of Finance: FY2026 Outline of Tax Reform (Cabinet decision of December 26, 2025), I. Personal Income Taxation / III. Corporate Taxation / V. International Taxation
• Ministry of Finance: Bills Submitted to the 221st Diet (2026 Ordinary Session), including submission, enactment, promulgation, and effective dates of the bill partially amending the Income Tax Act and other laws