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FY2009 Tax Reform (Main Points)

Ministry of Finance 19 December 2008

With a view to contributing to economic recovery, and while taking into account the current economic and financial environment, the FY 2009 tax reform will take appropriate measures regarding taxation of housing and land, taxation of corporations, taxation of SMEs, inheritance taxation, taxation of financial and securities transactions, international taxation, and motor vehicle taxation.

Taxation of housing and land

• Extend the application of tax credit relating to housing loans by 5 years. Raise the maximum amount eligible for tax deduction to 5 million yen (6 million yen for long-term quality houses) 

• Introduce new measures to allow tax deduction for housing investment relating to newly built long-term quality houses at one’s own expenses and renovation aimed at improving energy conservation and barrier-free 

• Introduce special tax deduction up to 10 million yen with regard to the profit gained from the sale of land purchased in 2009 or 2010 after the ownership of the land for at least 5 years 

• Introduce measures to allow tax deferral of a part of the profit gained from the sale of the land which corporations sell within 10 years after they purchase other land in 2009 or 2010 

• Maintain the current reduced tax rate of registration licence tax relating to the sale of lands for two years
  
  
  
• Expand the scope of the postponement of payment of inheritance tax for farmlands including loans intended to promote the effective use of farmlands Extend the application of the current reduced tax rate of 7% (10% if combined with Local Inhabitants Tax) for dividends and capital gains on listed shares by 3 years 

• Create simple tax incentives to encourage small investments in the FY 2010 tax reform (The tax incentives will be introduced when the reduced tax rate mentioned above is abolished and the tax rate of 15% (20% if combined with Local Inhabitants Tax) in principle is applied)

• Introduce individual contributions (matching contributions) in corporate defined contribution pension plans and increase the limits on contributions

• Introduce insurance premium deduction for long-term care and medical care as a new tax relief for life insurance premiums in the FY2010 tax reform
  Taxation of corporations

• Introduce two-year tax measures to allow immediate depreciation with regard to investment in energy-saving and new-energy facilities and in production facilities for goods such as energy-saving home electric appliances

• Introduce a measure to treat the dividends received from overseas subsidiaries as non-taxable income in the light of tax neutrality for company’s repatriation in place of indirect foreign tax credit
• Temporarily lower the reduced corporate tax rate for SMEs from 22% to 18 % for 2 years 

• Abolition of suspension of the refund system relating to net loss for SMEs 

• Establish a tax scheme to postpone the payment of inheritance tax and gift tax with regard to the unlisted shares in order to ease the transition of business for SMEs
• Temporarily reduce tax burden on the automobiles that have passed higher environmental standards 

• Extend the period of the special income tax credit for online tax return by two years  
• (Reference)*    Preliminary estimates of revenue impacts of FY 2009 Tax Reform (national internal taxes) 

(Billion Yen) Taxation of housing and land                     - 22

Taxation of corporation                                   -119

Taxation of SMEs                                           -204

Inheritance taxation                                         -17

Taxation of financial and securities transactions      -5 Motor vehicle taxation          -102

Total                                                            -469

(Billion Yen) Taxation of housing and land                     -177

Taxation of corporation                                   -128

Taxation of SMEs                                           -222

Inheritance taxation                                         -29

Taxation of financial and securities transactions     -27 Motor vehicle taxation          -102

Total                                                            -685

* Figures are rounded and subject to changes.

Regarding the housing loan tax credit, the following table is applied to a taxpayer who starts residing in 2009 to 2013.

1    Normal Houses                                                              2    Long-term Quality Houses

 【 Current system 】

【Reform proposal】

Note: The expiration date of the reduced tax rate (7%) for dividends on listed shares received by non-residents that do not have permanent establishments, and domestic and foreign corporations is also extended to December 31, 2011 from March 31, 2009.

１． Scope of tax exemption ：Dividends and capital gains derived from listed shares

２． Investment Limit of Tax Exemption ：1 million yen as new annual investment (unused quota cannot be carried over)

３．Total Investment Limit of Tax Exemption  ：5 million yen (1 million yen × 5 years)

４． Period of holding ：10 years (longest) free to sell shares any time (the amount of used quota cannot be reused)

５． Number of accounts ：one account per/person each year (allowed to open an account in a different financial institution every year)

６． Person entitled to open an account ：residents & non-residents with Permanent Establishment (20years old and above)

７． Timing of introduction ：when the 20% tax rate on dividends and capital gains from listed shares is applied

〈Image of measures〉

1st year  2nd year  3rd year  4th year  5th year  6th year  7th year  8th year  9th year 10th year11th year12th year 13th year14th year ○ 

Further consideration will be taken with regard to the details of the measure such as the appropriate management of accounts by means of number system to prevent illicit use of accounts and the withholding tax in the case where the breach of the requirements is found in the opening of an account. Necessary legal measures will be taken in the FY 2010 reform.

Revise the tax treatment with regard to defined contribution pension plans.

1. The individual contribution (“matching contributions”*) which will be introduced into corporate defined contribution pension plans are fully deductible.

*Matching contributions shall satisfy the following conditions:

they must not exceed the amount contributed by the employer; and the total amount contributed by an employee and his/her employer must not exceed the contribution limit.

1. Raise the maximum amount of contribution for defined contribution pension plans.

(in thousand yen, per month)

【Current system】

【Reform proposal】