The 2017 tax reform bills were passed by the 193rd ordinary session of the Japanese National Diet on 27 March 2017. Accordingly, the Japanese regulations on controlled foreign companies (CFC) have been fundamentally revised, taking into account the recommendations of Action 3 of the BEPS Final Reports in October 2015. Compared to the previous CFC rules, which adopted an entity approach with a trigger rate to determine whether a foreign subsidiary is to be treated as CFC, the amended new CFC regulations adopt an income-oriented approach by applying the “trigger rate” test In order to assess whether the foreign corporation should be treated as a CFC.

Current CFC Rules:

  • Income earned by a foreign related corporation (FRC) which satisfies the Economic Activity Tests will not be subject to CFC rules regardless of the corporate tax rate (passive income may be subject to CFC rules when the corporate tax rate is less than 20%);
  • Income earned by an FRC which does not satisfy the Economic Activity Tests and which is subject to a corporate tax rate of less than 20% will be subject to the CFC rules on an entity level basis; and
  • Income earned by a FRC which is a Paper Company, a Cash Box or a Black List Company and which is subject to a corporate tax rate of less than 30% will be subject to the CFC rules on an entity level basis.

According to the new CFC rules, the de minimis exemption rule for passive income is also reviewed.