Japan’s FSA issued guidance clarifying tax rules for interest-equivalent payments under the Earnings Stripping Regime, aligning with OECD BEPS Action 4.
Japan’s Financial Services Agency (FSA) released guidance on 24 June 2025 clarifying the tax treatment of “payments economically equivalent to interest” under the Japanese Earnings Stripping Regime (J-ESR). The document follows confirmation from the National Tax Agency (NTA) and aligns with the OECD/G20 BEPS Action 4 recommendations on limiting base erosion through interest deductions.
The J-ESR aims to prevent tax avoidance by restricting excessive interest payments and includes both direct interest and economically equivalent payments. The FSA confirmed that financial transactions, such as Interest Rate Swap agreements closely related to company borrowings, may be treated as equivalent to interest for tax purposes.
Determination depends on the economic substance of transactions, not merely accounting treatment. Payments must have a close economic connection to financing to qualify, and broad use of interest-related calculations alone does not automatically classify a payment as interest-equivalent under the regime.
