Income Tax Act

If a Resident has to pay foreign income taxes in any year (meaning taxes imposed pursuant to foreign laws or orders which are equivalent to income taxes and provided for by Cabinet Order; hereinafter the same applies in this paragraph and paragraph (9)), the amount of those foreign income taxes (other than any foreign income taxes imposed on income arising from a transaction provided for by Cabinet Order as one that cannot be regarded as an ordinary transaction undertaken by a Resident; other than any foreign income taxes prescribed by Cabinet Order as being imposed pursuant to foreign income tax laws or orders using as the tax base an amount on which income taxes are not to be imposed under the provisions of laws and orders concerning a Resident's income taxes; and any other foreign income taxes as prescribed by Cabinet Order; hereinafter referred to as the "amount of credit-eligible foreign income tax" in this Article) is allowed as a credit against the amount of income tax for the year, up to what is calculated pursuant to Cabinet Order as the part of the amount of income tax for the year as calculated pursuant to the provisions of Article 89 through Article 93 (Tax Rates and Related Matters) which corresponds to the amount of foreign income arising in that year (meaning the amount prescribed by Cabinet Order as equivalent to the amount that would be the tax base if income tax were imposed only on income related to foreign source income) (hereinafter the amount so calculated is referred to as the "maximum credit" in this Article).

If the credit-eligible foreign income taxes which a Resident has to pay in any year exceed the sum total of the maximum credit for the year and the amount specified by Cabinet Order as the maximum credit for local taxes, and part of the maximum credit in any of the three years prior to the relevant year (hereinafter referred to as "any of the last three years" in this Article) is an amount prescribed by Cabinet Order as being carried over to the relevant year (hereinafter referred to as the "maximum carry-over credit" in this Article), the amount by which the former exceeds the latter is credited against income taxes for the year pursuant to Cabinet Order, up to maximum carry-over credit.

If the credit-eligible foreign income taxes which a Resident has to pay in any year are less than the maximum credit for the year, and part of the credit-eligible foreign income taxes that the Resident has had to pay in any of the last three years constitute an amount prescribed by Cabinet Order as being carried over to the relevant year (hereinafter referred to as "carry-over, credit-eligible foreign income taxes" in this Article), the carry-over, credit-eligible foreign income taxes are credited against income taxes for the year pursuant to Cabinet Order, up to the amount remaining when the credit-eligible foreign income taxes that the Resident is to pay that year are deducted from the maximum credit.

The foreign source income prescribed in paragraph (1) means the following:

if a Resident conducts business through a foreign office or similar establishment (meaning an establishment equivalent to a permanent establishment located outside Japan or any other establishment prescribed by Cabinet Order; the same applies hereinafter in this Article), the income that should be attributed to the foreign office or similar establishment if it were a business operator conducting business independently of the Resident, taking into account the functions performed by the foreign office or similar establishment, the assets used at the foreign office or similar establishment, the internal transactions between the foreign office or similar establishment and the Resident's place of business or similar place (meaning a place of business related to the Resident's business or any other place prescribed by Cabinet Order as equivalent thereto, other than the foreign office or similar establishment; the same applies hereinafter in this Article), and other circumstances (including income arising from the transfer of the foreign office or similar establishment, and excluding income falling under item (xv));

income arising from the investment or holding of assets located outside Japan;

income prescribed by Cabinet Order as income arising from the transfer of assets located outside Japan;

compensation that a person conducting business prescribed by Cabinet Order whose main content is providing personal services outside Japan receives for providing those personal services;

consideration for renting out real property located outside Japan, a right on real property located outside Japan, or a right of quarrying outside Japan (this includes the establishment of a superficies right or a right of quarrying or doing anything else that gives another person the use of real property, a right on real property, or a right of quarrying), for establishing a mining lease outside Japan, or for renting out a vessel or aircraft to a Nonresident or Foreign Corporation;

interest and similar income as prescribed in Article 23, paragraph (1) (Interest Income) and anything equivalent thereto, which is as follows:

interest on foreign government bonds or foreign municipal bonds, or on bonds issued by a Foreign Corporation;

interest on deposits or savings (including anything equivalent to what is prescribed by Cabinet Order as referred to in Article 2, paragraph (1), item (x) (Definitions)) deposited with a business office or other office, or with any other facility equivalent thereto (hereinafter referred to as a "business office" in this paragraph), which is located outside Japan;

a distribution of proceeds from a Jointly Managed Trust or a trust equivalent thereto, a Bond Investment Trust, or a Bond-Based Investment Trust Under Public Offering or a trust equivalent thereto, which has been established as a trust at a business office located outside Japan.

dividends and similar income prescribed in Article 24, paragraph (1) (Dividend Income) and anything equivalent thereto, which are as follows:

dividends of surplus, dividends of profits, or distributions of surplus prescribed in Article 24, paragraph (1), or anything equivalent to distributions of monies or interest on funds prescribed in that paragraph, which is received from a Foreign Corporation;

a distribution of proceeds from an Investment Trust (other than a Bond Investment Trust, and a Bond-Based Investment Trust Under Public Offering and a trust equivalent thereto) or a Specified Trust That Issues Beneficiary Certificates or a trust equivalent thereto, which has been established as a trust at a business office located outside Japan.

interest from a loan provided to a person doing business outside Japan (including monies equivalent to such a loan) in connection with that business (including any amount prescribed by Cabinet Order as margin arising from purchase and sale transactions involving bonds with buyback or resale agreements which are prescribed by Cabinet Order);

any of the following royalties or consideration received from a person doing business outside Japan in connection with that business:

royalties for an industrial property right or any other right to the use of technology, a production method based on special technology, or any equivalent right or method; or consideration for the transfer thereof;

royalties for a copyright (including print rights, neighboring rights, and any equivalent rights), or consideration for the transfer thereof;

royalties for machinery, equipment, or any other tool prescribed by Cabinet Order.

a salary, remuneration, or pension as follows:

pay, compensation, wages, annual allowances, bonuses, or salary in the nature thereof, or any other remuneration for providing personal services, which arises from work done or other personal services provided outside Japan (other than work done outside Japan by a person acting as the officer of a Domestic Corporation, and any other provision of personal services prescribed by Cabinet Order);

a pension (including a benefit similar thereto) paid under a system for insurance or mutual aid based on foreign laws or orders which is similar to a system for social insurance or mutual aid under the provisions of the Acts prescribed in Article 31, items (i) and (ii) (Lump-Sum Payments Deemed to Be Severance Pay and Other Such Compensation);

severance pay and other such compensation as prescribed in Article 30, paragraph (1) (Retirement Income) which arises from work done or other personal services provided by the recipient of the severance pay and other such compensation during a period that the recipient was a Nonresident (other than work done by a person acting as the officer of a Domestic Corporation during the period when the person was a Nonresident, and any other provision of personal services prescribed by Cabinet Order).

income prescribed by Cabinet Order as a monetary award for doing advertising for business conducted outside Japan;

a pension received based on an insurance policy concluded by a foreign insurer prescribed in Article 2, paragraph (6) (Definitions) of the Insurance Business Act or any other contract for a pension prescribed by Cabinet Order, concluded through a business office located outside Japan or through a person acting as an agent for the conclusion of such contracts outside Japan (including a surplus distributed or a rebate refunded based on such a contract for a pension on or after the start date for the payment of the pension, and a lump-sum payment made in lieu of paying a pension based on such a contract);

compensation for periodic deposits, finance charges, profits, or margin profits as follows:

compensation for periodic deposits as set forth in Article 174, item (iii) (Tax Base for a Domestic Corporation's Income Taxes), linked to installment savings accepted by a business office located outside Japan;

anything equivalent to compensation for periodic deposits as set forth in Article 174, item (iv), linked to anything equivalent to the installments prescribed in that item accepted by a business office located outside Japan;

anything equivalent to finance charges set forth in Article 174, item (v), linked to anything equivalent to a contract as prescribed in that item which is concluded through a business office located outside Japan;

profits set forth in Article 174, item (vi) linked to a contract as prescribed in that item which is concluded through a business office located outside Japan;

margin profits set forth in Article 174, item (vii) linked to deposits or savings accepted by a business office located outside Japan;

anything equivalent to margin profits set forth in Article 174, item (viii), linked to anything equivalent to a contract as prescribed in that item which is concluded through a business office located outside Japan or through a person acting as an agent for the conclusion of contracts outside Japan.

a distribution of profits received based on a silent partnership agreement (this includes anything prescribed by Cabinet Order as an agreement equivalent thereto) for capital contributions made to a person doing business outside Japan;

income prescribed by Cabinet Order as income to be derived from operations conducted outside Japan, out of income arising from conducting a business of transportation by vessel or aircraft both in Japan and outside Japan;

income prescribed by Cabinet Order, out of income on which a contracting state or other contracting party to a treaty prescribed in the proviso to Article 2, paragraph (1), item (viii)-4 (referred to as a "tax treaty" in this item and paragraphs (6) through (8)) other than Japan (referred to as the "treaty partner" in paragraphs (7) and (8)) may impose taxes pursuant to the provisions of that tax treaty;

beyond what is set forth in the preceding items, income prescribed by Cabinet Order as income whose source is outside Japan.

The internal transactions prescribed in item (i) of the preceding paragraph means a transfer of assets, provision of services, or any other fact that occurred between a Resident's foreign office or similar establishment and place of business or similar place, which, if the same fact had occurred between independent business operators, would be found to constitute a sale of assets, purchase of assets, provision of services, or any other transaction (excluding a guarantee of an obligation related to the borrowing of funds, underwriting of reinsurance for insurance liability under an insurance policy, or any other transaction prescribed by Cabinet Order as similar thereto) between those business operators.

If a tax treaty contains provisions on foreign source income (meaning foreign source income prescribed in paragraph (1); the same applies hereinafter in this paragraph) that differ from the provisions of the preceding two paragraphs, then with regard to a Resident who is subject to the application of that tax treaty, notwithstanding those provisions, foreign source income is as prescribed in that tax treaty to the extent of those different provisions.

In calculating the income of a Resident set forth in paragraph (4), item (i), if the Resident's foreign office or similar establishment is located in the treaty partner of a tax treaty (limited to a tax treaty that provides that taxes may be imposed on the income of the Resident set forth in that item, and excluding one that provides that income arises from the internal transactions prescribed in that item), the internal transactions prescribed in that item are not to include a fact equivalent to the payment of interest (including anything prescribed by Cabinet Order as equivalent thereto) between the Resident's foreign office or similar establishment and place of business or similar place, or any other fact prescribed by Cabinet Order.

If a Resident's foreign office or similar establishment is located in the treaty partner of a tax treaty (limited to a tax treaty that provides that, if a Resident's foreign office or similar establishment conducts operations of purchasing Inventory for the place of business or similar place as well as other operations, the income arising from the operations of purchasing that Inventory is not included in the income that should be attributed to that foreign office or similar establishment) and the Resident's foreign office or similar establishment conducts operations of purchasing Inventory for the place of business or similar place as well as other operations, the income set forth in paragraph (4), item (i) arising from the operations of that foreign office or similar establishment of purchasing that Inventory is deemed not to exist.

If the foreign income taxes that a Resident has had to pay are reduced in any of the seven years beginning in the year after one in which the Resident is subject to any of paragraphs (1) through (3) with respect to those foreign income taxes, Cabinet Order provides for the application of those provisions for the year in which the day that the amount is reduced falls.

The provisions of paragraph (1) apply only if a Tax Return, Amended Return, or written request for Reassessment (referred to as a "Tax Return or similar filing" in the following paragraph) is accompanied by a document giving the amount allowed as a credit under the provisions of paragraph (1) and the details of the calculation thereof, a document evidencing that the amount of credit-eligible foreign income tax has been imposed, and the other documents prescribed by Ministry of Finance Order (referred to as the "detailed statement" in this paragraph). In such a case, the amount of credit-eligible foreign income tax and the other amounts prescribed by Ministry of Finance Order that form the basis for calculating the amount allowed as a credit under the provisions of paragraph (1) are limited to the amounts stated as those amounts in the detailed statement, except in the case where the district director finds that there are special circumstances.

The provisions of paragraph (2) and paragraph (3) apply only if the Tax Return or similar filing for each of the years in association with which there is a maximum carry-over credit or carry-over, credit-eligible foreign income taxes, beginning with the earliest year, is accompanied by a document indicating the maximum credit for that year and the amount of credit-eligible foreign income tax that the Resident has had to pay in that year, and if the Tax Return or similar filing for the year in which the Resident seeks to apply those provisions is accompanied by a document giving the amount allowed as a credit under those provisions and information to be used as the basis for calculating the maximum carry-over credit or the carry-over, credit-eligible foreign income taxes, and by the other documents prescribed by Ministry of Finance Order. In such a case, the maximum credit for each of those years, the amount of credit-eligible foreign income tax that the Resident has had to pay in each of those years, and the other amounts prescribed by Ministry of Finance Order that form the basis for calculating the amount allowed as a credit under those provisions are limited to the amounts stated as the amounts forming the basis for that calculation in the documents attached to the Tax Return or similar filing for each of those years pursuant to the provisions of the first sentence of this paragraph, except in the case where the district director finds that there are special circumstances.

A Resident who is subject to the application of the provisions of paragraphs (1) through (3) must, pursuant to Ministry of Finance Order, prepare a document giving the details of the transactions attributed to the Resident's foreign office or similar establishment and other documents specified by Ministry of Finance Order, with regard to those transactions the Resident has conducted with other persons in which the income arising from the transaction is attributed to the Resident's foreign office or similar establishment in the calculation of the Resident's amount of foreign income prescribed in paragraph (1) for the year.

A Resident who is subject to the application of the provisions of paragraphs (1) through (3) must, if a transfer of assets, provision of services, or any other fact between the Resident's place of business or similar place and foreign office or similar establishment falls under the internal transactions prescribed in paragraph (4), item (i), prepare, pursuant to Ministry of Finance Order, a document giving the details of that fact and other documents specified by Ministry of Finance Order.

The first sentence of Article 92, paragraph (2) (Dividend Tax Credits) applies mutatis mutandis to an amount allowed as a credit under paragraphs (1) through (3).

Beyond what is provided for in paragraph (9) through the preceding paragraph, necessary matters concerning the application of the provisions of paragraphs (1) through (8) are specified by Cabinet Order.

A credit under paragraphs (1) through (3) is referred to as a foreign tax credit.