Japanese companies have tended to accumulate their earnings within the companies, and there are lots of discussions about the internal reserves of companies in Japan. These internal reserves have been increasing in recent years, despite an improved profit structure for Japanese companies and a continuing decline in the domestic corporate tax rate, and it has been thought that this is one of the causes of economic stagnation.
In order to make use of the increasing internal reserves of Japanese companies and promote the supply of new funds to venture companies that will play a key role in innovations, a new “Open innovation tax incentive” has been introduced from 1 April 2020.
The open innovation tax incentive provides an income deduction equal to 25% of the amount invested in companies making an eligible investment in a venture company.
Note 1: A Japanese small and medium sized entity (SME) is allowed to utilise the tax incentive when it invests at least JPY 10 million in a Japanese venture. An SME is defined as a company whose capital is not more than JPY 100 million, excluding where 100% of the shares of the company are directly or indirectly held by one large-sized company (a company whose paid-in-capital is JPY 500 million or more), where 100% of the shares of the company are directly held by two or more large-sized companies in a 100% group, or other specific group companies hold certain rates of shares of the company.
The income deduction under this tax incentive is limited to JPY 2.5 billion per investment, and JPY 12.5 billion in total, per financial year.
The deduction will be subject to recapture if any changes on the capital contribution to the venture company occur within five years from the investment.
The open innovation tax incentive is applicable not only to Japanese venture companies but also to foreign-based venture companies, and the investment amount is applicable from JPY 100 million (or JPY 10 million for SMEs) for Japanese venture companies and JPY 500 million for foreign-based venture companies. METI also has an enquiry facility for any companies to confirm the applicability of each deal in advance. There are several requirements for the tax incentive to apply, but it could provide a huge boost to investment activities of Japanese companies.