Summary
An important legislative change affecting intragroup transactions has taken effect in Japan.
Under the amended Corporation Tax Act Enforcement Regulations, effective April 1, 2026, Japanese corporations are now legally required to obtain, prepare, and retain documentation evidencing the basis for calculating consideration for “specified transactions” with related parties (entities with 50% or greater capital relationships, etc.), including royalties, management fees, and shared cost allocations.
The background to this amendment is deeply significant. In a case reported by the National Tax Agency (NTA) to the Government Tax Commission, a Japanese corporation was subjected to three separate tax audits over a 20-year period, yet the foreign parent company refused to disclose any basis for calculating consideration, leaving the tax authorities unable to ascertain the true nature of the transactions.
The sanction is severe: revocation of Blue Return (aoiro shinkoku) approval has been added as a statutory ground for revocation. While not necessarily triggered immediately, the very existence of this “card” fundamentally alters the tax authorities’ negotiating power during audits, carrying the risk of losing the ability to carry forward tax losses and claim various tax credits.
To advisors of foreign parent companies with Japanese subsidiaries — “we didn’t know” is not a defense. This is already in effect.
Introduction — Why This Amendment Matters
On March 31, 2026, the “Act for Partial Amendment of the Income Tax Act, etc.” (Act No. 12 of 2026) was enacted by the Diet and came into force on April 1, 2026. Embedded within this legislation is a provision that brings about a fundamental change in the practice of intragroup transactions.
Newly established Article 59-2 (Special Provisions for Documentation and Retention of Related-Party Transactions) and Article 67-2 of the Corporation Tax Act Enforcement Regulations legally mandate the retention of documentation, including the basis for calculating consideration, for certain transactions (“specified transactions”) between Japanese domestic corporations and their related parties.
This amendment is far more than an additional documentation rule. It is a direct legislative response to a structural problem where foreign parent companies had been refusing to disclose the basis for pricing to their Japanese subsidiaries, effectively rendering tax audits powerless — a challenge that the NTA had flagged as a serious concern for many years.
Background — How the NTA Reached Its Breaking Point
(1) Issues Raised at the Government Tax Commission
In the “Expert Panel on Digitalization of the Economy and Tax Compliance Environment,” established in June 2024 under the Government Tax Commission, the NTA reported the following audit cases as examples of “conduct that significantly undermines the public’s sense of tax fairness”:
Case 1: A taxpayer that refused or delayed the presentation and submission of materials during a tax audit
Case 2: A case where the presentation of materials relating to cross-border transactions was refused, making it extremely difficult to determine the full picture
Case 3: A case where insufficient documentation was provided regarding payments to a foreign related party, making it difficult to verify the legitimacy of the expenses
Particularly noteworthy is a case reported at the Expert Panel meeting in June 2025: despite conducting three separate tax audits of a Japanese corporation over a span of 20 years, the foreign parent company had failed to provide any documentation on the basis for calculating consideration, and in none of those audits were the tax authorities able to adequately ascertain the facts.
(2) Structural Limitations of the Previous Regime
While the Corporation Tax Act already imposed document retention obligations, intragroup transactions — particularly those with foreign related parties — presented the following structural problems:
- Japan’s tax authorities lacked the power to exercise their right of inquiry directly against overseas related parties
- Intragroup transactions were routinely processed with nothing more than a single invoice or a lump-sum description, with no documentation of the basis for calculating consideration
- Foreign parent companies could effectively neutralize tax audits by intentionally refusing to disclose pricing rationale
(3) Pre-announcement in the FY2025 Tax Reform Outline
The ruling party’s FY2025 (Reiwa 7) Tax Reform Outline included a warning that “cases have been identified where materials requested by the NTA during tax audits are not presented or submitted, preventing accurate confirmation of the facts,” signaling that a legislative response was under consideration.
Summary of the Amendment — Key Provisions
(1) Scope of Application
Both Blue Return filers (Article 59-2) and ordinary corporations (Article 67-2) are covered. In practice, this means virtually all domestic corporations in Japan fall within the scope of the new rules.
(2) Definition of “Related Party”
The definition is based on the same criteria used to determine “foreign related parties” under the transfer pricing regime, and covers entities in the following relationships:
- Parent-subsidiary: One entity directly or indirectly holds 50% or more of the issued shares of the other
- Brother-sister: Both entities have 50% or more of their issued shares directly or indirectly held by the same person
- De facto control: One entity can substantially determine the business policies of the other, based on factors such as interlocking directorships, operational dependence, or financial dependence
- Chain relationships: Cases where the above relationships exist through a chain of entities
Critically, “related parties” are not limited to foreign corporations; transactions between domestic corporations also fall within scope. However, in practice, the greatest impact will be felt by Japanese subsidiaries transacting with foreign parent companies.
(3) Scope of “Specified Transactions”
The transactions covered are those that give rise to expenses (Corporation Tax Act, Article 22, Paragraph 3, Item 2), specifically the following:
① Transfer or licensing of industrial property rights, etc.
Transactions involving the following assets from a related party to a domestic corporation:
- Industrial property rights or other technology-related rights, special production methods, or equivalents thereof
- Copyrights (including publishing rights and neighboring rights)
- Program works (software)
② Provision of services
- Shared cost-type business activities: R&D, advertising, and other business activities leveraging the related party’s management resources; licensing of dedicated assets and their maintenance/management (where costs are borne under a contract or agreement)
- Management/advisory-type services: Management guidance, information provision, and other services based on the related party’s expertise in industry, commerce, or academia (i.e., management fees)
- Services similar to the above
(4) Required Documentation
Where the transaction-related documents (purchase orders, contracts, delivery notes, receipts, estimates, etc.) that must be retained under existing laws do not contain the following particulars, the domestic corporation must obtain or prepare a document (a “Specified Particulars Document”) that clarifies those missing items and retain it for seven years:
For transactions involving industrial property rights, etc.:
- Details of the industrial property rights being transferred or licensed
- The function those rights serve in the domestic corporation’s operations
- A breakdown of the consideration and the methodology for setting the amount
For shared cost-type service transactions:
- The content of business activities carried out under the contract or agreement
- The methodology for calculating the amount of costs to be borne by the domestic corporation
For management/advisory-type service transactions:
- Details and description of the services provided
- A breakdown of the consideration and the methodology for its calculation
(5) Sanctions for Non-Compliance
Failure to retain the Specified Particulars Documents in accordance with the law constitutes a statutory ground for revocation of Blue Return approval.
The consequences of Blue Return revocation are severe:
- Loss of the ability to carry forward tax losses
- Loss of access to various tax credits under the Special Taxation Measures Act (e.g., R&D tax credit)
That said, it would be unrealistic to expect the Japanese tax authorities to revoke Blue Return approval over a single documentation deficiency — the so-called “unsheathing of the final sword.” Based on past enforcement practice, this powerful sanction is more likely to be invoked in cases of intentional and persistent refusal to provide documentation, or repeated non-compliance with corrective guidance — in other words, in cases that are clearly egregious or uncooperative. What is critically important, however, is that the very codification of this as a statutory ground for revocation dramatically strengthens the tax authorities’ hand during audits. Where documentation has not been retained, the tax authorities can proceed with their audit while holding this provision in reserve as a “card.” The previous approach of “if we don’t produce the documents, there’s nothing they can do” is no longer viable.
(6) Effective Date
The provisions apply from fiscal years beginning on or after April 1, 2026. No transitional measures or grace periods have been provided.
Practical Considerations for Advisors of Foreign Parent Companies
(1) “We Didn’t Know” Is Not a Defense — Immediate Action Is Required
There is no transitional period for this regime. The NTA’s position is that the basis for calculating consideration in transactions should have been retained as a matter of course, irrespective of whether a specific legal mandate existed. The rules therefore apply from the very first fiscal year beginning on or after April 1, 2026.
(2) Specific Actions Required of Foreign Parent Companies
Foreign parent companies (and their advisors) should take the following steps promptly:
Step 1: Identification of In-Scope Transactions
Comprehensively identify all transactions between the Japanese subsidiary and its foreign parent (and other group entities), and determine which qualify as “specified transactions.” Typical in-scope transactions include:
- Royalties (technology license fees, trademark usage fees)
- Management fees
- Shared service charges (IT, HR, accounting, and other head office cost allocations)
- R&D cost-sharing contributions
- Advertising and marketing cost allocations
Step 2: Review of Existing Documentation
Examine whether existing transaction-related documents (contracts, invoices, calculation statements, etc.) contain the legally required particulars (basis for calculating consideration, details of services, etc.). Where documentation contains only entries such as “lump sum: ¥XX,” supplemental documentation will need to be prepared.
Step 3: Preparation of Supporting Documentation
Obtain the basis for calculation from the foreign parent, or prepare the documentation on the Japanese subsidiary’s side. Specifically:
- For cost allocations: allocation keys, calculation methodology, and breakdown of underlying costs
- For royalties: details of the subject IP, how the IP is used by the Japanese subsidiary, and the basis for the royalty rate
- For management fees: specific description of the services provided, time allocation, and the method for calculating consideration
In practice, it is entirely foreseeable that foreign parent companies will resist disclosing the full details of their global cost structures and internal allocation logic. Providing the full global allocation spreadsheet would effectively reveal the allocations made to subsidiaries in other countries and the parent’s internal cost structure. In such situations, the following pragmatic approaches can be considered:
- Preparation of a masked (redacted) summary: Anonymize or remove information relating to subsidiaries in other jurisdictions, and extract only the portions of the allocation calculation relevant to the Japanese subsidiary
- Customization of the global Defense File for Japan: Extract and restructure the portions of the group’s existing transfer pricing Defense File that address the requirements of this regime (details of services, cost calculation methodology, etc.)
- Preparation of a “service receipt confirmation” by the Japanese subsidiary: The Japanese subsidiary itself documents the content and frequency of services received from the foreign parent, and prepares a reconciliation of those services against the consideration paid
The key point is that the foreign parent is not required to lay everything bare. What the regime demands is an explanation of the matters necessary for calculating the consideration paid by the Japanese subsidiary, and information provision within a reasonable scope aligned with that purpose is sufficient.
Step 4: Building a Sustainable Compliance Framework
Rather than a one-off exercise, establish an internal framework that ensures the required documentation is reliably obtained, prepared, and retained in each fiscal year on an ongoing basis.
(3) The Risk When a Foreign Parent “Doesn’t Want to Disclose”
In the past, some foreign parent companies — for strategic transfer pricing reasons or information management concerns (such as avoiding disclosure of their global cost structure) — have declined to disclose pricing rationale to their Japanese subsidiaries. Under this amendment, however, the risk of such non-disclosure falls squarely on the Japanese subsidiary.
Where a Japanese subsidiary is unable to retain the Specified Particulars Documents, it will remain in a state that constitutes a ground for Blue Return revocation. As noted above, this may not lead to immediate revocation, but it is certain that the tax authorities will adopt a significantly stronger posture during audits against the backdrop of this provision, and the Japanese subsidiary’s tax position will become markedly unstable.
Accordingly, a paradigm shift is required: foreign parents must treat the provision of pricing rationale to Japanese subsidiaries not as “voluntary” but as “essential.” As discussed in Step 3 above, this does not mean disclosing everything; pragmatic solutions such as masked summaries tailored to Japan’s tax requirements are available. Before concluding that “we can’t provide this,” it is important to explore realistic middle ground.
(4) Relationship to Transfer Pricing — “We Already Have TP Documentation” May Not Be Enough
Foreign parent companies may argue that “we have already prepared transfer pricing documentation (Local Files, etc.) and therefore no additional action is required.” However, the two regimes differ in the dimension of what must be proved.
Transfer pricing documentation (Local Files and Master Files) primarily demonstrates that the pricing policy is consistent with the Arm’s Length Principle. By contrast, this new regime requires proof of the actual existence of the services provided (a “Benefit Test”) and specific evidence of the cost allocation calculations for the relevant fiscal year — a far more micro-level and concrete factual demonstration.
For example, even if a management fee is set under a transfer pricing policy of “total cost plus 5%,” this regime requires more than the mere existence of that policy. It requires details of what services were actually provided in the relevant fiscal year, how the underlying costs were calculated, and how the allocation to the Japanese subsidiary was determined.
There is also a significant difference in terms of monetary thresholds. The Local File simultaneous documentation obligation is limited to cases where the prior fiscal year’s transaction amount is ¥5 billion or more, or intangible asset transactions are ¥300 million or more. This new regime has no such monetary threshold — all specified transactions are in scope, regardless of size.
Conclusion
This amendment represents a landmark turning point in Japanese tax administration. It is a direct legislative response to the structural challenge of “non-disclosure of pricing rationale by foreign parent companies” — an issue the NTA had flagged for over 20 years.
For advisors of foreign parent companies, the implications are clear:
- Disclosing the basis for pricing to Japanese subsidiaries is no longer optional but essential to supporting a legal obligation (though this does not require full transparency — targeted information provision that reasonably meets Japan’s requirements is sufficient)
- The scope is broad, with no monetary threshold. Japanese subsidiaries of all sizes are covered without exception
- Blue Return revocation is now a codified statutory ground. While not necessarily triggered immediately, it serves as an extremely powerful “negotiating card” for the tax authorities during audits
- No transitional measures. Already in effect
We welcome inquiries from foreign parent companies with Japanese subsidiaries and their advisors.
