Japanese tax law historically has had two sets of rules to restrict interest deductions; the transfer pricing rules (for interest at a higher rate compared to the arm’s length principle) and the thin capitalization rules (for interest on excessive debt compared to capital), but until recently there has been no rule to restrict interest payments that are excessive compared to income.
Taking into account rules in other developed countries, Japanese earnings stripping rules were introduced under the 2012 tax reform with the aim of preventing tax avoidance by limiting the deductibility of interest paid to related persons where it is disproportionate to income.
The Japanese earnings stripping rules will be applicable for fiscal years beginning on or after 1 April 2013 in order to provide one year for the new rules to become broadly known and allow taxpayers time to review their funding schemes.
While our earlier newsletter “Outline of the 2012 Tax Reform Proposals” (issued on 14 December 2011) included an overview of the new rules, we have set out further details in this newsletter.
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