Japan Enacts Law for QDMTT and UTPR from April 1, 2026

On March 31, 2025, the Law to Partially Amend the Income Tax Act was published in the Official Gazette. 

Under-Taxed Profits Rule (UTPR)

New Articles 82-11 – 82-18 of the Corporation Tax Act provide for the UTPR from April 1, 2026.

This follows the standard provisions in the Pillar 2 GloBE rules.

The UTPR percentage (to allocate UTPR top-up amounts to a jurisdiction) is based on Article 2.6.1 of the OECD Model Rules. and is calculated as:

50% *(Number of employees in the jurisdiction/Number of employees in all jurisdictions)
+
50% *(Value of tangible assets in the jurisdiction/ Value of tangible assets in all jurisdictions)

Article 82-11(3) provides for an exclusion from the UTPR for MNEs that are in the initial phase of their international activity for a five-year period. The exclusion applies just for the UTPR – not the income inclusion rule (IIR). This is based on Article 9.3 of the OECD Model Rules. Additional details are to be provided by Cabinet Order.

A new Article 82-14 of the Corporation Tax Act requires the submission of a UTPR tax return within 15 months from the end of the fiscal year (increased to 18 months in the transitional year). The UTPR tax return must be accompanied by the consolidated financial statements of the ultimate parent entity of the MNE group for the relevant fiscal year and other documents prescribed by an Ordinance of the Ministry of Finance.

Article 82-17 of the Corporation Tax Act requires the payment of the UTPR top-up tax by the deadline for filing the UTPR tax return.

Domestic Minimum Tax

New Articles 82-18 – 82-26 provide for the domestic minimum top-up tax (intended to be a QDMTT) from April 1, 2026. The standard GloBE rules apply for the DMTT calculation subject to some specific amendments in the law and further amendments that are to be provided in a Cabinet Order.

Article 82-19(8) applies the de minimis rule for QDMTT purposes (ie the QDMTT is deemed to be zero) if:

-the average Pillar Two GloBE revenue of the jurisdiction for the current and the two preceding fiscal years is less than EUR 10 million; and

-the average net Pillar Two GloBE income or loss of the jurisdiction for the current and the two preceding fiscal years is a loss or is less than EUR 1 million.

The UTPR exclusion for MNEs in their initial phase of international activity does not need to be included in a QDMTT, however, it can be included. The Second Set of OECD Administrative Guidance provides jurisdictions with three options regarding the temporary UTPR exclusion in their QDMTT legislation.

Option one allows the jurisdiction not to adopt it.

Option two allows the jurisdiction to adopt it but limits it to cases where no Parent Entity is required to apply a Qualified Income Inclusion Rule with respect to Constituent Entities of an MNE Group located in the QDMTT jurisdiction.

Option three allows the jurisdiction to adopt it without any limitations. (Note, if a jurisdiction opts for Option three, for the purposes of the QDMTT Safe Harbour the Switch-Over Rule would apply).

Japan applies Option two in a new Article 82-19(14) of the law.

The law does not contain any of the other mandatory or optional deviations from the standard GloBE rules, as provided by the OECD Administrative Guidance. Article 82-19(17) provides that matters necessary for the calculation of the QDMTT are to be prescribed by Cabinet Order.

A new Article 82-22 requires the submission of a QDMTT tax return (for entities subject to with an amount of QDMTT payable) within 15 months of the end of the fiscal year (18 months in the transitional year).

This will include the following information:

(i) GloBE income for QDMTT purposes
(ii) The amount of QDMTT payable
(iii) The basis for calculating these amounts as provided by an Ordinance of the Ministry of Finance.

The QDMTT tax return must be accompanied by financial statements for the entity which are the basis for the preparation of consolidated financial statements of the ultimate parent entity of the MNE group, as well as other documents prescribed by an Ordinance of the Ministry of Finance.

A new Article 82-25 of the Corporation Tax Act requires the payment of the QDMTT top-up tax by the deadline for filing the QDMTT tax return.

Article 18 of the transitional provisions to the Law applies the Transitional CbCR Safe Harbour for DMTT purposes (for financial years beginning between April 1, 2026 and December 31, 2026 (and  ending by June 30, 2028)).