Japan Issues Guidance on its UTPR and QDMTT Application

On 30 January 2026, Japan’s National Tax Agency (NTA) released a law interpretation circular amending the Corporation Tax Basic Circular. This provides interpretive guidance for (i) Japan’s undertaxed profits rule (UTPR) (implemented domestically as the Corporate tax on the “Residual International Minimum Tax Amount”) and (ii) Japan’s Domestic Minimum Tax (QDMTT) (implemented as the Corporate tax on the “Domestic Minimum Tax Amount”).

UTPR in Japan: Key Aspects 

Japan’s UTPR implementation allocates UTPR to a jurisdiction’s using using employees and tangible assets (as provided in the OECD Model Rules). The January 2026 circular adds detailed interpretive rules on how to determine those allocation factors and how to apply certain exclusions.

Employees or similar persons: contractors and certain officers that can be included (18-3-1)

The new Basic Circular confirms that this category includes, for example:

-External personnel / independent contractors engaged in the constituent entity’s ordinary business under instruction/command, and

-Directors/officers who have duties as an employee.

Reasonable method for employee counts: year-end or average FTE approaches (18-3-2)

Where the regulations require counting employees using a “reasonable method” considering working hours and similar factors, the Basic Circular clarifies that this can mean:

-the total FTE-equivalent headcount at year-end, or

-the average FTE-equivalent headcount over the year.

Tangible assets includes tangible fixed assets regardless of certain accounting classifications (18-3-3)

For the tangible asset component of the allocation key, the Basic Circular states that qualifying tangible assets include tangible fixed assets and clarifies that the determination does not depend on whether assets are classified as investment property or otherwise presented under financial statements.

Initial stage of international activity exemption: jurisdiction-count mechanics (18-3-5 and 18-3-6)

For the initial phase exemption for international activity, the Basic Circular clarifies:

-Stateless constituent entities are excluded from the jurisdiction-count test.

-Even if a specified jurisdiction has no constituent entities (subject to defined carve-outs), it can still be treated as a specified jurisdiction for the exemption analysis; and, importantly, the specified jurisdiction is not included when testing whether the number of jurisdictions is 6 or fewer.

Yen translation where financial statements are in foreign currency (18-3-7)

Where consolidated financial statements are presented in a foreign currency, the Basic Circular provides examples of acceptable methods to translate the relevant tax base amounts into JPY (e.g., period average, year-end, or payment-date approaches using specified telegraphic transfer rates).