Japan Issues Regulations for its QDMTT from April 1, 2026

General

On March 31, 2025, Japan issued Ministry of Finance Ordinance No. 19 of 2025 and Cabinet Order No. 121 of 2025, which includes details of the application of Japan’s domestic minimum tax (intended to be a Qualified Domestic Minimum Top-Up Tax (‘QDMTT’)).

This follows the Law to Partially Amend the Income Tax Act (also enacted on March 31, 2025) which provided for the general enactment of the QDMTT. 

New Articles 82-18 – 82-26 of the Corporation Tax Act provide for the  QDMTT from April 1, 2026. Article 18-19(2) of the Corporation Tax Act applies the standard GloBE rules for the DMTT calculation subject to some specific amendments in the law and further amendments that are provided in the amended Enforcement Order.

Push-Down Taxes

Tax paid or incurred by a Constituent Entity-owner under a CFC Tax Regime that is pushed down to a domestic Constituent Entity in the GloBE Rules must be excluded, as provided in the OECD Administrative Guidance. This is included in Section 155-61 of the amended Enforcement Order.

This preserves Japan’s  primary right to tax income accruing to a Japanese member entity which is also a CFC. If there were no statutory derogation from the general GloBE rules for the calculation of the domestic minimum tax, and the CFC tax paid by the controlling company abroad were included in the included taxes of the Japanese CFC, the effective tax rate would be increased. Therefore, excluding the CFC tax from the Japanese CFCs covered taxes allows Japan to tax low-taxed income at a higher rate than would be the case under an IIR.

Section 155-61 of the amended Enforcement Order also prevents the pushdown of tax to hybrids, PEs and for taxes on distributions (except for Japanese withholding tax on dividends).

Ownership Interests

Section 155-70 of the amended Enforcement Order provides that top-up Tax that is subject to the QDMTT is based on the whole amount of the Jurisdictional Top-up Tax calculated, irrespective of the Ownership Interests held in the Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group.

Accounting Standard

The standard method of determining excess profit in Section 155-41 of the amended Enforcement Order applies. As such the accounting standard of the UPE is used as default, however, the accounting standard used in the preparation of the financial statements of the constituent entity can be used for QDMTT purposes if:

1. it is not reasonably practicable to determine the net profit or loss for the constituent entity on the basis of the UPE accounting standard;
2. it is an acceptable or authorised accounting standard;
3. the information contained in the financial statements is reliable; and
4. permanent differences of more than EUR 1 million are conformed with the UPEs accounting standard.

De Minimis Exemption

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.

Transitional CbCR Safe Harbour

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

Other

The Law and anended Enforcement Order generally ties the overall GloBE income calculation for QDMTT purposes in with the general GloBE calculation rules (subject to specific adjustments noted above). 

For instance, Article 82-19 1(A)(3)-3(H) of the law provides that an entity may elect not to add the group minimum tax relating to a permanent difference adjustment (which arises where the domestic QDMTT adjusted taxes is less than zero, and there is an amount remaining after deducting 15% x GloBE income for Japan from the amount less than zero), but to deduct it from the numerator of the effective domestic tax rate in the calculation of the current group minimum tax for the following fiscal year. This applies the OECD Excess Negative Tax Carry-Forward rules for QDMTT purposes.