Foreign tax credit is a system for not charging double taxation in a foreign country and Japan.

You can deduct the foreign tax you have paid in a foreign country.

As a general rule, income (= total worldwide income) of a company established in Japan and its head office located in Japan as well, the corporation tax of Japan will be imposed to not only its domestic income, but also foreign source income.

If, therefore, the company above has a branch in a foreign country and it earns taxable income in that country through overseas transactions, double taxation will be imposed to that income.

There are two ways to eliminate this double taxation.

One is the foreign tax credit method and another is the foreign income tax exemption scheme. The Corporate Tax Law of Japan adopts a foreign tax credit system to general cases.

In addition, regarding the foreign corporation tax for which foreign tax credit can be applied, although it is said that this tax is levied by a foreign country or its local public body for corporate income as a taxable basis based on foreign laws, various exceptions are defined.

Please contact our office for more content about this exception.

It should be noted that, if the creditable foreign tax exceeds the credit limitation for the current year and there are carryovers of unused credits, in the each  year that started within three years prior to the date of the start of the current year, the unused credits can be offset against the income taxes for the current year given that the offset is within the amount of the unused credits..

On the contrary, if the creditable foreign tax for the current year is below the limitation and there are  carryovers of foreign corporation tax you couldn’t credit in the each year that started within three years prior to the date of the start of the current year, the amount of carryovers can be offset against the amount of income taxes for the current year in order of the fiscal years up to the creditable amount for the current year (the excess of the corporation taxes less the foreign taxes).

※ method of calculating the maximum deduction

Amount of corporate tax × (foreign source income / worldwide income) 

⇒ foreign tax credits are lower of credit limits or creditable foreign corporation tax

Worldwide income of Company A in 2011 was 1 million yen. Among them foreign income amount is $5,000 and foreign tax payments were $500 respectively.

If corporation tax before taking foreign tax credit was

\400,000, what amount company A will be able to receive a foreign tax credit? (※ $1=\100)

In this case, the maximum amount of tax to be credited becomes ¥200,000

= Corporate Tax \400,000 x (Foreign Source income $5,000 (\500,000) / Worldwide income \1 million)

Foreign tax payments are $500=50,000 yen, so company A will receive 50,000 yen.

For the tax credit, please feel free to contact us.