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The tax authorities have recently become aware that tax related to foreign investment in Japan was not properly remitted. Several measures in the 2005 tax reforms aimed to increase foreign investors' compliance with investment rules. For example, Japan adopted a withholding tax on distributions of profits paid to foreign partners by partnerships engaged in business in Japan.

On June 29 2005 the Diet passed legislation reorganizing the existing laws on companies into a new Company Law. To date, the tax authorities have provided no guidance on the tax implications of the new law, which include a prohibition against certain foreign corporations to do business through branches in Japan.

On March 30 2005 the Diet approved the Tax Reform Bill 2005, which was submitted for discussions during the Diet's 162nd session. This update outlines the contents of the reform with regards to international, corporate and individual taxation.

The Tax Reform Bill 2004 affects general corporation tax, the new Japan-US Income Tax Treaty and the individual taxation of investments. With regard to corporation tax, the bill extends the tax loss carry-forward period and the statute of limitation, and repeals the 2% surcharge tax on consolidated taxable income.

Japan and the United States have signed a new treaty on the avoidance of double taxation in respect to income taxes. Ratification is expected to be complete by the end of 2004. When approved, the new treaty will replace an existing tax treaty between the two nations which has been in force for over 30 years.

The Japanese Diet recently passed the 2003 fiscal budget, which includes a number of tax reform measures. Chief among these are significant reductions in gift and inheritance tax, which previously ranked among the highest in the world. The maximum gift and inheritance tax rates have been reduced from 70% to 50%, and the marginal rate brackets have also been reduced.

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