The Japanese government is considering effectively deferring indefinitely the corporate tax imposed on profits that corporations earn by selling noncore businesses. The goal is to lower the tax burden that arises when winding down low-profit businesses to spur corporations' business restructuring and to nudge them to invest the funds they secure into high-growth core businesses.
On the 25th, Reuters reported, citing two people familiar with the matter, that the Japanese government is considering a tax break on gains from the sale of noncore businesses. It is expected to become one of the key policies in the corporate governance reforms pushed by Sanae Takaichi, Japan's prime minister.
The core of the plan under review is to indefinitely delay the timing of paying about 30% corporate tax levied on profits from selling noncore businesses. However, corporations must pledge to reinvest the sale proceeds within a few years in mergers and acquisitions (M&A) related to core businesses and to continue investing in the acquired businesses.
The plan is expected to be included in the tax reform requests to be submitted at the end of this month. After that, the Japanese government will fine-tune the details and decide whether to include it in the next fiscal year's tax reform package to be finalized at the end of the year.
This tax overhaul is an effort to improve inefficient capital allocation, long cited as a chronic problem of Japanese corporations. As Japan's large corporations grew into conglomerates operating multiple businesses, they often kept low-profit businesses within the group for long periods. In such cases, the fact that taxes are imposed on gains from business sales also became an obstacle for corporations in shedding noncore businesses.
According to a recent survey by the Japanese government, about 65% of the capital invested by Japanese corporations is tied up in businesses that do not generate even the cost of capital in revenue. A significant portion of the value created by high-profit businesses is offset by low-profit ones. Capital tied up in such low-profit businesses limits growth investment and weighs on long-term corporate value enhancement.
The practice of Japanese corporations prioritizing business scale and employment and management stability over portfolio reorganization is also cited as a factor that slowed the disposal of noncore businesses. In a report released in 2020 by the Ministry of Economy, Trade and Industry of Japan, it was found that Japanese corporations lack clear criteria for selling businesses and tend to prioritize group size and maintaining employment over business restructuring.
In the meantime, the Japanese government has introduced a series of systems to induce corporations to reorganize their businesses. In 2017, it established tax rules for corporate partitioning (spin-offs), and in 2023, it introduced a "partial spin-off system" that allows businesses to be carved out while retaining a portion of equity. Even so, business sales using these measures have been relatively few.
It is reported that the Japanese government referred to Germany's early-2000s tax reform when designing this system. At that time, Germany largely exempted taxes on corporations' stock sale gains, untangling the complex web of cross-shareholdings among corporations and making it easier for them to reorganize their business portfolios.
If the new system is introduced, it is expected to provide additional momentum to Japan's already lively M&A market. According to London Stock Exchange Group (LSEG), last year M&A involving Japanese corporations totaled $353 billion (about 488.552 trillion won), more than double the previous year and the highest on record. Of that, the scale of Japanese corporations' business sales reached $44.7 billion (about 61.7798 trillion won). With M&A already increasing rapidly, if the tax burden from selling noncore businesses also eases, corporate restructuring and industry reorganization are likely to gain speed.