Introduction to Japanese intangible assets

July 24, 2010  |  Intangible Assets

A picture by Japanese artist Kingei Marui

This post is an introduction to the Japanese taxation of intangible assets (‘IA’s) and a more detailed review of one particular class of Japanese IA called “Deferred Assets”, or in Japanese 繰延資産/kurinobe shisan. Follow up posts will look at other areas of Japanese intangible asset taxation and please also see this post on accounting recognition of intangibles in acquisitions.


The treatment of intangible assets for tax purposes is often a key issue in transfer pricing and the taxation of corporate reorganisations. In transfer pricing disputes the creation, valuation and entity ownership of brands or other marketing intangibles is often a major area of contention with the tax authorities. In corporate reorganisations the recognition and taxation of goodwill or other intangibles assets not previously recognised on the balance sheet can be critical to the profitability of the whole transaction. International supply chain reorganisations and related tax planning can combine elements of both these issues.

As noted in this post comprehensive Japanese rules around accounting for intangible assets were issued at the end of 2009 for public discussion. However Japanese tax rules in this area have seen little change. The treatment of IAs in the Japanese tax law is also rather ad-hoc, with different types of IAs being recognised under different sections of the Japanese tax code.

The different types of IA are explained further below.

  1. Deferred Assets – this is a balance sheet category appearing in both Japanese tax and financial accounting. In summary, Deferred Assets are IAs arising from the capitalisation of expenses whose benefit is expected to exceed more than one year. This category is discussed in detail at the end of this section.
  2. The Asset Adjustment Account and Liability Adjustment account – these are tax balance sheet accounts that are defined in the Japanese tax law relating to corporate reorganisations. For accounting purposes they correspond to goodwill and other intangible assets recognised on an acquisition or other business reorganisation.
  3. The Japanese tax code explicitly recognises some (mainly separable) IAs as fixed intangible assets and mandates specific depreciable lives. Patents and trademarks are included in this category. This post lists up the depreciable lifetimes of the assets concerned.
  4. Tax Instructions also include some ad hoc references to IAs, although these are rare. The STML Tax Instruction 66 no 4 (2) 3(8) recognises intangible assets as a factor in determining comparable prices in a transfer pricing context. This same Tax Instruction also refers to CTL Tax Instruction 20-1-21 which deals with patents, trademarks, know-how, industrial processes and other IAs when defining royalty payments on which withholding taxes may apply.

Deferred Assets – 繰延資産/kurinobe shisan


Deferred Assets are defined initially in CTL 2-24 as expenditures the effect of which extends over a year or more from the date that the amounts concerned were expended. The definition excludes amounts that should be capitalised as the cost of acquisition of other fixed assets (this is probably to prevent a shorter amortisation period applying through classifying the expenditures as a deferred assets rather than treating it as a capitalised acquisition costs) and also excludes Prepaid Expenses.

CTLEO 14-2 adds detail to the conceptual definition of Deferred Assets under CTL 2-24. In particular CTLEO 14-2 lists up the following items as Deferred Assets:

  1. Corporate Establishment Costs. Compensation to the promoter establishing a company, registration and license taxes and other costs of establishing a company, but not including the costs of commencing business (dealt with below). (Tax Instruction 8-1-1).
  2. Business Commencement Costs. Expenses post the establishment of the company but prior to the commencement of business incurred in preparation for such commencement
  3. Business Development Costs. Expenditure specially for the purposes of developing new technology, developing a new management organisation, developing natural resources or opening up new markets and including interest on borrowings for these purposes. (Tax Instruction 8-1-2).
  4. Share Issuance Costs. Costs of printing share certificates, registration and license taxes and other costs of issuing shares.
  5. Debt Issuance Costs. Printing, other expenditures on issuance of bonds and other debt.
  6. Other Deferred Assets.

Item 6 above specifies some further types of IAs and then finally has a catch all definition of items that could be treated as Deferred Assets. It includes the following subcategories:

  • Expenditure for a company’s own benefit on establishing or reforming public or common use facilities
  • Expenditure for the right to use, borrow or retire from the use of assets (although note that payments for the rights of use of land are a non depreciable asset)
  • Payments for the right to receive the provision of services
  • Expenditures arising with assets gifted along with their use as products for advertising
  • In addition to the previously stated items, expenditures made where the company expects to receive a benefit.

De-minimus Deferred Assets

Deferred Assets below a de minimus amount of JPY200K may be written off in the financial year end expended rather than being capitalised and amortised.

Lifetime for amortisation of Deferred Assets

In principle Deferred Assets should be amortised as deductible for tax purposes over the period they are expected to be of benefit. However as explained below one group of assets can be amortised immediately at the discretion of the tax paying company. Tax Instructions also prescribe an amortisation period for other classes of Deferred Assets.

Assets in (1) to (5) in the list above can be amortised immediately by the company. Given that some of these costs relate to the establishment of the company or business development and similar then if such amortisation creates a loss then the loss can be carried forward (for seven years under 2010 rules). Capitalisation and amortisation therefore may in practice extend the period over which the costs are deductible and reduce the risk of an expiring tax loss.

The table summarises the period prescribed in Tax Instructions for the amortisation of other classes of Deferred Assets. Note that this is only a summary and advice should be sought on their actual application.

Impairment or market to market valuation of Deferred Assets

There are a number of events that may require a re-assessment of the value of Deferred Assets for tax purposes (for example, under some circumstances the joining of a Japanese consolidated tax group; some Japanese corporate reorganisations). This post does not discuss this process in further detail, but note that the treatment may be different for assets under (1) to (5) above (those which can be voluntarily amortised at the company’s discretion) and others which may still require amortisation over their useful lives.

Leave a Reply