Japan eyes tax breaks for non-core business sales to spur restructuring

Japan's government is contemplating tax incentives for companies selling off non-core business units, a move intended to stimulate corporate restructuring and industry consolidation. The proposal, which aims to address inefficient capital allocation where a significant portion of invested capital is tied up in underperforming businesses, would allow for the deferral of approximately 30% corporate tax on gains from such sales.

Under the plan, companies would need to reinvest the proceeds within several years into acquisitions aligned with their core operations to benefit from the tax deferral. This initiative draws inspiration from Germany's tax reforms in the early 2000s, which facilitated the dismantling of cross-shareholdings and business portfolio reshaping.

Existing measures, such as spin-off tax rules introduced in 2017 and a partial spin-off regime in 2023, have seen limited uptake. A 2020 industry ministry report indicated that Japanese companies often prioritize maintaining group size and employment over portfolio reshaping. The proposed tax reform is expected to be submitted as part of tax reform requests by the end of August, with finalization anticipated by year-end.

This potential policy shift comes as M&A activity involving Japanese companies has surged, reaching a record $353 billion last year, with divestitures accounting for $44.7 billion of that total. The government hopes these tax breaks will further encourage companies to shed non-core assets and reallocate capital towards growth areas.