Japan: Tax Reform Proposals in 2026 - Structural changes to additional Income Tax

Clearstream informs the clients that, on 19 December 2025, the Japanese government published the 2026 tax reform proposals which include changes to the structure of the additional income tax applicable to investment income. Although the overall additional tax rate of 2.1% remains unchanged, the composition of this tax is expected to be modified.

Key Measures Included in the Proposal

1.    Introduction of a Special Defence Income Tax 

As part of the initiatives to finance Japan’s plans to strengthen its defence capabilities, a new tax, named the Special Defence Income Tax, will be imposed at a rate of 1% on the income tax amount. The measure is set to take effect in January 2027 for an indefinite period.

2.    Revision to the Reconstruction Special Income Tax

Alongside the new Special Defence Income tax, the rate of the Reconstruction Special Income Tax will be reduced from 2,1% to 1.1%. Its effective period will be prolonged by ten additional years, extending its application from 2037 to 2047.

Impact on Withholding Tax Rates

Despite these structural changes, the total additional tax burden will remain 2.1%. Therefore, the standard withholding tax rate of 15.315% applicable to dividends and interest paid to non-residents is not expected to change.

However, since the additional tax will be split into separate components (1.1% and 1%), the taxes may need to be calculated and applied separately. This could result in minor differences due to rounding rules (round-up or round-down), even though the overall tax rate remains the same.

Next Steps

The reform proposals have not yet been approved by the National Diet; therefore, the above details are subject to change until the National Diet’s approval.

Clearstream is actively monitoring legislative developments and will update clients as soon as further details become available.